ASIC says reward the good, punish the bad

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Australia’s financial institutions should ensure only good conduct by staff is rewarded while also penalising poor conduct according to the Australian Securities & Exchange Commission (ASIC).

ASIC yesterday released a report identifying the issues it has with the behaviour of financial institutions in the setting of key benchmark rates.

According to the report, benchmarks, which are reference prices for financial instruments or contracts, or to measure the performance of investment funds, are being manipulated by the sharing of confidential client information and submitting low rates to force down an institutions cost of funding.

This results in the value of positions held by banks increasing, while clients are forced into losses.

According to ASIC, poorly designed incentive schemes foster an environment where manipulation is likely to occur.

“However strong the compliance structures that are put in place, poorly-designed incentives will inevitably increase the risk of non-compliance with legal requirements at the individual level,” the report said.

“It is crucial that firms recognise performance in a way that not only promotes good conduct, but penalises poor conduct as well—by selecting appropriate drivers of pay and bonuses, and triggers for nonmonetary incentives such as development opportunities (e.g. conferences, assignments or promotion).

“Training must also be kept up-to-date and refresher training should be conducted for all staff, including senior staff, to ensure that entrenched practices and cultures that may not be compliant are addressed.”

ASIC commissioner Cathie Armour said it was imperative that consumers could have confidence in the country’s banks and other institutions.

“Financial benchmarks can have flow-on effects to ordinary investors and borrowers. For example, the Bank Bill Swap (BBSW) rate is often used in setting commercial lending rates,” Armour said.

“Given their importance, it is critical to market confidence that financial benchmarks are robust and reliable,” she said.

“Financial institutions must get this right. That is, have the right culture, oversight, and incentives in place to make sure they do not abuse client trust and threaten market confidence.”

ASIC is currently undertaking an investigation into benchmark manipulation that includes the examination of trading data, phone recordings, emails and chat messages.

Voluntary interviews and compulsory examinations of numerous individuals, up to senior management level, from a number of institutions are also being conducted.

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