Investment Banks Must Implement Conduct Risk Strategies

London and Hong Kong - 9 March 2015

The profits of leading investment banks are being eroded by regulatory fines and legal costs related to the mismanagement of employee conduct

Global regulators are focusing on company culture and employee behaviour, fining banks for conduct-related breaches

Investment banks globally must begin implementing measures to offset the risk that they could be fined by regional or global regulators for employee misconduct, according to a new research report from GreySpark Partners, a capital markets consulting firm. These risks also extend to regulatory fines and legal costs resulting from organisational misconduct ranging from illegal trading activities to corruption and other forms of illegal or scandalous behaviour. The GreySpark report, Best Practices in Conduct Risk 2015, explains what banks can do to offset threats to profitability related to a growing emphasis on conduct breaches and employee behaviour following the financial crisis.

The GreySpark report provides capital markets participants with a detailed perspective into the how global regulators respond to incidences of employee misconduct. The report provides advice on how both buyside and sellside institutions can internally implement best practices designed to offset conduct-related risks, and it offers a set of recommended best practices for the implementation and long-term effective management of management guidelines designed to offset such risks. The guidelines include recommendations on how companies should carry out incident escalation to include all the necessary levels of organisational management, identify root causes of misconduct incidents, address the incidents in an efficient manner, take remedial action and apply disciplinary action when appropriate. The report highlights the need for accurate and timely post-trade surveillance and scenario analysis to ensure that conduct-related breaches are identified quickly and efficiently managed.

“Globally, regulators are increasingly directing their attention to the management and mitigation of conduct risk within companies active in capital markets, with particular focus on the culture and governance of such firms,” said Benedict Cheng, report co-author and GreySpark Partners conduct risk practice head. “Regulators are becoming increasingly sophisticated in their ability to access a high-quality of internal corporate data, and they are now using analytical tools that allow them to drill-down to the organisational root causes of incidents of misconduct. The onus is now on banks and other types of investment companies to take action to further develop internal conduct risk frameworks beyond current corporate governance standards. Such ‘tone from the top’ governance standards must drive ethics, business culture and responsible practices within the company. As such, advanced surveillance techniques coupled with robust data analysis capabilities are essential for the early detection of potential employee behaviour patterns that could result in conduct risk.”

Malavika Shekar, report co-author and GreySpark consultant, added: “Recent conduct-related incidents at banks show that regulators are imposing greater fines that, just a few years ago, would have only incurred a verbal reprimand. Most global banks have already taken steps to shore up their conduct risk management strategies, but smaller, regional banks and buyside firms must now ensure that they have adequate conduct risk frameworks and best practices in place to mitigate the need for adverse legal action."

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