World’s top banks still guilty of misconduct

“The fact that over half of the world’s global systemically important banks [a.k.a. G-SIBs] — among them the top 10 G-SIBs — have had such misconduct-related fines levied against them, demonstrates that misconduct is not limited to just a few bad apples,” he said.

Moreover, Hubbs pointed out, much of this misconduct took place after the financial crisis, a time of increased regulatory attention on the industry.

“But even with the heightened awareness and attention on financial institutions,” Hubbs said, “financial institutions still behaved in a manner that exposes them to prudential and reputational risk — exposure that can damage an institution’s reputation and relationships with its customers, ultimately affecting its bottom line.”

Given these risks, OSFI is focusing on the “risk culture” at financial services firms, among other things, Hubbs noted. In particular, it is concerned about compensation and whether firms’ pay practices are structured in a way that drives misconduct. “More broadly, OSFI is reviewing performance management,” Hubbs said. “We are looking to see if financial institutions consider the behaviours of individuals or departments against risk appetite when setting compensation levels and promotional opportunities.”

Along with compensation practices, OSFI is also looking at the “role of risk culture in the acquisition decision process” and retail risk governance at the banks, Hubbs said.

“A strong risk-appetite framework, balanced with appropriate compensation practices can go a long way to mitigating misconduct risk,” he added.

The speech also addressed the importance of public disclosure and market discipline: “In times of uncertainty, high-quality disclosures can serve to ease the fears of the public and help to promote the safety and soundness of the Canadian financial system,” he said. “The public disclosure of risk culture, risk appetite and risk activities acts as a mechanism to hold an institution accountable for its actions. Good behaviour is rewarded, while bad behaviour is questioned.”

Earlier this year, OSFI proposed some revisions to banks’ disclosure requirements and, Hubbs said, it expects to issue a final guideline in this area in the summer. Looking ahead, disclosure requirements are likely to expand, he noted, as global regulators add mandated disclosures for items such as operational risk and total loss absorbency capacity to banks’ disclosure obligations.

However, Hubbs said, OSFI does not intend to start disclosing the results of stress testing by Canadian banks, as is the practice in some other jurisdictions: “OSFI believes that stress testing is best used as a supervisory tool and the results remain private since stress testing should be embedded in the practices and culture of the institutions we supervise.”