Implementation and Effects of the G20 Financial Regulatory Reforms: Fourth Annual Report

28 November 2018 | PDF full text (2 MB)

This is the fourth annual report on the implementation and effects of the G20 financial regulatory reforms. Ten years after the crisis, the report highlights the progress made in the reform agenda as the FSB pivots towards implementation and rigorous evaluation. Looking ahead, the report highlights some challenges in promoting a financial system that supports the G20’s objective of strong, sustainable and balanced growth, while preserving open and integrated markets and adapting to rapid technological change.

The report documents the substantial progress that has been made in implementing key post-crisis financial reforms; discusses how the reforms have contributed to the core of the financial system becoming more resilient to economic and financial shocks; describes the FSB’s work to evaluate whether reforms are working as intended; lays out why preserving financial stability, and supporting sustainable growth, requires the continued monitoring of developments in the global financial system; and documents the benefits of cooperation between jurisdictions in the aftermath of the crisis.

The report, which was delivered to the G20 Summit in Buenos Aires, calls for the support of G20 Leaders in implementing the agreed reforms, and reinforcing global regulatory cooperation.

The report includes a colour-coded table that summarises the status of implementation across FSB jurisdictions for priority reform areas.

Implementation of reforms in priority areas by FSB jurisdictions

The FSB is now pivoting towards dynamic implementation of the G20 reforms and rigorous evaluations of their effects in order to support the provision of financial services to the real economy. The FSB will also continue to monitor financial stability risks relating to high sovereign, corporate and household debt levels in many parts of the world, and to assess the resilience of evolving market structures and the impact of technological innovation.

Implementation and Effects of the G20 Financial Regulatory Reforms – Dashboard

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The FSB’s fourth annual report to the G20 summarises in a colour-coded table the status of implementation across FSB jurisdictions for priority reform areas. This ‘dashboard’ was included in the report.

FSB reports to G20 Leaders on progress in financial regulatory reforms

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Ref no: 51/2018

The FSB today published its fourth annual report on the implementation and effects of the G20 financial regulatory reforms. Ten years after the crisis, the report highlights the progress made in the reform agenda as the FSB pivots towards implementation and rigorous evaluation. Looking ahead, the report highlights some challenges in promoting a financial system that supports the G20’s objective of strong, sustainable and balanced growth, while preserving open and integrated markets and adapting to rapid technological change.

The report documents the substantial progress that has been made in implementing key post-crisis financial reforms; discusses how the reforms have contributed to the core of the financial system becoming more resilient to economic and financial shocks; describes the FSB’s work to evaluate whether reforms are working as intended; lays out why preserving financial stability, and supporting sustainable growth, requires the continued monitoring of developments in the global financial system; and documents the benefits of cooperation between jurisdictions in the aftermath of the crisis.

The report, which will be delivered to the G20 Summit in Buenos Aires, calls for the support of G20 Leaders in implementing the agreed reforms, and reinforcing global regulatory cooperation.  

  • Regulatory and supervisory bodies should lead by example in promoting the timely, full and consistent implementation of remaining reforms to Basel III, resolution regimes, OTC derivatives and non-bank financial intermediation. This will support a level playing field and avoid regulatory arbitrage.

  • Frameworks for cross-border cooperation between authorities should be enhanced in order to build trust, allow for the sharing of information, and to preserve an open and integrated global financial system.

  • Authorities should evaluate whether the reforms are achieving their intended outcomes, identify any material unintended consequences, and address these without compromising on the objectives of those reforms.

  • Financial stability authorities should continue to contribute to the FSB’s monitoring of emerging risks and stand ready to act if such risks materialise.

Notes to editors

This fourth annual report on the implementation and effects of reforms is the last FSB report to be published ahead of the G20 Leaders’ Summit in Buenos Aires. The report includes an implementation ‘dashboard’ that summarises, in a colour-coded table, the status of implementation across FSB jurisdictions for priority reform areas. The report also includes the main findings from the recently concluded FSB evaluations on the effects of G20 financial reforms on incentives to centrally clear OTC derivatives and infrastructure finance. A full list of the reports delivered to the Summit is available on the FSB website.

