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Governance and misconduct

Governance and misconduct

The Financial Stability Board (FSB) has published a “toolkit” to strengthen governance frameworks to mitigate misconduct risk in both retail and wholesale markets.

This “toolkit”(PDF 1.11MB) supplements earlier FSB work on risk governance, remuneration, benchmark setting and culture; and an earlier FSB stocktake of efforts by international bodies, national authorities, industry associations and firms to strengthen governance frameworks to reduce misconduct risk.

Firms in all sectors are likely to receive greater supervisory attention in the three main area on which the toolkit focuses: (i) cultural drivers of misconduct, (ii) individual responsibility and accountability, and (iii) the “rolling bad apples” phenomenon (where individuals who engage in misconduct are able to obtain subsequent employment elsewhere without disclosing their earlier misconduct to their new employer).

Individual responsibility and accountability

The toolkit here is very similar in approach to the UK's Senior Managers Regime (and the Hong Kong Securities and Futures Commission's Manager-In-Charge Regime).

The toolkit calls for supervisory authorities to develop a framework that identifies key responsibilities in a firm, allocates those responsibilities to specific individuals, and holds individuals accountable for the responsibilities to which they have been assigned.

This would then read across to the need for firms to identify key responsibilities, including for the mitigation of the risk of misconduct, to assign these responsibilities to specific individuals, to assess the suitability of individuals assigned key responsibilities, and to hold individuals accountable accordingly.

This may have a significant impact on supervisors and firms that have previously focused more on the collective responsibility of a firm's Board or senior management.

Culture

Apart from the specific emphasis on culture the toolkit contains nothing new or surprising. It reiterates the need for the senior leadership of firms to articulate a desired culture that will mitigate misconduct risk, to identify and address significant cultural drivers of misconduct that are in conflict with the cultural vision.

Supervisors are then encouraged to adopt a risk-based supervisory programme focusing on culture, using a broad range of information and techniques, and to engage with the senior leadership of firms on the outcomes form this.

Bad apples

Again, there is nothing new or surprising here. Firms are encouraged to enhance their interviewing techniques to consider behavioural competencies and a candidate's conduct history; to leverage multiple sources of available information before hiring; to reassess employee conduct regularly; and to undertake “exit reviews”.

Supervisors are then recommended to supervise firms' practices for screening prospective employees and monitoring current employees, and to promote firms' compliance with legal or regulatory requirements regarding conduct-related information about applicable employees, where these exist.

Although mentioned as a possibility, the toolkit contains no new mechanisms for ensuring that relevant past history is shared with future employers, nor any proposals for overcoming legal and “custom and practice” hurdles to information sharing.

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