An Overview of Conduct Risk

Paul Sharma

This chapter explains what conduct risk is and why it is important. It explores how approaches to conduct risk have changed over time, and explains from the point of view of different stakeholders how conduct risk may take on different meanings.

The first section sets out the basic concepts that are inherent in almost all approaches to defining and discussing conduct risk: conduct risk arises from the behaviour of insiders that has consequences for stakeholders.

The second section sets out the different stakeholder perspectives on conduct risk. These are based on the consequences that insider behaviour may have for key business or policy objectives of private and public sector stakeholders. In particular, it describes the prudential, reputational, consumer-protection and financial-stability perspectives from which insider conduct poses a risk of loss to a regulated firm, of damage to its reputation, goodwill or franchise, of harm to consumers or of disruption to financial stability.

The third section describes in more depth insider conduct as a risk of harm to consumers. It discusses the surprisingly difficult questions of

• • who in the financial services