The Financial Stability Board (FSB) has published a report entitled Stocktake of efforts to strengthen the governance framework to mitigate misconduct risks. The report describes the findings of a stocktake of efforts underway by international bodies, national authorities, industry associations and firms on the use of governance frameworks to address misconduct risk, and include a literature review on the root causes of misconduct.
The FSB’s workplan to reduce misconduct risk consists of three elements:
- examining whether reforms to incentives, for instance to governance and compensation structures, are having sufficient effect on reducing misconduct;
- improving global standards of conduct in the fixed income, commodities and currency markets; and
- reforming major financial benchmarks.
The FSB has also published a set of three areas for further work, with a view towards preparing a toolkit for supervisors and firms on:
- rolling bad apples. This problem arises when employees are dismissed due to misconduct at one firm (or leave under suspicion of misconduct) and then re-surface at another firm. This can be seen as a collective action problem. This work will try to define the problem and explore the current and potential uses of governance frameworks to make employee screening and due diligence more effective;
- responsibility mapping. While many policies set out supervisory expectations for the role and responsibilities of the board and senior management, some authorities have extended this concept to require institutions to identify the responsibility of specific senior individuals. This work will examine the ways in which responsibility mapping and related tools could be used to mitigate misconduct risk, including through supervisory examination or enforcement practices focused on the legal and regulatory requirements applicable to those individuals; and
- culture. The culture of an institution can be a major influence on its governance framework. This work will explore how governance mechanisms, such as escalation processes, training and non-financial incentives may mitigate misconduct risks posed by the culture of a firm.
A final report on this work will be published in March 2018.