1) The document discusses the concept of "conduct risk", which refers to the risks associated with how a company treats its customers. Conduct risk encompasses factors like corporate culture, governance, conflicts of interest, and reputation. 2) Managing conduct risk well can benefit companies by building trust with customers and regulators. It establishes a good reputation, increases customer loyalty, and helps the company's objectives. However, poor conduct can seriously damage reputation and trust. 3) The document advises companies to start evaluating how conduct risk applies to their organization by discussing topics like incentive structures, product design, and sales processes that impact customer outcomes. Prioritizing customer focus is important for managing conduct risk effectively.

1. Customer focus
Treating customers fairly:
An opportunity – not a cost
Mr Stephen Rosling from TCF Consulting Ltd introduces the concept of “conduct risk”,
an emerging term that is an evolution of the principles of treating customers fairly. It is
good business to have good conduct and to develop a good reputation. It also puts you
on the right side with the regulators. So this behaviour is an opportunity and not a cost.
EAIC Special Issue • November 2014 • Asia Insurance Review
1
With consumer protection reforms beginning to
taking hold across the globe, the C-suite and
Boards of Directors are beginning to take notice
of how they are being evaluated for their actions (or inaction).
Some executives may be anxious or even panicky due to
recent headlines surrounding fines relating to, ultimately, the
poor treatment of customers. No executive wants to wake up
to find his company’s name, let alone his own name, splashed
across the morning newspaper headlines.
To help prevent this situation from happening, what
approach do you use to manage and balance corporate
behaviour before it is time to panic?
It’s really all about managing “conduct risk”
Focus is on the customer
In the financial regulatory domains, the concept of “conduct
risk” is an emerging term that many see as an evolution of the
principles of “treating customers fairly”.
While conduct risk is being discussed and debated within
business circles across the globe, the term itself has no
universally agreed upon definition. Perhaps this is because
defining what constitutes fairness, good conduct or what “good
enough governance” entails can be so arbitrary and broad to
a financial institution’s various stakeholders. What is clear
however, is that the clear focus of these regulatory changes is
the “customer” – the person who buys and uses the insurance
product.
Even without a consensus on a clear meaning of these
terms, there does seem to be some converging agreement on
what forms the basis of the conduct risk construct.
According to a recent survey of financial institutions
sponsored by Thomson Reuters Accelus group, conduct risk
encompasses the broad categories of:
• An organisation’s culture;
• Corporate governance;
• Conflicts of interest; and
• Reputation.
Other international bodies groups such as the Organization
for Economic Co-operation and Development (OECD) and the
Financial Stability Board (FSB) take a more focussed view
and relate the concept of conduct risk to a principle-based
framework grounded on the fair treatment of customers, ie,
consumer protection and consumer confidence.
Start dialogue with internal stakeholders
Whatever approach to defining conduct risk might fit your
organisation’s risk management structure, now may be the
time to start a dialogue with internal stakeholders to get a jump
start on understanding how this new phenomenon of
conduct risk may affect your firm.

2. Customer focus
Have top-level discussions within your organisation
included topics such as incentive structures, product design
and sales processes? (When implemented without the customer
in mind, all of these can lead to poor consumer outcomes).
If not, perhaps its time for top level management to begin
exploring these areas.
Financial services the least trusted organisations
The majority of firms have begun to address some of the key
issues. Firms in Europe and Australasia have done the most,
whilst firms in the Middle East have more to do.
Specifically, the 2013 Thomson Reuters Accelus survey
showed that approximately 50% of firms in Europe and Asia
had reviewed sales processes in the last year, yet none of firms
surveyed in the Middle East had done so.
A related theme emerged from a 2013 Leadership
Roundtable report published by Insight Discovery that surveyed
the views of senior figures from insurance firms operating in
the GCC countries. It found “a lack of understanding of the
products available and a lack of trust of the advisers who
actually deal with consumers”.
