Managing conduct risk in wholesale markets: more thoughts from the FCA

David Pygott

The integrity of wholesale markets remains an area of focus for the FCA, which has not only given clear warnings over the past few years that it will focus on reinforcing proper standards of market conduct both through intensive supervision and through referrals to Enforcement, but has taken a series of high profile Enforcement cases concerning in particular LIBOR, FX and conflicts of interest. The integrity of wholesale markets remains a clear priority in the FCA’s Business Plan for this year and there is, in my view, clearly more Enforcement to come.

On 24 July 2015, Tracey McDermott gave a speech on wholesale conduct risk (‘Wholesale Markets and Risk: FEMR and beyond’). It is well worth a read; you can find it here. In short, following on from the publication of the Fair and Effective Markets Review final report back in June and the Enforcement action mentioned above, it was suggested that there are five questions that firms should pro-actively ask themselves regarding their management of conduct risk in the wholesale markets. The questions were characterised as a mechanism for helping firms to ask themselves “the hard questions that are needed”.

  1. How do you identify the conduct risks inherent within your business?
  2. Who is responsible for managing the conduct of your business?
  3. What support mechanisms do you have to enable people to improve the conduct of their business or function?
  4. How do the board and executive committees gain oversight of the conduct of the organisation?
  5. Does your firm have any perverse incentives or other activities that may undermine any strategies put in place to answer the first four questions?

These questions will be useful for firms that are currently engaging with the FCA on the conduct agenda. They will also no doubt be useful for firms carrying out their own internal work, for example remediation following previous Enforcement cases, work to respond to the Fair and Effective Markets Review, or work to implement the Senior Managers and Certification Regime. Looking to the future with a litigator’s eye, one can envisage how being able to provide answers to these questions to the FCA in circumstances where a conduct risk has crystallised – answers which are clear, simple, delivered quickly and tailored to the facts of a particular case – might help a firm to avoid a referral to Enforcement at all, or to defend itself and its senior management should Enforcement action proceed. Food for thought.

 

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