What does 'conduct risk' refer to in FCA regulation?

Conduct risk, in the context of FCA regulation, specifically pertains to the risk of inappropriate, unethical, or unlawful behavior by financial services firms. This involves actions that could harm customers or the integrity of the financial market itself. The FCA places a strong emphasis on this aspect because it directly affects consumer trust, market stability, and the overall reputation of the financial services sector.

When firms engage in conduct that fails to meet regulatory standards—such as mis-selling products, providing misleading information, or treating customers unfairly—they not only risk regulatory sanctions but also harm their own business in the long run. This focus on conduct risk aims to ensure that firms act with integrity, transparency, and in the best interest of their customers, thereby promoting a fair and equitable financial system.

The other options refer to different types of risks that, while relevant in financial contexts, do not specifically capture the essence of conduct risk as defined by FCA regulation. Temporary market fluctuations relate more to market risk, operational inefficiencies pertain to operational risk, and systemic financial collapse relates to systemic risk, which involves the stability of the entire financial system rather than individual firm behavior.