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Buck to stop with bankers as G-7 seeks conduct code for lenders

Monday, June 1, 2015 - 07:22
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With a slew of scandals freshly in mind over benchmark rigging that led to billions of dollars in fines for international lenders, finance ministers of the Group of Seven nations decided last week that a new global code of conduct needs to be drawn up.

[FRANKFURT] Global regulators may soon be focusing on making individuals just as accountable for banking misbehavior as the institutions that employ them.

With a slew of scandals freshly in mind over benchmark rigging that led to billions of dollars in fines for international lenders, finance ministers of the Group of Seven nations decided last week that a new global code of conduct needs to be drawn up. The Financial Stability Board has been given the task.

Revelations of foreign-exchange manipulation have worsened the image of a banking industry already darkened by the fallout from the financial crisis. At the same time, governments are recognising that the response to misdeeds should move toward encouraging better conduct from the outset, and rely less on penalties that weaken banks' capital health.

"This kind of malpractice has got to do with the dominant company culture but not just that - it's also about the behavior of individuals, who should not be absolved from responsibility," Bundesbank President Jens Weidmann said in the German city of Dresden on Friday, announcing the G-7's lead. The code "should be a voluntary self-commitment made by the financial industry, an international initiative," he said.

The G-7 consists of the US, Japan, the UK, Canada, Germany, France and Italy. Last week's meeting of finance ministers and central-bank governors will be followed by a summit of government leaders in Bavaria on June 7.

Rule makers and judicial authorities have so far found it difficult to hold individual employees responsible for misconduct and instead have imposed penalties on the banks.

While regulators spent seven years chasing the manipulators of the London interbank offered rate, or Libor, the first individual prosecution only started in May. Meanwhile, Deutsche Bank AG was handed a US$2.5 billion fine in April, and six banks including JPMorgan Chase & Co., Barclays Plc and UBS AG were fined US$5.8 billion on May 20 after a currency-rigging probe by the U.S. Justice Department.

"It is important to change the individual behavior of bankers," said Thomas Mosk, a researcher on conduct in banking at the Sustainable Architecture for Finance in Europe Center in Frankfurt. "Culture is the buzzword of the moment. Regulators believe bad behavior at banks goes deeper than a few bad apples and demand a cultural change."

Codes of conduct already exist in some countries, such as in the UK since 2011 and the Netherlands since last year. Senior UK banking executives are also taking part in a 'banking standards board' to help improve public trust. Even so, a global standard that major states sign up to might make it less easy for ethical breaches to be overlooked.

"Currently a certain number of disparate codes exist in different jurisdictions, and they were often ignored," Banque de France Governor Christian Noyer said after the Dresden meeting. "We need to pull all this together, so that we have a code that is coherent and applicable everywhere."

Ministers didn't specify when the Basel-based FSB should deliver a final document. Officials said the work should be done in partnership with the industry and wouldn't be handed down as a diktat.

The FSB brings together regulators and central bankers from the Group of 20 nations. It was set up in 2009 amid the financial crisis and is responsible for overseeing global financial policy making.

It can harness the experience of chairman Mark Carney, the governor of the Bank of England. The BOE is currently developing measures to tie senior bankers' pay and personal reputations to the fate of their firms.

Those rules will implement recommendations made in 2013 by the Parliamentary Commission on Banking Standards, which was set up in the wake of the Libor manipulation scandal. They also increase the responsibilities of non-executive directors and introduce potential jail sentences for bankers who take risks leading to the failure of their firm.

In his role as FSB chairman, Mr Carney has already called on eight central banks' foreign-exchange committees to make sure currency traders follow conduct guidelines on conflicts of interest, gambling and client anonymity.

The G-7's proposed global code should also attempt to reinforce the ethical basis of good conduct, according to Andre Spicer, Professor of Organizational Behavior at Cass Business School at City University, London.

It could start with "basic human universal values such as not lying outright," Mr Spicer said in an e-mailed response to questions. "The reality is that building a standard is the easy part. The much more difficult issue is ensuring it is complied with and it is actually used."

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