Understanding Conduct Risk in Financial Services

This white paper provides an in-depth examination of conduct risk, particularly within the banking, financial services, and insurance (BFSI) sector. It outlines the definition of conduct risk as actions that lead to consumer detriment or adversely affect market stability. The paper discusses the emergence of conduct risk following the 2008-09 financial crisis, highlighting the regulatory responses such as the Dodd Frank Act and the establishment of the Financial Conduct Authority in the UK. It details various behaviors contributing to conduct risk, including poor financial advice, conflicts of interest, mis-selling, and market misconduct. The paper also reviews the regulatory frameworks in India that govern conduct risk, such as SEBI and RBI regulations. Furthermore, it emphasizes the importance of organizational culture in managing conduct risk, identifying key drivers of good conduct, including leadership, governance, and accountability. The insights presented aim to enhance understanding and compliance with conduct risk management in the BFSI sector.