As part of its reporting, the FSB also published today the latest annual survey responses by its member jurisdictions on implementation of other areas of reform together with summary tables and jurisdiction profiles on implementation progress. Taken together, these reports provide a holistic picture of the implementation of the G20 reforms.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Mark Carney, Governor of the Bank of England. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

FSB Procedural Guidelines

27 November 2018

FSB Chair’s letter to G20 Leaders meeting in Buenos Aires

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This letter from the FSB Chair was sent to the G20 Leaders ahead of their meeting in Buenos Aires on 30 November-1 December. The Chair highlights that 2018 has been a year of transition:

  • from robust, broad-based global growth to a more uneven global expansion with emerging downside risks;

  • from accommodative to tightening financial conditions; and

  • from strong capital inflows to emerging market economies to capital outflows from many of them, in some cases significantly so.

These transitions are taking place against a backdrop of important structural changes in the financial system, with fast-growing sectors such as fintech and non-bank finance bringing welcome diversity while also creating potential vulnerabilities.

The FSB has also transitioned. After a decade delivering the G20’s ambitious reforms to address the fault lines that caused the global financial crisis, the FSB is pivoting to focus on implementing those reforms, evaluating their effectiveness, and adjusting them where necessary. In parallel, new policies are being developed to address new risks to financial stability.

The letter reports on the FSB’s delivery against its four priorities for this year:

Addressing emerging vulnerabilities while harnessing the benefits of innovation

The letter highlights the importance of continued vigilance to contain the risks of non-bank finance, including implementing the FSB’s recommendations to address structural vulnerabilities associated with asset management; the publication of a cyber lexicon, and new work to develop effective practices for financial institutions’ responses to, and recovery from, major cyber incidents. It also highlights the FSB’s work to ensure that the G20 can harness the benefits of new financial technologies, while containing risks to financial stability.

Disciplined completion and implementation of the G20’s reform priorities

G20 post-crisis reforms have delivered a safer, simpler and fairer financial system. To reinforce this progress, the FSB is working with standard-setters to complete work on a few final policy areas and focus on the implementation of the agreed financial reforms. Priorities include: full, timely and consistent implementation of Basel III; finalising policy to deliver resilient, recoverable and resolvable central counterparties; and work by the International Association of Insurance Supervisors to deliver a new framework for addressing systemic risks in insurance sector. The letter also highlights deliverables including completing a toolkit of measures to address the underlying causes of misconduct; maintaining an open and inclusive financial system through the Correspondent Banking Action Plan; and encouraging progress in mitigating the financial stability risks from climate change through the Taskforce on Climate-related Financial Disclosures.

Pivoting to policy evaluation to ensure reforms are delivering resilience efficiently

As its work to fix the fault lines that caused the financial crisis draws to a close, the FSB’s objectives are to assess whether reforms are operating as intended, and to identify and deliver adjustments where appropriate, without compromising on the agreed level of resilience. This dynamic implementation will ensure that the G20 reforms remain fit for purpose amidst changing circumstances. To this end the FSB delivered to the G20 Leaders Summit the first two evaluations of reforms, on the effects on infrastructure finance and on incentives to centrally clear over-the-counter derivatives.

Optimising how the FSB works to maximise its effectiveness and transparency

A decade ago, the G20 created the FSB to identify and address vulnerabilities that could threaten the stability of the global financial system. The FSB’s strength results from its multidisciplinary, consensus-based and member-driven approach. To make sure the FSB is fit for the next phase, the FSB has reviewed how it works and will take a number of steps to improve process and transparency, including an enhanced approach to prioritisation of work focused on promoting financial stability and outreach with external stakeholders.

Conclusion

The letter ends by noting that, having built a safer, simpler and fairer financial system the G20 and FSB bear heavy responsibilities to safeguard recent progress, address new risks, and seize new opportunities presented by the major transitions underway in the global economy and financial system. Seizing new opportunities includes building a more open, integrated and resilient financial system on the strong platform created.

FSB Chair reports to G20 Leaders ahead of the Buenos Aires Summit

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Ref: 49/2018

The Financial Stability Board (FSB) today published a letter from FSB Chair Mark Carney to G20 Leaders ahead of their Summit in Buenos Aires this weekend.

The Chair highlights that 2018 has been a year of transition:

  • from robust, broad-based global growth to a more uneven global expansion with emerging downside risks;

  • from accommodative to tightening financial conditions; and

  • from strong capital inflows to emerging market economies to capital outflows from many of them, in some cases significantly so.

