Widespread misconduct in the financial sector on a broad scale creates mistrust, weakening the ability of markets to allocate capital to the real economy. This in turn may give rise to systemic risks, which is why addressing misconduct is part of the Financial Stability Board’s (FSB) work programme.

Recent instances of misconduct have included collusion in the manipulation of wholesale markets and retail mis-selling schemes. Financial penalties are often extensive. Since the financial crisis of 2007-08, fines and legal costs for misconduct by global banks are estimated to have reached more than $320 billion [Boston Consulting Group, "Staying the course in banking," Global Risk 2017. The wider costs to the financial system and the economy from misconduct at financial institutions are harder to estimate.]. However, as noted by Mark Carney, Chair of the FSB, in his July 2017 letter to G20 Leaders,

Fines are essential to punish wrong doing and have an important deterrent effect, but it is insufficient and inefficient to rely solely on ex post penalties of institutions and their shareholders. The resources paid in fines, had they been retained as capital, could have supported up to $5 trillion in lending to households and businesses.

Fines and sanctions act as deterrents to misconduct. Such fines have generally been imposed on firms rather than individuals, but preventative approaches that aim to influence the behaviour of individuals may also be needed to mitigate misconduct risk. Among these preventive approaches are improved corporate governance practices.