Conduct risk and customer outcomes

RiskAtoms Bank's largest loss in ten years was not a fraud, a rogue trader or an outage. It was an account sold to a million customers from 2012 to 2016. The bank provisioned £82m for redress in February 2018 and had to add £38m seventeen months later, because more customers complained than it had planned for. Those two entries are 50% of all the bank's operational losses since 2016.

L2.3.09: Conduct risk defined conduct risk and told the PPI and LIBOR stories. Here the question is practical: how does a bank find conduct risk before it becomes redress, and what does it cost when it does not?

How mis-selling builds up

Conduct losses are slow. Harm is done at the point of sale, one customer at a time, and shows up years later as complaints. The bank's packaged accountPackaged bank account: a current account with a monthly fee that bundles extras such as travel insurance, phone insurance and breakdown cover. began to be sold in March 2012. The problem was found in September 2017, 2,023 days later: the longest gap in the book.

Product governance

The defence is to treat a product as something with a life cycle that the firm must govern, not a launch that is then left to the sales teams.

Mis-selling of retail products remains one of the bank's four High residual risks (15 inherent, 10 residual). A second conduct risk, poor outcomes for customers in financial difficulty, has not moved at all (9 to 9): its only control, checking forbearance decisions against policy, is partly effective in design and in operation.

Indicators that lead, and one that lags

The book's complaints KRI has amber at 2.0 and red at 2.5 complaints per 1,000 accounts a month. It turned red only once in two years: in October 2025, at 2.64, after the payments outage had already happened. That is a lagging indicatorLagging indicator: a measure that moves after harm has happened, such as complaints. Leading indicators move before it, such as sales to customers outside the target market.: it counts harm done. Conduct teams pair it with indicators that move earlier: sales outside the target market, low claim rates, early cancellations, incentive pay tied to volume, and outcomes for vulnerable customers.

The Consumer Duty

The FCA's Consumer DutyConsumer Duty: the FCA's rules, in force from 31 July 2023, requiring firms to act to deliver good outcomes for retail customers. (policy statement PS22/9, July 2022) moved conduct regulation from rules about the sale to evidence about outcomes. Its principle is that “a firm must act to deliver good outcomes for retail customers”, with three cross-cutting rules: act in good faith, avoid foreseeable harm, and enable and support customers to pursue their financial objectives. Four outcomes give it shape: products and services, price and value, consumer understanding, and consumer support. The board must review a report on outcomes at least once a year.

When it goes wrong: redress

Once a firm finds that customers were harmed, it must put them right with redressRedress: putting customers back in the position they would have been in, usually a refund of what they paid plus interest. and book a provisionProvision: a liability booked for an obligation of uncertain timing or amount, at the best estimate of what it will cost (IAS 37; L3.7.13). for the cost. A redress programme is a simple model with uncertain inputs: how many customers are in scope, how many will complain or respond, how many complaints will be upheld, and what each is owed.

With $N$ customers in scope, response rate $r$, uphold rate $u$, average redress $R$ and handling cost $A$ per complaint, the provision and its sensitivity to the response rate are:

Redress on a fee-based product refunds the fees with simple interest $i$ from each payment to settlement, on average $\bar\tau$ years: $R = F\,(1 + i\,\bar\tau)$. For the packaged account, fees of £11 for 40 months and $\bar\tau = 3.125$ years:

Each percentage point of response is worth $N \times 0.01 \times 400 = \text{£}4\text{m}$. The bank's mis-selling scenario (L3.7.06: Scenario analysis) puts a programme like this at once in 10 years, typically £40m and £300m in a severe case: an expected $\lambda\,e^{\mu + \sigma^2/2} = 0.1 \times 58.2 = \text{£}5.82\text{m}$ a year.

Set the four assumptions behind the packaged-account provision and compare your answer with what the bank booked first and what it finally cost.

• Consumer Duty. In force from 31 July 2023 for products open to sale or renewal and 31 July 2024 for closed products. It sets a higher standard than the earlier principle of treating customers fairly, and the FCA expects firms to evidence outcomes, not just processes.
• Redress. Where harm is widespread, the FCA can set up an industry scheme, as it did for motor finance in March 2026. PPI was far larger: £38.3bn paid from January 2011 to December 2019.
• Capital. Redress and conduct fines are operational losses under “clients, products and business practices”, so they enter the loss component of the standardised approach in M4.4: Counterparty, operational and large exposures. Without its redress programme, the bank's Basel internal loss multiplier would be below 1 (L3.7.07: Measuring frequency and severity).

• Conduct is 53% of the bank's ten-year losses; one mis-sold account is 50%.
• Mis-selling is created at the sale and found years later (5.5 years here); complaints are a lagging indicator.
• Product governance runs from target market and fair value through approval and sales oversight to outcome monitoring and review.
• A redress provision is customers × response × (uphold × redress + handling); the response rate moves it most (£4m a point here).
• The Consumer Duty asks firms to act to deliver good outcomes and to evidence them across four outcomes, with an annual report to the board.

Packaged bank account

Packaged bank account: a current account with a monthly fee that bundles extras such as travel insurance, phone insurance and breakdown cover.

Redress

Redress: putting customers back in the position they would have been in, usually a refund of what they paid plus interest.

Provision

Provision: a liability booked for an obligation of uncertain timing or amount, at the best estimate of what it will cost (IAS 37; L3.7.13).

Target market

Target market: the customers a product is designed for, by their needs, characteristics and objectives; also who it is not for.

Fair value assessment

Fair value assessment: the firm's check that the total price a customer pays is reasonable for the benefits they get, for each group of customers.

Consumer Duty

Consumer Duty: the FCA's rules, in force from 31 July 2023, requiring firms to act to deliver good outcomes for retail customers.

Lagging indicator

Lagging indicator: a measure that moves after harm has happened, such as complaints. Leading indicators move before it, such as sales to customers outside the target market.

Vulnerable customer

Vulnerable customer: someone who, because of their personal circumstances, is especially likely to suffer harm, for example through ill health, a bereavement or low financial resilience.