From ‘ethical drift’ to ‘ethical lift’: Reversing the tide of misconduct in global financial markets - speech by Minouche Shafik

Given at the New York Federal Reserve’s conference ‘Reforming Culture and Behaviour in the Financial Services Industry: Expanding the Dialogue’.
Published on 20 October 2016

Bank of England Deputy Governor Minouche Shafik and Executive Director James Proudman today speak at the New York Federal Reserve’s conference ‘Reforming Culture and Behaviour in the Financial Services Industry: Expanding the Dialogue’. We have published the text of both speeches here.

Minouche, the Bank’s Deputy Governor for Markets and Banking, discusses the challenge of reform from a market-wide perspective, while James, who is Executive Director for UK Deposit Takers Supervision, discusses firm-level implementation. Minouche explores the wide-ranging actions of the UK authorities after the Fair and Effective Markets Review (FEMR) to help reverse the tide of misconduct that had emerged across markets since the financial crisis. Within this broad theme, James explains how the Prudential Regulation Authority (PRA) is implementing a regulatory framework around accountability and how this is applied to individual firms.

Highlighting the progress described in the FEMR implementation report published in July, Minouche explains that while ‘regulators must introduce rules and regulations to enforce minimum standards of conduct, hold individuals to account for their actions, and put in place incentives to promote good conduct, hard law is not enough…market participants must come together to create soft law: aspirational standards that are higher than the regulatory minimum and encourage ongoing behavioural change’.

Minouche emphasises the importance of the official sector not only implementing rules and regulations but also playing ‘a broader role by promoting good behaviour’. In particular she praises the work of senior market participants in establishing the Fixed Income, Currencies and Commodities (FICC) Markets Standards Board and notes the progress being made towards a single Global FX code, which is being developed through a partnership between 16 central banks and market participants. 

Minouche also notes that ‘conduct risks will evolve over time and the official sector needs to stay on the front foot’. In response, the UK authorities have announced a work programme to scan the horizon for potential market or private sector coordination failures that may be damaging the fairness or effectiveness of FICC markets. The authorities will seek to catalyse reforms to insure that market structures that are vulnerable to manipulation and misconduct do not develop over time. 

Both Minouche and James reinforce the Bank’s commitment to improving standards and ethics in financial markets. 

Minouche concludes: ‘It will take time to move from ‘ethical drift’ to ‘ethical lift’. Better regulation is part of the solution, but so is a more effective partnership between the official and private sectors to improve market practices and conduct norms.’

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