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Conduct risk

Conduct risk is the risk that the behaviour of a firm or its employees, in how they sell products, treat customers, or make decisions, leads to poor outcomes for customers or markets. It arises from culture, incentives, governance and individual judgement, and sits at the centre of the FCA's supervisory approach.

Conduct risk is the risk that the behaviour of a firm or its employees, in how they sell products, interact with customers, or make decisions, leads to poor outcomes for customers or markets. It includes risks arising from culture, incentives, governance failures and individual decision-making. The FCA places conduct risk at the centre of its supervisory approach, and the Consumer Duty has raised the bar by requiring firms to proactively avoid foreseeable harm.

Why conduct risk matters

Unlike many regulatory risks, conduct risk is embedded in everyday decisions made across the firm, well beyond the compliance functions. Poor conduct can lead to customer harm, market distortion, regulatory action and significant remediation costs. Firms are expected to manage conduct risk through culture, governance, incentives and training, not just through rules and controls.

Who it applies to

All staff. Conduct risk is particularly acute in customer-facing, product design and pricing functions, but it can arise anywhere in the firm.

Consumer Duty and SM&CR.

Frequently asked questions

What is conduct risk in financial services?
Conduct risk is the risk that how a firm or its staff behave, in selling products, treating customers or making decisions, leads to poor outcomes for customers or markets. It arises from culture, incentives, governance failures and individual judgement, not just from compliance functions, and is central to the FCA's supervisory approach.
How do firms manage conduct risk?
Firms manage conduct risk through culture, governance, incentive design and training rather than rules alone, because the risk is embedded in everyday decisions across the business. The Consumer Duty has raised the bar by requiring firms to proactively avoid foreseeable harm, making the active management of conduct risk a regulatory expectation rather than good practice.

Reviewed by Margaret Hassett

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