13 June 2017

Financial Stability Board to develop toolkit for mitigating misconduct

The Financial Stability Board (FSB) has published a report that takes stock of efforts to strengthen the governance frameworks to mitigate misconduct risks. The report forms part of the FSB’s work plan to reduce misconduct risk in the financial sector, following a series of high-profile misconduct cases that came to light in the aftermath of the financial crisis. The FSB identified three areas for further investigation and aims to prepare a toolkit for supervisors and financial undertakings on these three areas.

The FSB’s work plan consists of three elements:

  1. examining whether reforms to incentives, for instance, to governance and compensation structures, have a sufficient effect on reducing misconduct
  2. improving global standards of conduct in the fixed income, commodities and currency markets
  3. reforming major benchmarks.

The FSB is in the process of assessing these areas and will, where appropriate, propose new measures.

The FSB report has identified the following areas for further investigation:

  1. the “rolling bad apples” problem: this arises when employees are dismissed due to misconduct at one firm (or leave under suspicion of misconduct) and then are employed by another firm, where they repeat their misconduct. The FSB sees this as a collective problem of the financial sector arising from a clash between the wish to conduct strong due diligence on prospective employees, and the fear of disclosing information about former employees because of concerns over privacy and litigation risks.
  2. responsibility mapping: identifying and specifying responsibilities of specific senior individuals, in addition to supervisory expectations of the board and senior management as a collective. The goal is to make specific senior individuals responsible and accountable for governing the conduct of others.
  3. culture: the norms and expectations that most strongly influence behaviour within financial undertakings can be very different from the undertaking’s stated values and policies. As the culture of an undertaking can be a major influence on its governance framework, the FSB will seek to give examples of how a change in company culture can provide practical support to governance frameworks in addressing misconduct risks.

The FSB aims to prepare a toolkit for supervisors and financial undertakings on these three areas.

FSB’s Working Group on Governance Frameworks, responsible for the report, will finalise its work by March 2018.

Link to the FSB report: http://www.fsb.org/wp-content/uploads/WGGF-Phase-1-report-and-recommendations-for-Phase-2.pdf