Bringing the Customer Back to the Foreground: The End of Conduct Risk?

Bertrand Hassani

In this chapter we argue that conduct risk arising from the way financial institutions are conducting business with respect to their customers might be prevented, mitigated and potentially annihilated. Indeed, we believe that data science, proper segmentation, product design and control will lead to a tremendous reduction in conduct risk exposure, and therefore we address these topics here.

Financial institutions’ misconduct or perception of misconduct leads to conduct risk. The terminology “conduct risk” not only covers various processes and behaviours that fall into Basel operational risk category 4: “clients, products and business practices” (Basel Committee on Banking Supervision 2004) in terms of event, but goes further, as it generally implies a non-negligible reputational risk. Indeed, financial institutions might be perceived as unprofessional or not knowing what they are doing. From an operational risk point of view, conduct risk can lead to huge losses, usually resulting from compensations, fines or remediation costs. But, from a reputational point of view, it may result in reduced revenues, as customers may think that banks do not treat them fairly or, worse, are