Both the AIFMD and the UCITS Directive include requirements on depositaries and sub-custodians regarding the safe-keeping of fund assets.
This “toolkit” (PDF 1.11MB) supplements earlier FSB work on risk governance, remuneration, benchmark setting and culture; and an earlier FSB stocktake of efforts by international bodies, national authorities, industry associations and firms to strengthen governance frameworks to reduce misconduct risk.
Firms in all sectors are likely to receive greater supervisory attention in the three main area on which the toolkit focuses: (i) cultural drivers of misconduct, (ii) individual responsibility and accountability, and (iii) the “rolling bad apples” phenomenon (where individuals who engage in misconduct are able to obtain subsequent employment elsewhere without disclosing their earlier misconduct to their new employer).
Apart from the specific emphasis on culture the toolkit contains nothing new or surprising. It reiterates the need for the senior leadership of firms to articulate a desired culture that will mitigate misconduct risk, to identify and address significant cultural drivers of misconduct that are in conflict with the cultural vision.
Supervisors are then encouraged to adopt a risk-based supervisory programme focusing on culture, using a broad range of information and techniques, and to engage with the senior leadership of firms on the outcomes from this.
The Central Bank has adopted international best practice in relation to behavior and culture and has recently commenced a series of inspections with the aim of challenging the effectiveness of the underlying culture in banks. The inspections, in particular, focus on the leadership behaviour of the management board and any potential risks related to the behaviour and culture of management boards that might impact the stability of the banks and cause detriment to consumers.
The toolkit here is very similar in approach to the UK's Senior Managers Regime (and the Hong Kong Securities and Futures Commission's Manager-In-Charge Regime).
The toolkit calls for supervisory authorities to develop a framework that identifies key responsibilities in a firm, allocates those responsibilities to specific individuals, and holds individuals accountable for the responsibilities to which they have been assigned.
This would then read across to the need for firms to identify key responsibilities, including for the mitigation of the risk of misconduct, to assign these responsibilities to specific individuals, to assess the suitability of individuals assigned key responsibilities, and to hold individuals accountable accordingly.
In its response to the Law Reform Commission’s Paper on Regulatory Enforcement and White Collar Crime, the Central Bank has recently endorsed the UK’s approach to individual accountability and has indicated that it is open to introducing a similar regime in Ireland. Such a regime would permit the Central Bank to require senior managers to submit a statement of responsibilities that clearly states the matters for which they are responsible, as outlined in the FSB’s toolkit. The introduction of this regime in Ireland would have a significant impact on supervisors and firms that have previously focused more on the collective responsibility of a firm's Board or senior management.
Again, there is nothing new or surprising here. Firms are encouraged to enhance their interviewing techniques to consider behavioural competencies and a candidate's conduct history; to leverage multiple sources of available information before hiring; to reassess employee conduct regularly; and to undertake “exit reviews”.
Supervisors are then recommended to supervise firms' practices for screening prospective employees and monitoring current employees, and to promote firms' compliance with legal or regulatory requirements regarding conduct-related information about applicable employees, where these exist.
Although mentioned as a possibility, the toolkit contains no new mechanisms for ensuring that relevant past history is shared with future employers, nor any proposals for overcoming legal and “custom and practice” hurdles to information sharing.