Unit 2 / Section 2 - Company Conduct

Question 1

What are 4 key elements of market conduct?

Answer 1

1) The business objectives of the firm
2) Marketing strategies of a firm
3) Whether or not suppliers in a market are so closely interdependent that they control a market
4) The ways in which competition acts to increase differentiation and choices in a market

Question 2

What can Conduct risk be described as, from a customer’s perspective?

Answer 2

The risk that a firm’s behaviours pose to achieving what they see as fair outcomes, or even to the sound, stable, resilient and transparent operation of the financial markets.

Question 3

In what ways can firms communicate their conduct expectations?

Answer 3

> Published code of conduct
Training and guidance
Key information messages describing and illustrating the core components of good conduct
Board and senior management establishing the ‘tone from the top’

Question 4

What 4 items could be included on a personal checklist for good conduct behaviour?

Answer 4

1) Is the action or proposed action legal and does it meet regulatory standards?
2) Does it comply with the letter of internal policies and procedures?
3) Does it comply with the spirit of internal policies and procedures?
4) How would it look if it was reported in the media? Would it appear to be wrong, or would it make you embarrassed?

Question 5

What resources are available to employees to help them understand their firm’s approach to conduct?

Answer 5

1) Line management (day-to-day responsibility for that area of the business)
2) HR (employee-related issues concerning colleagues or management)
3) Legal departments (if concerns on how conduct may be affected by legislation)
4) Compliance functions (compliance professionals can help with concerns regarding policies and practices)
5) Advice line (help employees to feel secure about discussing conduct concerns)

Question 6

What 7 questions can be used to identify contributory factors for the conduct risk definition?

Answer 6

1) How complex is the product, and how does this relate to the sophistication of the end consumer?
2) Is the product actively requested by the consumer, or is it just an add-on or ancillary product to add to an existing portfolio?
3) What other suppliers are there competing in the market, and what is the size of the market?
4) Is it easy for the consumer to withdraw from any contract with no negative consequences?
5) Can the impact of poor conduct be measured for both the customer and the company?
6) How important is the product for the company’s overall business?
7) How profitable is the product?

Question 7

In defining Conduct Risk Appetite, what 6 things should firms consider and be able to evidence?

Answer 7

1) Consumers understand what they are buying
2) Products are suitable for the consumer who buys them
3) Consumers receive acceptable levels of service
4) The extent to which consumers receive the best possible price for the service or the product
5) How to reward consumer loyalty
6) The extent to which conduct risk appetite includes the behaviours of distributors or third-party suppliers / outsourcing providers

Question 8

What 5 features may feed into a Conduct Risk Tolerance score?

Answer 8

> Product characteristics
> Customer experience
> Customer outcomes
> Sales incentives 
> Staff capabilities

Question 9

What is the role of business in an open market economy system?

Answer 9

To create wealth for shareholders, employees, customers and society at large.

To create meaningful jobs and produce goods and services profitably – profit being essential to long-term business survival and job creation.

Question 10

What are three Commercial benefits of good conduct?

Answer 10

> Reduced cost of regulatory enforcement actions and associated costs

> Increased customer loyalty and persistency rates

> Firms are more aware of the ‘state of play’ in their business, so are better able to anticipate future change requirements

Question 11

What are three Reputational benefits of good conduct?

Answer 11

> Reduced risk of high-profile actions being taken, leading to the potential for increased sales opportunities

> Reputation within the industry and with the regulator, leading to a more consultative not confrontational approach

> Reduced possibility of negative publicity

Question 12

What does the ICC (International Chamber of Commerce) propose as the definition of corporate responsibility from a business perspective?

Answer 12

“The voluntary commitment by business to manage its activities in a responsible way”

Question 13

What are the ICC’s 9 practical steps to responsible business conduct?

