Change Behaviour, Change Markets
At this week’s IOSCO conference in Jamaica, the world’s capital markets regulators gathered to discuss the global framework of rules that cover public securities, wholesale and retail markets and consumer protection in the public’s dealings with financial intermediaries and products.
One issue that regulators are concerned with is to better address the root causes of misconduct in markets. Five years after the Libor and other benchmark scandals, regulators are still refining the tools they have to deter misconduct, hold individuals responsible and punish behaviour that impairs the fairness of markets.
Andrew Bailey, CEO of the UK’s FCA, Julia Leung, Executive Director from the Hong Kong SFC, Mr Sergey Shetsov, First Deputy Governor of the Central Bank of Russia and Mr Yuji Nakata, Executive MD from Nomura Holdings discussed their approach to changing behaviour in professional markets.
There tends to be a “behavioural triangle” that plays on actors in markets: Rationalisation, (“everyone is doing it”), Opportunity (“No one is checking”) and Pressure (“I need to hit my targets”), according to Nomura’s Mr Nakata, who urges regulators to consider all of these related motivators and seek to constrain each of the factors in terms of imposing controls and encouraging behavioural change.
The panel addressed each of these areas and discussed new mechanisms that are being used around the world. The panel seems to agree on the root causes of misconduct, including remuneration models, and the short term focus of companies that sometimes leads to misconduct, almost as a transitory competitive advantage.
Mr Shetsov wryly expressed his concern that Generals tend to prepare their armies for the wars of the past. He emphasised the need to have data that ensures that misconduct is very rapidly identified, combined with clear rules to regulate behaviour. The key takeaway? Having a combination of relevant and timely structured and unstructured data that can be (and is) analysed at a company as well as a regulatory level is key to improving the ethics of participants in financial markets.