Financial Stability Board Publishes Toolkit to Abate Misconduct Risk

The Financial Stability Board has published a report, "Strengthening Governance Frameworks to Mitigate Misconduct Risk: A Toolkit for Firms and Supervisors." The report is part of the FSB's work on measures to reduce misconduct in the financial sector and follows the FSB's stocktake of endeavors by international bodies, national authorities, industry associations and firms.

The Toolkit is designed to provide firms and authorities with a set of tools that can be used, taking into account the applicable legislative, judicial and regulatory frameworks. Rather than creating an international standard or adopting a prescriptive approach, the FSB's Toolkit allows firms and supervisors to decide whether and how to use the Toolkit to address misconduct risk. The FSB also states that firms and their supervisors can use individual tools separately or in combination.

The Toolkit comprises 19 tools, divided into three categories and assigned between firms and national authorities. These are set out below.

Category 1: mitigating cultural drivers of misconduct

• Firms

1. Senior leadership of the firm articulate desired cultural features that mitigate the risk of misconduct;
2. Identify significant cultural drivers of misconduct by reviewing a broad set of information and using multidisciplinary techniques; and
3. Act to shift behavioral norms to mitigate cultural drivers of misconduct.

• National authorities

1. Build a supervisory program focused on culture to mitigate the risk of misconduct;
2. Use a risk-based approach to prioritize for review the firms or groups of firms that display significant cultural drivers of misconduct;
3. Use a broad range of information and techniques to assess the cultural drivers of misconduct at firms; and
4. Engage firms' leadership with respect to observations on culture and misconduct.

Category 2: strengthening individual responsibility and accountability:

• Firms and/or national authorities

1. Identify key responsibilities, including mitigation of the risk of misconduct, and assign them;
2. Hold individuals accountable; and
3. Assess the suitability of individuals assigned key responsibilities.

• National authorities

1. Develop and monitor a responsibility and accountability framework; and
2. Coordinate with other authorities.

Category 3: addressing the rolling bad apples phenomenon:

• Firms

1. Communicate conduct expectations early and consistently in recruitment and hiring processes;
2. Enhance interviewing techniques;
3. Leverage multiple sources of available information before hiring;
4. Reassess employee conduct regularly; and
5. Conduct 'exit reviews'.

• National authorities

1. Practices for screening prospective employees and monitoring current employees; and
2. Promote compliance with legal or regulatory requirements regarding conduct-related information about applicable employees, where these exist.

View the report.