Global policymakers issued guidance that aims to help firms adopt compensation practices that use clawbacks and other tools to deter misconduct in the financial industry, and to deal with bad behaviour when it does occur.
The Financial Stability Board (FSB) on Tuesday published new draft guidance on Thursday that is intended to provide financial firms and regulators with a framework to consider how compensation practices and tools, such as bonus adjustments, maluses, and clawbacks, can be used to reduce misconduct risk and to address incidents of misconduct.
The guidance, which is out for public consultation, is designed to supplement the FSB’s principles on sound compensation practices that were developed in response to the financial crisis. Since then, the FSB notes, regulators and firms have been working to improve the link between risk governance and compensation practices.
“Recent events related to misconduct have focused the attention of many supervisors and financial institutions more intensively on the need to develop robust frameworks for identifying, preventing and remedying misconduct,” the FSB says in a statement.
The FSB says that compensation structures can help reduce the risk of conduct, while also signalling financial firms efforts to establish acceptable behaviour standards, and compliance expectations. “To ensure such accountability, firms should have tools available to consider using when misconduct occurs,” it says.
The guidance highlights eight considerations that, the FSB says, are relevant for firms and regulators in terms of governance of compensation and misconduct risk, and for the effective alignment of compensation and supervision of misconduct risk.
Comments on the consultation are due by Aug. 30.
The FSB plans to finalize the guidance by the end of the year.