Misconduct [For the purposes of this toolkit, misconduct can be generally understood as conduct that falls short of expected standards, including legal, professional, internal conduct and ethical standards.] in some financial institutions has the potential to significantly harm consumers, undermine trust in financial institutions and markets and create systemic risks. As the Federal Reserve Bank of New York recently noted:

The impact of employee misconduct extends beyond the individual and can impact the firm as a whole and the economy and financial markets more broadly. Employee misconduct can make a firm less resilient, for example, by diverting management attention, harming a firm’s reputation in a way that impedes its business, driving change in the composition of the workforce, and depleting its capital. For the broader economy and financial markets, misconduct can inflict harm directly on consumers and employees. Over time, market participants may lose confidence in the financial sector as a whole and adversely impact its critical role in financial intermediation [Federal Reserve Bank of New York, Misconduct risk, culture, and supervision, December 2017, p 3.].

Mitigating misconduct risk is an important issue for both firms and national authorities. While authorities can take steps to promote strong internal practices at firms, these do not replace the actions that firms should take to promote appropriate conduct within their organisations.