Global banks could benefit from the Financial Stability Board’s (FSB) planned focus on misconduct, which could improve the predictability of sanctions and reduce the likelihood of unexpected sanctions, Fitch Ratings says.

Earlier in the month, the FSB said that it will seek to address industry misconduct, which is rising to the point of representing a systemic risk. Among other things, the FSB said that it will examine the extent to which enhanced cooperation between conduct supervisors and greater consistency in the application of conduct regulations across jurisdictions can improve.

In addition, the FSB will consider reforms to reduce the likelihood of misconduct, that includes assessing initial reforms to risk governance and compensation; and, it may propose additional measures, Fitch says. “It will also look to improve market structure, practice standards and incentives for good conduct more broadly, so banks are likely to have further work to do to upgrade governance frameworks,” the rating agency says.

Fitch says that the FSB’s efforts to enhance cooperation and consistency between jurisdictions, “should make the whole process more predictable.” This could also give banks greater certainty about whether certain conduct is acceptable or not, and it could allow for a more coordinated approach to sanctions, it adds.

“This would help banks establish policies and frameworks and avoid problems of the past, when they engaged in certain behaviour that they thought was legal at the time, but later gave rise to litigation and regulation risk,” it says.

In the short term however, Fitch says that it expects conduct risks to remain high. “In part, this reflects the long timeframe between misconduct and subsequent sanctions and/or potential reputational damage, as HSBC saw recently from extensive media coverage relating to activities that had been addressed some years previously,” it says.

“The FSB initiative appears to represent an attempt to mitigate some of the unintended negative consequences of increasing anti-money laundering/sanctions pressure on banks, while enforcing better conduct. But it’s unlikely to help banks under investigation now,” it concludes.