A panel of wealth experts discussed the phenomenon of "conduct risk" at the recent WealthBriefing Breakfast Briefing in London.

The issue of conduct risk and how wealth management professionals assess and manage it made for a lively recent Breakfast Briefing in London as organised by the publisher of this news channel.

Speakers at the event, held at the Carlton Club, were Gary Linieres, chief executive of WDX; Michael Bennett, chief operations officer, Charles Stanley; Emily Morris, director, Acanthus Consulting; Vinita Ramtri, head of conduct risk, Barclays Wealth and Investment Management, and Mark Spiers, head of wealth management, Bovill. The event was sponsored by WDX.

Drawing from his firm's experience, WDX’s Linieres said that only 25 per cent of wealth management firms had conducted serious conduct risk assessments and only 15 per cent had actually evolved an IT-related strategy to address the issues.

Moreover, he said 88 per cent of such firms said this regulatory change was not justified and almost 80 per cent found the extra workload of dealing with these regulations difficult or very difficult. Figures quoted by the panel’s chairman, Bruce Weatherill (also chairman of ClearView Financial Media), 75 per cent of wealth managers plan to increase the budgets of their compliance departments in the next 12-18 months, with 44 per cent seeing it as an opportunity to introduce positive strategic change. Charles Stanley’s Bennett spoke about the issue of firms demonstrating their services and products are suitable. "Our first relationship manager has just completed his full book last week – the champagne's going 'round!"

Emily Morris of Acanthus Consulting said: “Conduct risk is about putting the client at the heart of the business model and marketing is about meeting client needs profitably so they should be much aligned.”

“The wealth management market has been sales-led for the last few decades rather than marketing-led, but this is changing. Conduct risk and marketing cultures both need clients to be well-understood and for that understanding to permeate the whole business, and I think technology plays an important part in doing that. On the basis that we have to collect far more data on clients than we used to, I don't think it takes too much to push out the boat a little further and use a lot of the systems and processes that are used for conduct risk, including effective product governance and suitability to actually re-engage with clients.  Firms need to really understand their needs, very much with an eye to retention, referral and share of wallet which at the end of the day are the life-blood of all these businesses,” Morris said.

Linieres looked back at the inception of his firm in early 2013 and the environment at the time. “Clients have been seen as the RMs' intellectual property rather than part of the actual firm themselves; I think we saw the regulations that the Financial Conduct Authority was coming out with around conduct risk and suitability as something of a real game-changer in terms of CRM [customer relationship management] solutions. Client relationship data is a fundamental part of everything that conduct risk is about,” he said.

Panellists were asked how do wealth managers prove to clients and regulators that they are not just complying with the rules, but providing a better customer service when it comes to conduct risk? Barclays’ Ramtri persuaded a delegate to walk out of the room and walk back in again. Her explanation for this amused the audience.

“I guess you all know the answer. How do you actually prove something? The simplest way is to actually do it, so how do you prove to a regulator or a client that you comply with the law? The best way to prove that you provide clients with the best possible services is to provide them with the best possible services. Ultimately, you need to be doing this day in day out,” Ramtri said.

She enumerated three steps towards this goal:

-- Step 1, Outline to your organisation what is and what is not acceptable, telling everybody that it is definitely not acceptable to "tweak relationships to make a profit for yourself”;
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-- Step 2, When you are changing a proposition, or changing a relationship, or doing something else, make sure that you can give examples of your decision-making, logging such details as: “I thought of how to minimise the consequences of something going wrong and did this, then I thought of making the experience more flexible for the customer and therefore changed that”;

-- Step 3, Try to make it easy for people to do the right thing by realigning incentives and pay structures.

Bovill’s Spiers said that his firm fo9und that the FCA had taken to asking such questions as “why does the customer not buy your product?” Charles Stanley’s Bennett added: “They are now blaming you when you don't do something; it's just as important as when you do.”

Weatherill said that in present-day court cases, the weight of documentation requested “is amazing – they really want you to be able to say what were you doing on such-and-such a day at 11 o'clock.” He added that the FCA was now asking firms such questions as: “Show us the products that you decided were not suitable for clients.” Weatherill also said that people were now having to ask clients who'd been with them for 20 years or so questions such as “what was your source of wealth 20 years ago?”

“The last thing you want is a solution that's just there to keep the regulator happy. It'll then be a place where people go to dump data all day long and it won't be part of the day-to-day way that people work. RMs will find a hundred thousand reasons for not doing it.

They think that their relationship with the client is sacred. In their minds the client is theirs, not the firm's! That mentality has to change.” Linieres said.

In a straw poll of the delegates, they were asked the proportion (points out of ten) to which the 'behavioural side' met conduct risk. Nobody thought that it was ten out of ten; most of the panel thought 6-7. The audience as a whole placed it between 4 and 7.