What is "conduct risk"?

Conduct risk refers specifically to the risk associated with the behavior of individuals and organizations that can lead to negative outcomes, particularly in the context of ethical standards and regulatory compliance. It encompasses actions that are deemed inappropriate or unethical, which can significantly impact the reputation and operational integrity of an organization.

This type of risk is particularly prevalent in financial services, where misconduct can have far-reaching consequences, including legal penalties, financial losses, and damage to the organization's reputation. By emphasizing the potential for unethical behavior, conduct risk highlights the importance of maintaining a culture of integrity and accountability within an organization.

Understanding conduct risk is vital for developing effective risk management frameworks and practices that foster ethical behavior and compliance with laws and regulations. Organizations that do not adequately address conduct risk may find themselves facing serious operational issues and lack of trust from stakeholders.