The Financial Stability Board (FSB) today published its second report on progress in its work plan of Measures to reduce misconduct risk that it agreed in May 2015.
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. Misconduct is also relevant to prudential oversight as it can potentially affect the safety and soundness of a particular financial institution.
The FSB’s work plan covers: (1) examining whether reforms to incentives, for instance to governance and compensation structures, are having sufficient effect on reducing misconduct; (2) improving global standards of conduct in the fixed income, commodities and currency (FICC) markets; and (3) reforming major benchmarks.
The report provides an update on progress made and future actions to take forward the FSB’s misconduct work plan:
- The role of incentives in reducing misconduct. Earlier this year the FSB undertook a survey and held a roundtable with financial institutions (focusing on banks and bank holding companies) on the role of compensation tools, such as in-year bonus adjustment, malus and clawback, in incentivising good conduct. By end-2017, the FSB will develop and consult on (i) supplementary misconduct-related guidance for existing compensation standards and (ii) recommendations for consistent national reporting and collection of data on the use of compensation tools to address misconduct.
- Improving standards of market practice. 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. To promote the integrity and effective functioning of foreign exchange markets, in May 2016 the Foreign Exchange Working Group of the Bank for International Settlements (BIS) issued its first phase of the Global Code of Conduct for the Foreign Exchange Market and principles for adhering to the new standard. The complete Global Code and the adherence mechanisms will be released in May 2017, which will include principles related to electronic trading (including algorithmic operators and users), trading venues, brokers and prime brokerage.
- Reforming financial benchmarks.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. 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.
The FSB will publish a third progress report on its misconduct work plan in advance of the next G20 Leaders’ meeting in July 2017.
The FSB statement and related information is available here.