These transitions are taking place against a backdrop of important structural changes in the financial system, with fast-growing sectors such as fintech and non-bank finance bringing welcome diversity while also creating potential vulnerabilities.

The FSB has also transitioned. After a decade delivering the G20’s ambitious reforms to address the fault lines that caused the global financial crisis, the FSB is pivoting to focus on implementing those reforms, evaluating their effectiveness, and adjusting them where necessary. In parallel, new policies are being developed to address new risks to financial stability.

The letter reports on the FSB’s delivery against its four priorities for this year:

Addressing emerging vulnerabilities while harnessing the benefits of innovation

The letter highlights the importance of continued vigilance to contain the risks of non-bank finance, including implementing the FSB’s recommendations to address structural vulnerabilities associated with asset management; the publication of a cyber lexicon, and new work to develop effective practices for financial institutions’ responses to, and recovery from, major cyber incidents. It also highlights the FSB’s work to ensure that the G20 can harness the benefits of new financial technologies, while containing risks to financial stability.

Disciplined completion and implementation of the G20’s reform priorities

G20 post-crisis reforms have delivered a safer, simpler and fairer financial system. To reinforce this progress, the FSB is working with standard-setters to complete work on a few final policy areas and focus on the implementation of the agreed financial reforms. Priorities include: full, timely and consistent implementation of Basel III; finalising policy to deliver resilient, recoverable and resolvable central counterparties; and work by the International Association of Insurance Supervisors to deliver a new framework for addressing systemic risks in insurance sector. The letter also highlights deliverables including completing a toolkit of measures to address the underlying causes of misconduct; maintaining an open and inclusive financial system through the Correspondent Banking Action Plan; and encouraging progress in mitigating the financial stability risks from climate change through the Taskforce on Climate-related Financial Disclosures.

Pivoting to policy evaluation to ensure reforms are delivering resilience efficiently

As its work to fix the fault lines that caused the financial crisis draws to a close, the FSB’s objectives are to assess whether reforms are operating as intended, and to identify and deliver adjustments where appropriate, without compromising on the agreed level of resilience. This dynamic implementation will ensure that the G20 reforms remain fit for purpose amidst changing circumstances. To this end the FSB delivered to the G20 Leaders Summit the first two evaluations of reforms, on the effects on infrastructure finance and on incentives to centrally clear over-the-counter derivatives.

Optimising how the FSB works to maximise its effectiveness and transparency

A decade ago, the G20 created the FSB to identify and address vulnerabilities that could threaten the stability of the global financial system. The FSB’s strength results from its multidisciplinary, consensus-based and member-driven approach. To make sure the FSB is fit for the next phase, the FSB has reviewed how it works and will take a number of steps to improve process and transparency, including an enhanced approach to prioritisation of work focused on promoting financial stability and outreach with external stakeholders.

Conclusion

The letter ends by noting that, having built a safer, simpler and fairer financial system the G20 and FSB bear heavy responsibilities to safeguard recent progress, address new risks, and seize new opportunities presented by the major transitions underway in the global economy and financial system. Seizing new opportunities includes building a more open, integrated and resilient financial system on the strong platform created.

Mark Carney’s term as Chair of the FSB ends at the conclusion of the G20 Summit on 1 December. In his letter, he highlights that the new FSB Chair, Randal K. Quarles, and the new Vice Chair, Klaas Knot, will provide strong leadership as the FSB moves forward with implementing the post-crisis reforms and addressing any emerging vulnerabilities in the global financial system.

Notes to editors

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with 65 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Mark Carney, Governor of the Bank of England. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

On 26 November 2018, the FSB appointed Randal K. Quarles (Governor and Vice Chairman for Supervision at the US Federal Reserve) as its new Chair and Klaas Knot (President of De Nederlandsche Bank) as Vice Chair, for a three-year term starting on 2 December 2018. The Plenary also agreed that after three years on 2 December 2021 Mr Knot will take over as Chair for the next three-year term.

FSB completes a review of its processes and transparency to maximise its effectiveness

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Ref: 50/2018

The FSB has reviewed its processes and transparency to maximise its effectiveness for the next phase of its work focused on promoting global financial stability. The review confirmed the FSB’s existing strengths, and the FSB also found scope to enhance some of its work processes, reinforce the member-driven character of its work, further foster effective communication and strengthen engagement with external stakeholders. The FSB has already begun implementing these actions.