However, even with progress in Asia and Europe,
there is still a long way to go – for the last three years,
the Edelman Global Trust survey has shown that financial
services, (including insurance), are amongst the least trusted
organisations across all global markets.
Assessing conduct risk
Much thought leadership in this area is currently coming out of
the UK. Specifically, the Financial Conduct Authority (FCA),
which regulates firms and financial advisers in order to protect
consumers, refers to conduct risk in the context of “consumer
detriment arising from the wrong products ending up in the
wrong hands, and the detriment to society of people not being
able to get access to the right products.”
The FCA approach for assessing conduct risk is tied to the
organisation’s objectives. By looking closely at the drivers of
conduct risk, organisations can evaluate how different factors
or scenarios (ie, combinations of factors) impact the financial
services market and its participants.
Good conduct is good business
Some of you may be asking yourselves: “Well, isn’t that simply
operational or process risk?” In two words, the simple answer
is “not exactly.”
While operational components of product design, sales
practices, remuneration, and overall culture are all part of the
conduct risk equation, viewing these components individually
without considering scenario implications to your firm’s
strategy is simply short-sighted from a regulatory perspective.
According to Chris Perry, Managing Director of Risk
for the Thomson Reuters study, “good conduct is good
business. The cost of poor conduct is high; not just in terms
of enforcement actions, but also in long lasting reputational
damage and the wider erosion in trust this creates”.
This author would propose that the opposite is true as well;
the benefit of good conduct is high, not just in terms of reduced
enforcement actions…..but also in terms of reputational and
competitive advantage and the wider restoration of customer
trust that it creates.
Intuitively, it makes sense that if your firm has a reputation
for good conduct, ie being seen as trustworthy by your
customers, this can only affect the bottom line in a positive
way. This is difficult to argue against.
Thus, integrity and trust are taking centre stage in the
assessment of how firms behave.
So what is the opportunity?
Benefits of a good reputation
It is clear that the fair treatment of customers plays an important
role in establishing, maintaining, and developing a good
corporate reputation and that this, in turn, can contribute to
the bottom line:
• Customer preference in doing business with you when other
companies’ products and services are available at a similar
cost and quality;
• Customer preference in staying with you (persistency) when
other companies are trying to win your customers;
• Your ability to charge a premium for products and services;
• Stakeholder support for your organisation in times of
controversy; and
• Your organisation’s value in the financial marketplace.
Although reputation is an intangible concept, research
universally shows that a good and trustworthy reputation
demonstrably improves financial performance, increases
corporate worth and provides sustained competitive advantage.
Objectives can be achieved more easily with good
reputation
A business can achieve its objectives more easily if it has a good
reputation among its stakeholders, especially key stakeholders
such as its customers, opinion leaders in the business community,
suppliers and current and potential employees.
If your organisation is well-regarded by your main
customers, they will prefer to deal with you ahead of others.
And these people will influence other potential customers by
word of mouth and social media tools, ie, customer advocacy.
Suppliers will be more inclined to trust in your organisation’s
ability to pay and to provide fair trading terms. If any problems
occur in their trading relationship with you, your suppliers will
be more inclined to give you the benefit of the doubt when you
have a reputation for fair dealing.
Likewise, financial regulators will trust you more if you
have a good reputation, and they will be less inclined to punish
you if you trip up along the way. And clearly, a potential
employee will be more likely to sign up with you if you have
a good reputation for your treatment of staff compared with
an employer who may have an equivocal reputation.
Time for top management to know about conduct risk
By whatever means, choose to assess, measure and monitor
risk, it is probably about time that your organisation’s top
level management familiarise themselves with the evolving
concept of conduct risk and how it relates to the fair treatment
of customers.
How these concepts may affect ongoing operations into
your organisation’s future will become more and more
prominent very soon. If your organisation chooses not to
participate in conduct risk discussions, you may be missing the
next step in supervisory scrutiny and regulatory evolution.
Mr Stephen Rosling is Director of TCF Consulting Ltd.
EAIC Special Issue • November 2014 • 2 Asia Insurance Review