Conduct risk is the risk that a firm’s behavior, actions, or omissions cause poor outcomes for its customers or undermine market integrity. Managing conduct risk requires moving beyond traditional legal compliance checks and actively auditing internal corporate cultures.
Managing Sales Incentive Structures
Poorly designed sales incentives are a common driver of conduct risk. The compliance function must review and balance variable compensation plans to prevent conflicts of interest:
[Pure Revenue Bonus System] --------> High Conduct Risk (Drives Mis-selling)
                                               |
                                               v
[Balanced Balanced Scorecard Model] -> Reduced Conduct Risk (Protects Clients)
  |- 50% Quantitative Volume Targets
  |- 50% Qualitative Compliance Metrics (Low Error Rates, High Retention)

Protecting Vulnerable Customers
Regulators expect firms to identify and protect vulnerable customers, such as individuals facing cognitive decline, financial distress, or sudden life changes. Compliance guidelines must outline clear protocols for front-line staff to escalate potential issues, simplify product disclosures, and prevent the exploitation of vulnerable groups.
 
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