Conduct risk
Also called misconduct risk
Conduct risk is the risk that a firm or its staff behave in ways that cause poor outcomes for customers, damage market integrity or weaken competition. It covers mis-selling, unfair pricing, poor complaint handling and market misconduct. It sits alongside credit, market and operational risk in a firm's risk framework.
How it works
Firms manage conduct risk through product governance, sales monitoring, complaints analysis, incentive design and staff conduct rules. A conduct risk framework sets appetite statements, metrics such as complaint volumes or product switching rates, and escalation routes. Compliance monitoring and management information show where behaviour drifts. Remuneration committees can adjust pay when misconduct occurs.
Conduct failures have led to large redress schemes and fines, which is why regulators treat conduct as a core risk, not a compliance afterthought. In the UK, the Senior Managers and Certification Regime makes individuals accountable, and the Conduct Rules apply to most staff. The Consumer Duty adds a requirement to evidence good retail customer outcomes.
The rules
Sets individual conduct rules, including acting with integrity and due care, treating customers fairly and, under Rule 6, acting to deliver good outcomes for retail customers.
Staff at FCA solo-regulated firms; banks and insurers earlierSets out tools for firms and supervisors on culture, individual responsibility and the problem of rolling bad apples moving between firms.
Financial institutions and supervisorsRequires firms to deliver and evidence good outcomes for retail customers, raising the standard against which conduct is assessed.
FCA-regulated firms serving retail customersCommon questions
Is conduct risk the same as operational risk?
They overlap but differ. Operational risk covers losses from failed processes, people, systems or external events. Conduct risk focuses on behaviour that harms customers or markets. Many firms manage conduct risk as its own category with separate appetite and metrics.
How do firms measure conduct risk?
Common indicators include complaint volumes and themes, product cancellation rates, sales spikes, breaches of conduct rules, staff turnover in sales teams and outcomes testing results. Firms compare these against appetite thresholds and escalate breaches.
Who is accountable for conduct risk in UK firms?
Under the Senior Managers and Certification Regime, named senior managers hold prescribed responsibilities, and most staff are bound by the Conduct Rules. Boards set conduct risk appetite and oversee whether the firm stays within it.
