Creating credible deterrents to misconduct are key to effective regulation, suggests a new report from the International Organization of Securities Commissions (IOSCO) published on Wednesday.
The IOSCO report aims to identify the key factors that may help prevent misconduct in international securities and investment markets. The report calls on regulators in both emerging and developed markets to consider how to integrate credible deterrence into their enforcement strategies.
“This is an important contribution to our global efforts to crack down on financial misconduct and rebuild and strengthen financial systems post-crisis,” said Georgina Philippou, acting director of enforcement and market oversight with the U.K.’s Financial Conduct Authority (FCA) and chairwoman of IOSCO’s enforcement committee. “This is not an assessment tool but a think piece to encourage and support securities regulators around the world to consider how they can build effective credible deterrence strategies.”
The IOSCO report defines deterrents as credible when the risks of engaging in misconduct are perceived as outweighing the rewards and when non-compliant attitudes and behaviours are discouraged.
“Deterrence occurs when persons who are contemplating engaging in misconduct are dissuaded from doing so,” the report says, “because they have an expectation of detection and that detection will be rigorously investigated, vigorously prosecuted and punished with robust and proportionate sanctions.”
In turn, the IOSCO report sets out several key elements for credible deterrence: that the consequences for misconduct are certain and predictable; that regulators are equipped to detect misconduct; and that sanctions for misconduct are strong.
In addition, the report stresses that regulators must work together to eliminate safe havens for wrongdoers and send the right messages to the public.
There is no single model of credible deterrence and these policies cannot be one-size-fits-all, the IOSCO report cautions. Rather, regulators must decide what it means for them in the context of their strategic objectives, powers and responsibilities. They also need to take into account their own market, economic and financial situation.
“Ensuring our enforcement activity acts as a credible deterrent is key to our effectiveness as financial services and markets regulators,” says IOSCO chairman Greg Medcraft. “This critically important report provides our members with a timely basis for designing, developing and reviewing enforcement strategies. I strongly support it.”