A decade ago, the G20 created the FSB to identify and address vulnerabilities that could threaten the stability of the global financial system. The G20 put the FSB on a firm institutional footing which has ensured its effectiveness in pursuing an ambitious set of cross-sectoral financial reforms to fix the fault lines that caused the crisis as well as to mitigate new and emerging risks. The FSB’s strength results from its multidisciplinary, consensus-based and member-driven approach. The FSB provides a unique forum for senior policy makers drawn from finance ministries, central banks and supervisors, as well as international organisations and standard-setting bodies, to promote global financial stability. It has maintained a lean and efficient approach, with its work supported by a small secretariat of only 30 people. The recent transition from policy development has meant that the number of FSB working groups has fallen by one third from its 2016 peak.

To ensure its effective operation as it moves to the next phase of its work, the FSB’s membership has undertaken a review of how the FSB works. In January 2018 a working group was established to review the FSB’s processes for: (i) identification, consideration and actions regarding its policy work and priorities to align with its core financial stability mandate; (ii) the organisation of work under the FSB’s Committee structure and the associated work processes as set out in the FSB Procedural Guidelines to increase efficiency; and (iii) the transparency and accountability of the FSB, including the information that the FSB makes public about its activities, and its current practices as regards consultation with stakeholders. The review was informed by a comprehensive survey of the FSB membership.

The working group consisted of Plenary members, reflecting the diversity of FSB membership. The group was chaired by Rob Stewart, Associate Deputy Minister of the Canadian Ministry of Finance.

The review found that the FSB Plenary members value the FSB’s strengths as a multi-disciplinary, consensus-based and member-driven body and unique forum for senior policy makers to discuss and address financial stability risks. These qualities should be maintained. While the review did not detect a need for any major changes in the manner in which the FSB is organised and operates, as part of the review, FSB Plenary members also identified a number of specific areas where the FSB’s processes and transparency can be further improved.

The FSB has agreed a set of concrete measures in these areas. Specific actions include: enhancing processes for policy prioritisation and developing future work programmes anchored in the FSB’s financial stability mandate; steps to further enhance the efficiency of senior-level meetings and the work processes of working groups and workstreams; and actions to improve communication and engagement with external stakeholders.

One specific recommendation relates to the FSB’s six Regional Consultative Groups (RCGs). The RCGs are an important mechanism for a wider range of authorities to exchange views on financial stability issues, including for non-FSB member authorities to provide feedback on the direction of the FSB’s work. The FSB has decided to conduct in 2019 a review, with the involvement of RCG members, of how to enhance the effectiveness of RCGs as an outreach and feedback mechanism.

The actions to improve communication and engagement with external stakeholders are as follows:

  • The FSB is standardising its public consultation processes, including through: an explicit expectation that documents that may materially affect external stakeholders are subject to a 60-day public consultation process; improving the visibility of consultation responses on the FSB’s website; and routinely publishing, for all public consultations in a consistent format, reports that summarise public comments and explain how they have been addressed in the final policy document.
  • To support its outreach the FSB will make more frequent use of stakeholder workshops, and also outreach to academia, consumer and other interest groups, including non-governmental organisations, and the general public, so as to ensure external engagement is not confined to the financial industry but encompasses all relevant stakeholders. Considering and deciding on appropriate forms of stakeholder engagement becomes an integral part of planning new initiatives.
  • The FSB will improve the accessibility of information to the general public by increasing website information on FSB meetings and structure; providing more information about the FSB’s work in language targeted at a non-technical audience; and more generally making the FSB’s website more user-friendly.

Commenting on the review’s proposals to improve communication and engagement with external stakeholders, FSB Chair Mark Carney said ‘The FSB’s strength results from its multidisciplinary, consensus-based and member-driven approach, and the unique forum it provides for senior policy makers drawn from across finance ministries, central banks and supervisors to discuss and address financial stability risks. After a review, the FSB has identified steps to build on these strengths by further improving our efficiency and how we communicate and engage with external stakeholders. This will help to ensure that the FSB remains fit for the future.’

The FSB has amended its Procedural Guidelines to reflect the outcomes of the review. The amended version is available on the FSB website.

The FSB will review its processes and transparency again, including the experience with implementing these recommendations, in 2021.

