The Effect of Conduct Risk Losses on Reputation

Peter Mitic

We are being dishonest by definition and are at risk of damaging our reputation in the market and with the regulators.

The above statement is a quote within a quote. It refers to a submission made by a bank representative to the UK Financial Conduct Authority (FCA) with respect to the London Interbank Offer Rate rigging scandal of 2014, and was quoted in a speech by Tracey McDermott, the Director of Enforcement and Financial Crime at the Financial Conduct Authority (McDermott 2014). Many would say that it is obvious that poor conduct in financial dealings damages reputation, but there is very little quantitative evidence in support of that view. The main reason for this is that a way of objectively measuring reputation was only developed in the wake of the financial crisis of 2008. The aim of this chapter is to provide that evidence. When we consider what losses due to bad conduct actually are, we can write down factors such as mis-selling, dealing with complaints, paying for legal disputes and dealing with the consequences of giving poor advice. Continuing the theme of what is obvious, we can offer two simple examples. First, if a customer is dissatisfied with a service, they