Conduct Risk is sweeping the financial services world and catching many risk manager out as there is still a lack of understanding. Risk management need to determine the corporate risk philosophy and appetite. To assess or understand the risk philosophy, try to comprehend the organisation's culture, values and environment. The way business operations are conducted on a daily basis and the organisation’s strategy are typically good indicators where you can find the company risk philosophy. Assess whether business has an aggressive, innovative, typical or conservative attitude towards risks for achieving business goals. Risk appetite is simply the amount of risk which the organisation is willing to take to undertake business activities and achieve the business objectives, where Conduct Risk is concerned this has to include good customer outcomes. A simple question to ask the board of members could be “What amount of reported mismanagement or public uproar would make you uncomfortable if it appeared in the business newspapers?” Consolidate the various risk exposures from the risk department's identified risks and present them to the board. Finally, assess whether the company’s internal perception and rhetoric on risk philosophy and appetite are consistent with the board and other stakeholder's viewpoints. Realign the two where required to prepare the annual strategy.

1. Conduct Risk
ESTABLISHING RISK APPETITE

2. Conduct Risk
How To Establish Risk Appetite
Many people struggle with the concept of
Conduct Risk Appetite, assuming it to be a hard
and fast figure that they will be censured if they
do not keep below it.
However, without risk, there is usually no
reward.
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3. Conduct Risk
How To Establish Risk Appetite
Risk appetite is risk jargon that is best explored by
asking the question, "How much capital are you are
willing to risk to achieve your strategic goals?“
Conduct Risk appetite is how much capital are you
are willing to risk to try and achieve your forecasted
profit, or what are you willing to do to achieve your
objectives considering good customer outcomes.
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4. Conduct Risk
How To Establish Risk Appetite
Statements of Risk Appetite
Risk is measured typically by the likelihood and
consequence (normally single point entry) and
mapped onto some form of heat map.
While risk criteria in this form can be valuable
expressions of risk appetite, members of your staff
who were not directly involved in the discussions that
formulated them are not specifically aware of all of
the measured thinking that goes on behind them.
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5. Conduct Risk
How To Establish Risk Appetite
Providing clear definition or commentary on
each category and level of risk so that the
cumulative effect can be seen to impact the
core corporate objectives will;
better communicate your message to all
employees precisely what constitutes
acceptable operational behaviour; and
a clear link can be seen with the outcomes for
customers and how they are also maintained.
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6. Conduct Risk
How To Establish Risk Appetite
Completing Your Risk Statement
Initially, a risk statement is actually a
conversation involving the risk owner along with
stakeholders which may have or should have an
interest in the risk.
It's also a record of your analysis, a guideline for
initial and continuing risk reporting and a to-do-list
for the risk owner to watch.
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7. Conduct Risk
How To Establish Risk Appetite
When your risk statement fulfils its role as a
good conversation between risk owner and
stakeholders, each stakeholder will need to have
a specific appreciation of your position
concerning the Conduct Risk .
That does not mean they have to concur with it,
however, they will have enough information to
have meaningful interaction with you and judge
by themselves if and when they consider your
analysis or if perhaps they may wish to
recommend changes.
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8. Conduct Risk
How To Establish Risk Appetite
Your clear articulation of any risk should be with
regard to a specific objective and be made up of
a range of sources of risk taken to no more than
two levels below the objective.
Level 2 and level 3 Conduct Risk descriptions
provide sufficient granularity for effective
design of controls.
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9. Conduct Risk
How To Establish Risk Appetite
In fact the achievement of the higher level objective
may be at higher risk, or may require many controls
to be designed and embedded, …
… therefore the third level of risks (the actual failure
of performance or process) is needed to get a clearer
picture of what is driving the high risk.
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10. Conduct Risk
How To Establish Risk Appetite
This serves to help identifying the inherent controls
to be designed or addressed within the process or
the performance indicators needed to form risk
indicators that alert senior management to breaches
of Conduct Risk .
In the realm of risk it therefore follows that you can
capture a strategic Conduct Risk profile for an
organisation in 5 to 9 risk statements (specific risks)
since most organisations ordinarily have around 4 to 6
main objectives.
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11. Conduct Risk
How To Establish Risk Appetite
Then you may need to add some specific “Conduct
Risk ” objectives for instance one for complaint
handling or product design governance in the event
the organisation does not have a separate objective
for it already or it is not sufficiently captured in a
broader objective.
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12. Conduct Risk
How To Establish Risk Appetite
Example of Product Design Risk Events (descriptions/definitions) and Customer Outcomes or
Objectives.
Level 1 Risk Category may be “Retail Products” and the Level 2 Risk definition might be “The risk
that our products and services (including contracts & T&Cs) are not designed, developed and
operated to deliver fair and compliant customer outcomes.”
Risk Category – Level 3
Risk Event Customer Outcomes or Objectives
Definition
The risk that we fail to
implement adequate
systems and controls in
relation to product
governance, design &
Pricing
Design
The target market is not clearly defined
Products are not designed to meet an identified
customer need.
Product features are not suitable for the target
market.
Associated risks and complexity of a product against
the financial capability of each group of customers
are not identified and mitigated.
Product design is complex and difficult for
customers in the target marker to understand.
Product design does not meet regulatory
expectations.
Products are not stress-tested to identify how it
might perform in a range of market environments
and how the customer could be affected.
All business stakeholders are engaged to ensure the
requirements of people, processes and systems to deliver
new products are assessed.
All business stakeholders are engaged to ensure clear
communication of the product, its features, intended markets
and potential risks.
We provide adequate training to our staff
We regularly review and identify the different and likely
needs of our customer groups.
We design product features to ensure they are suitable to
the target customer market
We research and stress-test the product or service to
identify how it might perform in a range of conditions.
We consider the wider environment that may affect products
or customers.
Customers are updated on product features, benefits and
performance over a product’s lifetime.
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13. Conduct Risk
How To Establish Risk Appetite
LeeWerrell Chartered FCSI FISMM
Owner – Compliance Consultant
◦ Lee has been involved in risk & compliance work for; Inter-dealer
Brokers, Retail Banks, Investment Banks, Stockbrokers, Building
Societies other Distribution channels.
◦Much of our business at Compliance Consultant is conducted
under NDAs as it involves remedial and corrective work.
◦ Lee was appointed a Skilled Person in 2012 by the FSA.
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14. Conduct Risk
How To Establish Risk Appetite
Conduct Risk – How to Establish Risk Appetite
Lee Werrell Chartered FCSI FISMM
Owner of Compliance Consultant
Contact me on 020 7097 1434
info@complianceconsultant.org

15. Conduct Risk
How To Establish Risk Appetite
•Why Not Buy Your
•Compliance Manual
•From Us …. Many Firms Have.
•http://bit.ly/ComplianceManualTemplate
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16. Conduct Risk
How To Establish Risk Appetite
Thank You For Your Time
Lee Werrell Chartered FCSI FISMM
Contact me on 020 7097 1434
info@complianceconsultant.org
uk.linkedin.com/in/leewerrell
facebook.com/ComplianceConsultant
@complianceconst @s166reports

17. Conduct Risk
ESTABLISHING RISK APPETITE