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iif final report July 18, 2008

Posted by Bradley in : Uncategorized , trackback

The IIF published its final (long) Report on Principles of Conduct and Best Practice Recommendations yesterday (this report follows April’s interim report). The report combines a set of principles with some recommendations and some lobbying (labelled “consideration for the official sector”). The principles are general and the report states that the recommendations may not be appropriate for all firms – they are “benchmarks”.

Many of the principles are so general as to be pretty meaningless. Principle I.i states:

A robust and pervasive risk culture throughout the firm is essential. This risk culture should be embedded in the way the firm operates and cover all areas and activities, with particular care not to limit risk management to specific business areas or to restrict its mandate only to internal control.

The principles on compensation seem a bit more specific, for example: “Severance pay should take into account realized performance for shareholders over time.” But there are no recommendations with respect to these principles (although there is some discussion of the principles) because:

Compensation, especially the “incentive” component of compensation, is a differentiating factor for firms, and each firm must make its own decisions on how to apply the Principles of Conduct. Moreover, there are difficult choices in balancing, for example, the principle of alignment of compensation incentives with firm-wide profitability while taking into account the impact of particular business units’ results.

The report claims not to be “self-regulation”:

This Report does not propose or in any sense reflect an attempt at “self-regulation”; rather, it aims to support the emerging consensus that a balanced mix of industry corrections, market discipline, reinforced regulatory incentives, and enhanced cross-border supervisory arrangements will provide a sound foundation for stronger firms and more resilient markets. Ultimately, of course, it is a matter for the public sector to determine the balance, but the Institute looks forward, through the Report and convincing dialogue, to contributing useful private-sector input to that determination.

The disclaimers about self-regulation may refer to the fact that the IIF proposes to run courses (for fees, presumably) to help market participants comply with the principles and recommendations rather than ensuring compliance (although the report says the IIF will monitor implementation).


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