The Financial Stability Board (FSB) has issued a progress report to the G20 concerning measures to reduce misconduct risk.
The background to the progress report is that in early 2015 the FSB agreed a work plan on measures to reduce misconduct risk which would examine:
- whether the reforms to incentives, for instance to risk governance and compensation structures, are having sufficient effect on reducing misconduct and whether additional measures are needed to strengthen disincentives to misconduct;
- the progress of ongoing reforms to benchmarks, and whether steps are needed to improve global standards of conduct in the fixed income, currency and commodities (FICC) markets;
- whether there are ways that authorities could enhance coordination in the application of conduct regulation and the need for credible deterrence; and
- together with the World Bank and other relevant bodies, the extent of potential withdrawal from correspondent banking, its implication for financial exclusion, as well as possible steps to address this issue.
The progress report provides a summary of progress made so far and the planned next steps across the above first three streams.
Among the comments made on compensation structures the FSB notes that more analysis is needed to assess whether tools such as malus and clawback are sufficiently developed and effectively used to deter conduct risks.
In relation to conduct in FICC markets the FSB notes that there have been a number of discussions at the international level. In particular, at its annual board meeting in June the International Organization of Securities Commissions (IOSCO) had a wide ranging discussion of market conduct work streams including the UK Fair and Effective Markets Review and developments in other jurisdictions. The IOSCO board approved in October the establishment of a task force on market conduct that aims to:
- map IOSCO’s work to date on standards of conduct for individuals and firms engaged in activities with ‘professional’ counterparties in financial markets;
- undertake a survey of IOSCO members on the regulatory tools and approaches they have developed to promote proper conduct and accountability by market participants. This will include personal accountability mechanisms and remediation measures taken as a result of enforcement actions; and
- taking into account information collected in previous steps, discuss and develop a tool kit comprising measures to promote proper conduct by market participants, including individuals and firms. The task force aims to provide a final report by end-June 2016.
Future FSB actions planned for the first three streams mentioned at the beginning of this article are set out below.
Role of incentives in reducing misconduct
Future action includes:
- FSB to establish a working group to exchange good practices on the use of governance frameworks to address misconduct risks with a view to potentially developing a supervisory tool kit or guidelines, taking into account the work of the standard setting bodies;
- FSB to facilitate sharing of national experiences on the role of banks regulators’ (and possibly other regulators’) enforcement powers in addressing misconduct by individuals; and
- FSB to further examine the use of compensation tools such as malus and clawbacks and the use of different instruments as an element of deferred compensation and if appropriate make recommendations on better practices.
International coordination on conduct in the FICC markets
Future action includes:
- BIS Markets Committee to finalise its FX Code of conduct standards and principles, and proposals to ensure greater market adherence than to existing codes;
- FSB to publish a report on further progress in implementing the work plan on interest rate benchmarks;
- IOSCO to publish its final report on its follow up review of key interest rate benchmark administrators;
- IOSCO to conduct a follow-up review of major global FX benchmark providers; and
- IOSCO to publish its report to further strengthen the current global framework to address misconduct by firms and individuals in professional markets.
Coordination in the application of conduct regulation and need for credible deterrence
Future action includes that senior officials from prudential and conduct financial authorities on an ongoing basis to share information on their respective powers and approaches to the supervision and enforcement of conduct rules.
View FSB releases progress report on reducing misconduct risk in the finance industry, 6 November 2015