Financial Institutions Face Growing Conduct Risk Concerns as Regulatory Framework Lags Behind
As the financial landscape continues to evolve at a rapid pace, concerns are mounting over the growing conduct risk faced by financial institutions. This increasingly complex issue refers to the risks associated with behaviors that deviate from social norms, violate business and market practices, and lack user perspectives.
A New Era of Conduct Risk
The Financial Services Agency (JFSA) in Japan has highlighted the need for financial institutions to prioritize conduct risk management. The JFSA’s approach involves a wide-ranging intelligence gathering process that takes into account various sources of information, including:
- Interviews with executives and employees
- Analysis of documents submitted by financial institutions
- Monitoring of news and market trends
In addition, the agency is placing greater emphasis on collecting and analyzing data from a wider range of sources, including:
- Non-financial firms
- Legislative movements
- Economic and social changes
Risks to User Protection and Market Integrity
Conduct risks can materialize when behaviors of financial institution executives and employees adversely affect user protection, market integrity, or social criticism. Financial institutions have always been expected to contribute actively to user protection and market integrity due to their public nature and social role.
The JFSA’s approach recognizes that conduct risk is not just about identifying risks that have already materialized, but also about detecting potential issues before they arise.
Supervisory Approach
To mitigate conduct risk, the JFSA will take a proactive approach by:
- Gathering intelligence from a wide range of sources
- Setting monitoring issues based on an analysis of each financial institution’s business model and strategy
- Developing strategies to address identified risks
The agency will also make use of IT systems to analyze large amounts of data and identify trends.
Conclusion
As the financial landscape continues to evolve, conduct risk is emerging as a major concern for financial institutions. The JFSA’s approach recognizes the need for a proactive and comprehensive approach to monitoring conduct risk, including intelligence gathering, analysis, and strategy development.
By prioritizing conduct risk management, financial institutions can help prevent future misconducts and maintain trust in the financial system. As the regulatory framework continues to evolve, it is essential that financial institutions stay ahead of the curve and prioritize user protection and market integrity.