With the widespread abuse practices which some firms in the industry have engaged in during the past several years while using financial benchmarks in the industry, the U.K. Financial Conduct Authority has taken to the forefront of the global regulatory bodies to tackle the issues which have surfaced.
The watchdog has committed a substantial amount of resources to conduct a study on how financial industry participants are using benchmarks and what should be done to eliminate the worries which have been triggered by recent investigations into LIBOR, precious metals and foreign exchange benchmarks.
It is now critical that firms act to restore trust and confidence in the system
Trust in the financial system hinges on the proper conduct of financial transactions across the globe and with the recent findings that several financial institutions have not been adhering to fair practices when it comes to a number of benchmarks, it is up to the FCA to restore systemic credibility.
The thematic review of oversight and controls related to financial benchmarks has been conducted by the U.K. watchdog for almost a year between August 2014 and June 2015. The findings of the FCA point out that despite some efforts by firms in the financial industry to optimize controls and conduct related to benchmark activities, there is still a lot of work to be done to regain full trust.
Enacted Changes in Benchmark Practices
The FCA found out that while virtually all companies have changed the way they do business related to financial benchmarks, not all benchmarks have been related to in their internal reviews. There has also been a notable difference between some companies when compared to others in terms of the speed at implementing the changes.
Unsurprisingly, those companies which were heavily fined have implemented changes faster, while the senior management of the same firms has focused efforts on appropriate conduct.
Firms should have in place systems to manage the risks posed by benchmark activities
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The review has highlighted a total of six counts on which companies need to do more work in order to appease regulators and work towards the public regaining trust in financial benchmarks.
Starting from the definition of a financial benchmark, according to the FCA, all companies should aim to identify all the activities constituting such. Identifying all benchmark activities remains a cornerstone of enforcing appropriate conduct.
On a similar note, the regulator recommends that financial firms enforce all of the findings in the case of certain benchmarks across the full spectrum. Since in many cases management was not aware of the misconduct an integrated approach and appropriate information path for senior management should be set in place.
The FCA also recommends several “lines of defense” against misconduct in order to make it more complex for individuals to collude on multiple levels.
Regular reviews of conduct are the appropriate practice in order to identify conflicts and take steps to manage those according to the FCA review.
In-house benchmarks should also come under scrutiny in order to avoid misconduct spreading into the outside world, since the internal wrongdoings can easily spread into the outside world.
Finally, the FCA highlights that firms need to take into account the much wider implications of a seemingly isolated case of misconduct and the broader impact on clients, the financial system and ultimately legal, operational and financial risks for the institution itself.
Acting in a Timely Manner
The director of supervision – investment, wholesale and specialists and the upcoming interim CEO of the FCA, Tracey McDermott, commented on the FCA’s review, “We have seen widespread historic misconduct in relation to benchmarks. It is now critical that firms act to restore trust and confidence in the system. Firms should have in place systems to manage the risks posed by benchmark activities and to address the weaknesses that have previously been identified.”
“We recognise that this is a significant task and firms had made some improvements, but the consistency of implementation and speed at which these changes have been taking place is disappointing. Firms should take our findings on board and consider further steps to improve their oversight,” she added.