Notes to editors

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with 65 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Mark Carney, Governor of the Bank of England. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Appointment of new FSB Chair and Vice Chair

26 November 2018

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Ref no: 48/2018

The Plenary of the Financial Stability Board (FSB) today appointed Randal K. Quarles (Governor and Vice Chairman for Supervision at the US Federal Reserve) as its new Chair and Klaas Knot (President of De Nederlandsche Bank) as Vice Chair, for a three-year term starting on 2 December 2018. The Plenary also agreed that after three years on 2 December 2021 Mr Knot will take over as Chair for the next three-year term.

Plenary members unanimously welcomed these appointments, which were made at the recommendation of a specially constituted Nominations Committee.

FSB Plenary members expressed their gratitude to the current FSB Chair, Mark Carney for his exemplary leadership of the FSB over the past seven years.

Speaking about the appointments, Mark Carney said: “It has been an honour to serve these last seven years. I would like to commend the dedication and professionalism of the FSB Secretariat, and the commitment and wisdom of my fellow policymakers. Randy and Klaas will provide strong leadership and continuity as the FSB pivots towards the implementation and evaluation of post-crisis reforms, and to addressing emerging vulnerabilities in the global financial system. Their appointment demonstrates the FSB’s unique role as a member-led, international body for cooperation on global financial stability.”

Randal Quarles said: “Under Mark’s leadership, the FSB has played a central coordinating role in building a resilient global financial system in the aftermath of the financial crisis. Ten years on, the FSB’s work remains just as relevant. With its broad membership, it is uniquely placed to promote resilience and preserve an open and integrated global financial system in the future. I look forward to working with Klaas and all FSB members towards this goal.”

Klaas Knot, who as FSB Vice Chair will continue to serve as Chair of the FSB’s Standing Committee on Assessment of Vulnerabilities (SCAV), added: “I look forward to working with Randy and the FSB membership in promoting global financial stability through rigorous implementation of agreed reforms, and by addressing emerging vulnerabilities in the financial system.”

Notes to editors

Mark Carney’s term of office as FSB Chair ends on 1 December 2018. Randal K. Quarles has been appointed as Chair for a three-year term running from 2 December 2018 until 1 December 2021 with Klaas Knot as Vice Chair. Klaas Knot will succeed him as Chair from 2 December 2021 until 1 December 2024.

The FSB Chair is selected from representatives on the Plenary and appointed by the Plenary for a term of three years renewable once. The Plenary made the appointments during a conference call of the FSB earlier today, following a proposal by the Nominations Committee.

The process for appointing the FSB’s Chair is set out in the FSB’s Procedural Guidelines and the Charter. In line with the agreed procedures, the FSB Plenary established a Nominations Committee in January 2018. FSB members nominated candidates for the position of FSB Chair and the Nominations Committee consulted members about the nominated candidates.

The Nominations Committee was chaired by Jens Weidmann (President, Deutsche Bundesbank) and its other members were Ashley Alder (Chair, International Organization of Securities Commissions/CEO, Securities and Futures Commission of Hong Kong), Philip Lowe (Governor, Reserve Bank of Australia), David Malpass (Under Secretary of the Treasury for International Affairs, US Department of the Treasury) and Ismail Momoniat (Deputy Director-General, South African National Treasury).

Biographies

Randal K. Quarles took office as a member of the Board of Governors of the Federal Reserve System on 13 October 2017, to fill an unexpired term ending on 31 January 2018. He was reappointed to the Board and sworn in on 23 July 2018, for a term ending 31 January 2032. He was sworn in as Vice Chairman for Supervision on 13 October 2017. His term as Vice Chairman for Supervision ends on 13 October 2021. In this capacity, he is a member of the Financial Stability Board.

Prior to his appointment to the Board, Mr. Quarles was founder and managing director of the Cynosure Group, a Utah-based investment firm. Before founding the Cynosure Group, Mr. Quarles was a partner at The Carlyle Group, a private equity firm based in Washington, DC.

From September 2005 to November 2006, Mr. Quarles served as Under Secretary of the Treasury for Domestic Finance. Prior to serving as Under Secretary, from April 2002 to August 2005, Mr. Quarles was Assistant Secretary of the Treasury for International Affairs. During his tenure, Mr. Quarles served as policy chair of the Committee on Foreign Investment in the United States. Prior to joining the Department of the Treasury, Mr. Quarles served, from August 2001 to April 2002, as the U.S. Executive Director of the International Monetary Fund.

