The past year has seen “significant progress” in the implementation of the Fair and Effective Markets Review (FEMR) recommendations; however, “the job is far from being done” as a “lack of trust in financial markets” remains and the focus is now on companies and individuals to address issues, according to an implementation report issued today by the chairs of FEMR and presented to the heads of the UK Treasury, the Bank of England and the Financial Conduct Authority (FCA).
The members of FEMR have undertaken work over the past year to implement or progress the “recommendations under our direct control”, as well as continue “supporting those taking forward other recommendations both domestically and internationally”, the implementation report says.
FEMR was established by the Chancellor in June 2014 to “conduct a comprehensive and forward-looking assessment of the way wholesale financial markets operate, help to restore trust in those markets in the wake of a number of recent high profile abuses, and influence the international debate on trading practices”.
In August 2014, the Review made recommendations to Treasury bring a further seven major UK-based FICC benchmarks into the scope of the UK legislation originally put in place to regulate Libor. Then in October 2014, the FEMR published a consultation document examining what needs to be done to reinforce confidence in the fairness and effectiveness of the fixed income, currency and commodities (FICC) markets.
A final report was published in June 2015 which set 21 recommendations, including the following key recommendations: to raise standards, professionalism and accountability of individuals; to improve the quality, clarity and market-wide understanding of FICC trading practices; to strengthen regulation of FICC markets in the UK; to launch international action to raise standards in global FICC markets; to promote fairer FICC market structures while also enhancing effectiveness; and to promote forward-looking conduct risk identification and mitigation.
Progress made so far includes the coming into force of the Senior Managers and Certification Regimes (SM&CR) in March 2016 for deposit-takers and PRA-designated investment firms. These are aimed at supporting better decision-making at firms, and ensure that senior managers are held accountable for breaches of regulations.
Moreover, the FCA and Prudential Regulation Authority (PRA) are set to finalise rules on the mandatory form for regulatory references, which will “help prevent ‘bad apples’ rolling between firms”, FEMR says. In addition, FEMR points to the creation of the Fixed Income, Currency and Commodities Markets Standards Board (FMSB) in July 2015 by senior market participants to “improve the quality, clarity and market-wide understanding of wholesale FICC trading practices; produce guidelines, standards and other materials to promote good conduct and undertake horizon scanning by periodically reviewing wholesale FICC markets for emerging risks”, the three agencies explain. As part of its work, the FMSB has provided input for the creation of a Global FX Code of conduct, the first version of which was released globally on May 26.
Work to produce a single Global FX Code was already underway by central banks, “under the aegis” of the Bank of International Settlements. Sections on ethics, information sharing, and trade execution and confirmation and settlement were released in the May iteration, while the final Code is “on track for publication in May 2017”, FEMR says.
Moreover, the International Organization of Securities Commissions (IOSCO) is to publish a report that includes a set of expectations of conduct that apply to individual market participants and a toolkit to address conduct in wholesale markets “towards the end of 2016”, FEMR says.
However, “while authorities can put in place legislation and regulation, firms are responsible for creating, both individually and collectively, cultures that place integrity, professionalism and high ethical standards at their core”, FEMRnotes.“So while we have been encouraged with the actions taken over the past year, the initial momentum must not be lost,” says FEMR, adding that, “It took years for the ‘ethical drift’ that resulted in misconduct to occur and it will take time to build new ethical norms in financial markets.”