, market abuse
The final report of the Fair and Effective Markets Review (FEMR) was published last week. Commissioned in response to the series of scandals that have blighted the fixed income, currency and commodities (FICC) markets, the Report’s account of the shortcomings that led to such scandals is depressingly familiar; a combination of:
- a lack of personal and professional standards and associated accountability;
- poor market structures that were open to abuse;
- an absence of adequate governance and control on the part of firms;
- the incentivisation of short-termism; and
- the prevalence of a “culture of impunity”.
Notably, the report makes several recommendations aimed at placing greater emphasis on the personal conduct and oversight of individuals working in FICC markets. It argues for the development of a set of common standards for trading practices. Minimum standards of training and qualifications should be developed for those working in UK FICC markets, under the guidance of a FICC Market Standards Board (FMSB). These should include a requirement for continuing professional development.
Surely, this proposal is to be welcomed (although, of course, the success of such standards will rely upon their precise content and the consistency with which they are upheld). In practice, it will be essential that standards are clear, relevant, robust, authoritative and respected.
The Report also recommends the extension of elements of the Senior Managers and Certification Regimes to FICC firms previously outside of scope. Again, the devil may lie in the detail. As David Strachan, Deloitte, points out: “This will clearly increase personal accountability for top executives in active FICC firms, but the extension of the Certification Regime will come with significantly higher compliance costs, especially for smaller firms. Deciding which firms to bring within this wider scope will be challenging.”
Further, the Report proposes that all FICC instruments covered under the Market Abuse Regulation should be included in the UK criminal sanctions framework for market abuse for individuals and firms, and that the maximum sentence for criminal market abuse should be extended from seven to ten years (as it is for fraud and bribery). Of course, the effectiveness of such a measure may depend upon its application in practice.
Broadly, FEMR has been well-received. As David Heffron, Pinsent Masons, says: “The Review’s recommendations will provide a better framework for improving standards of market practice. However, where standards are not met, whether by individuals or firms, regulators and prosecutors will have a larger stick with which to take action.”
Assuming they are adopted, the litmus test for FEMR’s recommendations will be the extent to which they improve confidence in FICC markets and protect against future abuses. Their success may depend in part upon coordinated and concerted international action. While presenting a blueprint for reform of FICC markets, perhaps only time will tell whether the proposed reforms can achieve their aims. If you have any views on the FEMR – whether on its fitness for purpose, the effectiveness of its recommendations, or their associated compliance costs – please share them below.
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