FSB Publishes Update on Misconduct Reform

The Financial
Stability Board (FSB) has published its second report on progress in its
workplan of Measures to reduce misconduct risk that it agreed in May
2015.

The board says that ethical
conduct, and compliance with both the letter and spirit of applicable laws and
regulations, is “critical” to public trust and confidence in the financial
system.

It adds that misconduct
is also relevant to prudential oversight as it can potentially affect the
safety and soundness of a particular financial institution.

The FSB’s workplan is
looking at 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 (FICC)
markets; as well as reforming major benchmarks.

As part of its work to
study the role of incentives in
reducing misconduct, the FSB says it
undertook a survey and held a
roundtable earlier this year with financial institutions (mainly banks and bank
holding companies) on the role of compensation tools, such as in-year bonus
adjustment, penalties, and clawbacks in incentivising good conduct.

It says that by
end-2017, it will develop and consult on supplementary misconduct-related
guidance for existing compensation standards as well as recommendations for
consistent national reporting and collection of data on the use of compensation
tools to address misconduct.

The FSB says it also
held a roundtable with banks, bank holding companies, asset managers and
insurers to discuss efforts underway to strengthen governance frameworks to address
misconduct. The board has established a working group on governance frameworks,
under the chairmanship of Jeremy Rudin, Canada’s superintendent of financial institutions.
“By March 2017, the working group will take stock of efforts underway by
international bodies, national authorities, industry associations and firms relating
to governance practices to address misconduct, and then potentially develop a supervisory
toolkit or guidance for strengthening such governance frameworks,” FSB states.

The update does not add much on the work aimed at improving standards of
market practice.
The report says the
International Organization for Securities Commissions (Iosco) continues to
explore ways to further strengthen the current global framework to address
misconduct by firms and individuals in professional markets. It has completed a
mapping exercise of past Iosco work on conduct issues in wholesale markets and
a survey of Iosco members on their tools and approaches used to regulate this
sector. Iosco will publish a final report of its Market Conduct Task Force in
January 2017, including a detailed regulatory toolkit for wholesale market
conduct regulation, FSB says.

The report also notes
the release in May 2016 of the first stage of the FX market’s Global Code of
Conduct and notes that the complete Global Code and the adherence mechanisms
will be released in May 2017. These will include principles related to
electronic trading (including algorithmic operators and users), trading venues,
brokers and prime brokerage.

The update also notes
the FSB is monitoring progress in implementing the FSB’s recommendations set
out in its July 2014 report Reforming
Major Interest Rate Benchmarks
, which includes proposals, plans and
timelines for reform and strengthening of existing major interest rate
benchmarks and for additional work on the development and introduction of
alternative benchmarks. The FSB will issue a final progress report by end-2017,
it says.

The FSB further notes
that Iosco has undertaken a number of projects with respect to benchmarks
reform which are aimed primarily at assessing the degree of implementation of
the Principles for Financial Benchmarks
by benchmark administrators operating in Iosco jurisdictions.

“By end-2016, Iosco will
finalise guidance for benchmark administrators on the content of the statements
of compliance that administrators are expected to publish, and will also
publish its follow-up review of the WM/Reuters 4pm London Closing Spot Rate, a
key FX benchmark,” FSB states, adding it will publish a third progress report
on its misconduct workplan in advance of the next G20 Leaders’ meeting in July
2017.

Colin_lambert@profit-loss.com

Twitter @lamboPnL

Twitter
@Profit_and_Loss 

Colin Lambert

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