Answer 13

1) Confirm CEO/board commitment to give priority to responsible business conduct
2) State company purpose and agree on company values
3) Identify key stakeholders
4) Define business principles and policies
5) Establish implementation procedures and management systems
6) Benchmark against selected external codes and standards
7) Set up internal monitoring
8) Use language that everyone can understand
9) Set pragmatic and realistic objectives

Question 14

In what 4 ways must firms ensure transparency with customers?

Answer 14

1) Promotional material must be clear, fair and not misleading and must illustrate any warnings or risks that the customer needs to be aware of before entering into any contract
2) Communicate warnings around lending, including the consequences of not fulfilling the contractual obligations to make payments
3) Inform customers how they can access after-sales service and put in place appropriate arrangements to manage these customer interactions
4) Communicate how customers can complain, how complaints are managed, including timescales for responses and the ability to refer to an ombudsman if not possible to resolve disputes in a way which is acceptable to all parties

Question 15

What does the term ‘customer centricity’ mean?

Answer 15

Putting the interest of the consumer of the products and services at the heart of its strategy, products and services, the information it produces and the way in which it manages its relationships

Question 16

In what 2 ways can a firm demonstrate ‘proactivity’?

Answer 16

Suitability - Consider whether consumer’s circumstances may change, in which case the recommended product will no longer be suitable.

Contact - Bring new and suitable products and services to the attention of customers where it is clear that they would benefit from them

Question 17

What 6 elements should be considered when developing a conduct framework?

Answer 17

1) Complete diagnostic check to ID any required changes
2) Review identified business changes from conduct perspective
3) ID conduct gaps and prioritise remedial actions
4) Strengthen actions
5) Review the effectiveness of remedial actions once complete, ID any additional actions to close gaps
6) Re-design or amendments to the business model

Question 18

What is an explanation of ‘Accountability’?

Answer 18

Accountability can most succinctly and precisely be described as answerability.

Having accountability means a necessity and expectation to explain one’s actions for whatever they are accountable for.

Whatever the results of a person’s actions, that person must be able to give an account of not just what happened, but why it happened and how.

Question 19

What is an explanation of ‘Responsibility’?

Answer 19

Responsibility is the idea of being completely in charge of something, that the person who is responsible for something is the root cause behind whether that thing succeeds, fails, lives, or dies.

Question 20

What 5 things describe an effective Board?

Answer 20

1) Understands the business
2) Establishes a clear strategy
3) Articulates a clear risk appetite to support that strategy
4) Oversees an effective risk control framework
5) Collectively has the skills, the experience and the confidence to hold executive management rigorously to account for delivering that strategy and managing within that risk appetite

Question 21

What did the UK PRA consider to be the 12 key areas for firms to achieve robust corporate governance in its July 2018 Supervisory Statement SS5/16 Corporate Governance: Board Responsibilities?

Answer 21

1) setting strategy
2) culture
3) risk appetite and risk management and internal controls
4) board composition
5) the respective roles of executive and non-executive directors
6) knowledge and experience of non-executive directors
7) board time and resources
8) management information and transparency
9) succession planning
10) remuneration
11) subsidiary boards
12) board committees

Question 22

What important role does the HR team play in helping maintain good conduct?

Answer 22

They need to undertake a comprehensive review of contractual documentation and make it a condition of employment that staff who require certification continue to be deemed fit and proper to undertake their role throughout the duration of their employment.

They must also be aware of the implications of any conduct-related regulation on employees, especially where such regulation requires certification and record keeping.

Question 23

What 8 questions should be asked when challenging a firms decisions / handling of particular situations?

Answer 23

1) How is the firm making a profit (either directly or indirectly)?
2) How is the firm being clear and transparent in its dealings and communications with all its stakeholders?
3) How is it creating long-term value?
4) How is shared value being created for the benefit of the firm and its stakeholders?
5) Is the firm doing the right thing on this occasion?
6) Is the decision/action in question legal and in keeping with both the letter and the spirit of relevant regulation?
7) Have the interests of all of those who may be adversely affected by the decision/action been taken into account?

