What Does a Conduct Regulator Consider to be Misconduct?

A conduct regulators walking audit approach takes at least three different forms, what are they?

1. A regulatory case officer approaching you personally in your workplace to have a conversation at the desk with you
2. A regulatory case officer simply watching you work, the behaviour observation test. For example, this may be the conduct regulator attending a board meeting
3. An invitation to visit the conduct regulator in their own offices for a private interview

What are the two key forms of misconduct?

1. Financial misconduct
2. Non-financial misconduct

What is financial misconduct, and what does it consist of?

Any bad behaviour around selling your product. Common forms include:

• Misleading customers - such as taking unfair advantage of their ignorance to sell them something they don’t need
• Collusion
• Price manipulation
• Trading on inside information
• Manipulating benchmarks
• Selling inappropriate products
• Circular trading and improper order handling

What is non-financial misconduct, and what does it consist of?

Includes many forms of misbehaviour that don’t relate directly to the business of selling products, although they may well affect how your team sets about making its sales. For example:

• Intimidation - threatening people
• Discrimination - in any of the ways you hire, promote, reward and recognise peoples achievements. This might also include favouritism, exclusion or ostracising
• Sexual misconduct, and sexual or other harassment
• Bullying - that is, making someone feel bad when they’re simply trying to do their job

What are the cash impacts of misconduct to your business?

This is the cash cost of dealing with the immediate fallout of a regulatory hit, after an enforcement against your business. This will impact your business in the following ways:

• Paying fines to the regulator
• Lost revenue from the sales of the product that’s just been suspended (Assuming mis-selling)
• If you’re in banking, you may face a run on deposits as customers associated with the suspended product take that money elsewhere
• Cash costs of clear-up and maybe restitution
• The cost of new hirings and training to replace the team that got fired

What are the capital impacts of misconduct to your business?

There is a capital cost whenever you’ve been hit by a regulatory action. Common forms may include:

• If you’re a publicly quoted company, your share price may take a hit
• Potential credit rating downgrade
• Increased regulatory capital cover
• Capital charges against your operational risk
• Your cost of borrowing rises, and a range of other hits on your goodwill value can undermine your business even further
• Customer and public mistrust in the brand, and connected to that, staff and customer boycotts and defections

What are the ‘lost autonomy’ impacts of misconduct to your business?

The lost autonomy as a damaged business finds that it can no longer carry out the strategic decisions made by its senior managers. These may include for example:

• The business may be halted suddenly pending a regulatory investigation or staff suspensions or a lost trading licence
• Business lines may fail as markets deny access as trading partners, buyers or insurers simply stop returning calls because they no longer trust you
• Loss of your social licence
• Likely to face public protest and shareholder activism which can result in a revolt where shareholders veto board appointments and rewards
• Become a takeover target

What are the new set of indicators that conduct/culture regulators use to identify business health?

These come under the general headings of Purpose and Value, the whole conduct project asks firms to take a fresh look at the way we report “what we’re really here for” and “what actually happens” in our business.

In the new era of culture audits, regulators look to see how wider stakeholders, not just shareholders or owners rate your business. Some of these include customers, staff, and suppliers. Each of these stakeholders must verify that you have a culture based on psychological safety, corporate purpose, social licence and cognitive diversity.