ASIC Viewpoint: Behavioural drivers of conduct in the wholesale spot foreign exchange market
Published by the Australian Financial Markets Association in AFMA Member News, June 2017.
In recent years the wholesale spot foreign exchange (FX) market has been subject to regulatory scrutiny in a number of jurisdictions. As a key global market, it is also of systemic importance to the Australian economy.
By facilitating the exchange of one currency for another, the spot FX market allows participants to buy and sell foreign currencies. But, to ensure the effective functioning of the market, all participants must act with fairness and integrity.
To date a number of international regulators have taken action against banks for misconduct in their spot FX businesses. Our own investigations into the spot FX market have uncovered conduct in some of Australia’s largest financial institutions that has fallen short of our expectations.
These investigations have resulted in the acceptance of enforceable undertakings from a number of institutions. As part of the enforceable undertakings these institutions have undertaken to implement changes to their spot FX businesses. They have also made voluntary contributions totalling $13 million to fund independent financial literacy projects in Australia.
Our focus has now moved to making sure this doesn’t happen again. Last month we released Report 525 Promoting better behaviour: Spot FX, which draws on our observations from the investigations. Report 525 also takes a close look at the key behavioural drivers which are most likely to lead to poor conduct if not properly managed.
To help you manage these drivers we have set out a number of good practice principles in Report 525. We encourage all participants in FX markets to consider how these can be tailored to reflect the nature, scale and complexity of your business.
Employees’ conduct may be influenced by the common practices they observe among their colleagues. It can also be shaped by the expected standards of behaviour communicated and modelled by their employer and supervisors. Appropriate standards of behaviour may be based on businesses’ code(s) of conduct and/or industry good practice guidelines.
To set appropriate standards of behaviour, you should:
- provide employees with effective training and guidance about expected standards of behaviour
- require supervisors to model expected standards of behaviour, and
- foster an environment that allows for challenges to inappropriate practices.
Remuneration and incentives
Rewards and incentives can be direct and powerful drivers of behaviour; and recognition by management can be an important informal incentive.
To formulate remuneration and incentives that drive good conduct, you should:
- ensure performance targets are achievable and give appropriate weight to conduct when assessing how they have been met, and
- hold supervisors responsible for modelling high standards of conduct, and raise their awareness of the influence of informal incentives on behaviour.
Deterrence, detection, response
The decision to engage in inappropriate conduct can be influenced by the perceived likelihood of detection and punishment. Your business’s ability to detect, investigate and respond to misconduct can have an important deterrent effect.
To maximise your business's ability to effectively deter, detect and respond to misconduct, you should:
- hold supervisors responsible for the proactive monitoring, detection and escalation of misconduct
- have robust surveillance systems supported by appropriate compliance staff
- have adequate records to facilitate identification and investigation of potential misconduct, and
- impose sanctions for misconduct which are visible to all employees.
Report 525 was released to coincide with the publication of the FX Global Code of Conduct. Developed in conjunction with industry, the FX Global Code provides a global set of practice guidelines designed to promote the integrity and effective functioning of the wholesale FX market.
To help you manage the drivers of inappropriate conduct in your FX business, the good practice principles set out in Report 525 should be considered alongside the FX Global Code.