Financial services misconduct can impact not only consumers and markets, but the financial system as a whole. In response, the Financial Stability Board (FSB) announced in 2015 the launch of a workplan to reduce misconduct risk. Recently, the FSB published a “toolkit” for firms and supervisors offering a set of options for Strengthening Governance Frameworks to Mitigate Misconduct Risk, completing one of the four “building blocks” of its misconduct workplan. The toolkit outlines nineteen (19) tools organized around three overarching issues: mitigating cultural drivers of misconduct, strengthening individual responsibility and accountability, and dealing with "rolling bad apples."
Mitigating cultural drivers of misconduct: The FSB highlights the role of culture in reducing incidents of misconduct and emphasizes that governance frameworks and culture mutually influence one another. Elements of culture that can influence governance frameworks include leadership, the decision-making process, and values and behavioral norms. The FSB identifies seven tools to mitigate potential drivers of misconduct.
For firms, the FSB emphasizes the role of senior leadership in transforming culture. This includes:
To assess culture, national authorities might consider:
Strengthening individual responsibility and accountability: Holding individuals accountable for their behavior has become increasingly important in response to rising fines and settlements. The FSB notes that emphasizing individual accountability can support cultural change and encourages regulators to review the effectiveness of such firm-led approaches.
Tools related to individual responsibility and accountability for both firms and national authorities include:
National authorities may also consider:
Addressing the "rolling bad apples" phenomenon: A "rolling bad apple" is an individual who changes firms, or changes roles within a firm, without disclosing previous misconduct or conduct that contravenes a firm's policies, norms, or values. The ability to change firms without a record of misconduct can reduce deterrence.
To address the “rolling bad apple” phenomenon, firms might consider:
National authorities might consider:
The FSB stresses that the outlined tools do not constitute guidance and are not recommendations. Rather, the tools are based on the shared experiences and diversity of perspectives of FSB members. The FSB encourages firms and national authorities to choose those options that work within their jurisdictions, considering their legislative, judicial, and regulatory frameworks. Nonetheless, the FSB adds that the overarching issues mitigating cultural drivers of misconduct, strengthening individual responsibility and accountability, and dealing with "rolling bad apples," are interlinked and build upon each other to outline the critical elements needed to strengthen governance frameworks and mitigate misconduct.
The building blocks of the FSB’s workplan to reduce misconduct risk consist of i) standards and codes of behavior, such as the FX Global code and reforms to benchmark-setting practices; ii) a toolkit of measure related to wholesale market conduct, based on national approaches; iii) guidance on compensation practices in addressing misconduct; and iv) a toolkit to strengthen governance frameworks by improving corporate culture, clarifying individual responsibility and accountability and preventing the movement of “bad apples” within or between firms. Publication of the toolkit completes the fourth building block.