8) Am I confident the decision/action will not result in current or future criticism of the company?
Would I be comfortable in explaining or justifying the decision/action to colleagues, family or friends?

Question 24

What 2 terms may be used to describe how employees may ‘Do the right thing’ by raising / escalating concerns about how a firm’s code of conduct is being followed?

Answer 24

1) Whistle-blowing

2) Speaking up

Question 25

What do the 7 FCA whistleblowing rules introduced Sep-16 require a firm to do?

Answer 25

1) Appoint a Senior Manager as their whistleblowers’ champion
2) Put in place internal whistleblowing arrangements able to handle all types of disclosure from all types of person
3) Put text in settlement agreements explaining that workers have a legal right to blow the whistle
4) Tell UK-based employees about the FCA and PRA whistleblowing services
5) Present a report on whistleblowing to the board at least annually
6) Inform the FCA if it loses an employment tribunal with a whistleblower
7) Require its appointed representatives and tied agents to tell their UK-based employees about the FCA whistleblowing service

Question 26

What does “The Senior Managers Regime” focus on?

Answer 26

Individuals who hold key roles and responsibilities in relevant firms.

In preparation for the new regime, relevant firms must map out how responsibilities have been allocated within the firm, and prepare Statements of Responsibilities for individuals performing Senior Management Functions (senior managers).

Question 27

What does “The Certification Regime” apply to?

Answer 27

Other staff (i.e. not covered by The Senior Managers Regime) who could pose a risk of significant harm to the firm or any of its customers (for example, staff who give investment advice or submit to benchmarks).

These staff will not be pre-approved by regulators, but firms will assess their fitness and propriety.

Question 28

What do “The Conduct Rules” which came into effect on 7 March 2016 do?

Answer 28

Set out a basic standard for behaviour for all staff covered by the new regimes.

Firms need to ensure that these staff are aware of the Conduct Rules and understand how they apply to what they do.

Question 29

In a business context, what are 2 definitions of “Integrity”?

Answer 29

1) Strict adherence to a moral code, reflected in transparent honesty and complete harmony in what one thinks, says and does
2) State of a system where it is performing its intended functions without being degraded or impaired by changes or disruptions in its internal or external environments

Question 30

Give 6 examples of practices that lack integrity

Answer 30

1) Not treating every customer with the same baseline of respect, no matter how much they spend with you
2) Underpaying or mistreating staff or contractors
3) Misleading clients or misrepresenting your services and abilities
4) Overselling and under-delivering
5) Faking reviews and running misleading ads
6) Spamming clients and customers with unsolicited emails

Question 31

What are 5 advantages of acting with integrity?

Answer 31

1. It gives your business a competitive edge
2. It helps save face during a crisis
3. It makes difficult decisions easier
4. It costs less in the long run
5. It helps secure favourable publicity

Question 32

What are the 5 dimensions of integrity in business?

Answer 32

1. Trust - make honesty and transparency priorities in your business.
2. Consistency - don’t juggle your morals depending on the situation or decide to put them aside when it’s convenient.
3. Ownership - admit mistakes and face the consequences head-on.
4. Collectivity - find and hire the right kind of people.
5. Evolution - stay open to continuous learning and improvement.

Question 33

What are 4 ways to improve integrity in your business?

Answer 33

1. Evaluate it on a personal level
2. Learn what integrity means to others
3. Hire with values in mind
4. Learn it from others

Question 34

What are 5 ways to demonstrate business integrity to your clients?

Answer 34

1. Make it part of your culture
2. Offer stellar customer service
3. Prioritise quality
4. Practice transparency
5. Give back (to the community)

Question 35

What 5 features must a financial institution consistently demonstrate to be considered ethical?

Answer 35

1. Total transparency of reporting and communication
2. Genuine concern for the needs of customers, including providing services to vulnerable groups
3. Fair and reasonable pay and incentive structures
4. Protection for whistle-blowers
5. Prudent balance sheet management and responsible lending, including refusing to lend where it is not in the customer’s best interests.