From January 1991 to January 1993, he served in the Treasury Department as a Special Assistant to the Secretary of the Treasury for Banking Legislation and as Deputy Assistant Secretary of the Treasury for Financial Institutions.

Prior to, and in between, his service at the Department of the Treasury, Mr. Quarles was a partner at Davis Polk & Wardwell, serving in their New York and London offices.

Klaas H.W. Knot has been President of De Nederlandsche Bank since 1 July 2011 and was reappointed for a second seven-year term on 1 July 2018. In this capacity he is a member of the Governing Council and the General Council of the European Central Bank, Governor of the International Monetary Fund, Governor of the Bank for International Settlements and also member of its Board of Directors, member of the European Systemic Risk Board, member of the Financial Stability Board and also chairman of its Standing Committee on the Assessment of Vulnerabilities.

Knot holds several secondary positions. He is chairman of the Supervisory Boards of the Teylers Museum and the CliniClowns Foundation. Since 2005, he has been honorary Professor of Economics of Central Banking at the University of Groningen and since 2015 he is also honorary Professor of Monetary Stability at the University of Amsterdam. Knot has published several articles in leading international journals in monetary and financial economics.

Before taking up DNB’s Presidency, Knot was Deputy Treasurer-General and Director of Financial Markets at the Dutch Ministry of Finance (2009-11). Between 1995 and 2009 he held several positions at DNB, the Pension and Insurance Authority (2003-04), and the International Monetary Fund (1998-99).

In 1991, he graduated with honours in general economics at the University of Groningen. In 1995, he obtained his PhD in economics.

The FSB

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with 65 other jurisdictions through its six regional consultative groups.

The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Recommendations for national supervisors: Reporting on the use of compensation tools to address potential misconduct risk

23 November 2018

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The Recommendations are directed to the relevant national supervisory authorities for firms in all financial sectors. They build on national supervisory work and existing international efforts including Basel Committee Pillar III disclosures on compensation. They will help supervisors understand whether governance and risk management processes at financial institutions:

  • Appropriately include conduct considerations in the design of their compensation and incentive systems, including the setting of individual goals, ex ante performance measurement mechanisms and ex post compensation adjustments;

  • Support the effective use of compensation tools in combination with other performance management tools to help promote good conduct or to remediate misconduct;

  • Promote wider risk management goals, including for conduct issues, consistent with the firm’s strategy and risk tolerance; and

  • Support the effective identification of emerging misconduct risks and appropriate review of incentive systems and compensation decisions in response to conduct incidents to ensure alignment of incentives, risk and reward.

Recommendations for national supervisors: Reporting on the use of compensation tools to address potential misconduct risk

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These Recommendations set out the types of data that can support improved monitoring by supervisory authorities on the use of compensation tools to address misconduct risk in significant financial institutions.

The Recommendations are directed to the relevant national supervisory authorities for firms in all financial sectors. They build on national supervisory work and existing international efforts including Basel Committee Pillar III disclosures on compensation. They will help supervisors understand whether governance and risk management processes at financial institutions:

  • Appropriately include conduct considerations in the design of their compensation and incentive systems, including the setting of individual goals, ex ante performance measurement mechanisms and ex post compensation adjustments;

  • Support the effective use of compensation tools in combination with other performance management tools to help promote good conduct or to remediate misconduct;

  • Promote wider risk management goals, including for conduct issues, consistent with the firm’s strategy and risk tolerance; and

  • Support the effective identification of emerging misconduct risks and appropriate review of incentive systems and compensation decisions in response to conduct incidents to ensure alignment of incentives, risk and reward.

In recent years, supervisors and firms have directed significant attention to improving compensation governance and risk adjustment practices. They have focused more intensively on the impact compensation and related performance management mechanisms can have on incentives, and the role they can play in addressing misconduct risks, by providing both ex ante incentives for good conduct and ex post adjustment mechanisms that support appropriate accountability when misconduct occurs.

The FSB’s 2015 Workplan on Measures to Reduce Misconduct Risk  promoted incentives for good behaviour through:

The most recent update on progress under the overall Workplan on Measures to Reduce Misconduct Risk was delivered to the Hamburg G20 Summit in July 2017.