Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Financial Conduct Authority Consults on Measures to Reduce Misconduct in Unregulated Markets and Activities
Financial Regulatory Developments Focus
  • UK Financial Conduct Authority Consults on Measures to Reduce Misconduct in Unregulated Markets and Activities
    The Financial Conduct Authority has published a consultation paper on proposals to clarify its expectations on authorized firms and their staff when operating in markets or undertaking activities that are not covered by regulatory rules and principles. The FCA cites, as a particular example of the need to clarify its expectations, the spate of enforcement action in response to serious misconduct such as benchmark manipulation by employees of regulated firms in the fixed-income, currency and commodities (FICC) markets, which fall outside the FCA's regulatory perimeter.

    A number of solutions to help reduce this type of misconduct in the FICC markets were suggested following the recommendations of the Fair and Effective Markets Review (FEMR) that was conducted in 2014-15. In these unregulated wholesale markets, activities undertaken by authorized firms were often only governed by industry-written codes of conduct, such as the UK's Non-Investment Products (NIPs) Code, rather than FCA rules. One recommendation of the FICC market standards board, which was established as a result of the FEMR, was that proper market conduct should be managed in FICC markets through regulators and firms monitoring compliance with all standards - formal and voluntary - under the Senior Managers and Certification Regimes.

    The FCA believes there is a role for firms and their Senior Managers to champion the setting and achievement of higher standards. It sets out for consultation a general approach to supervising and enforcing the SM&CR rules for unregulated markets and activities, including those covered by industry-written codes of conduct.

    It is also seeking views on a "recognition" approach for industry codes of conduct. Under the recognition approach, the FCA will review and assess industry codes against new criteria and then publicly state if it considers a particular code is a helpful explanation of the proper standard of market conduct for a particular market. The FCA considers that this will encourage participants to adhere to that code, but it does not intend that the recognition approach would give such codes a status equivalent to binding regulation. Instead, where recognized industry codes are complied with, the FCA will view this as tending to indicate compliance with FCA rules that require firms or individuals to observe "proper standards of market conduct" in relation to unregulated markets. The FCA will usually not take action against firms for behaviour that is so compliant.

    The FCA also seeks views on extending the application of Principle 5 of its Principles for Businesses to unregulated activities. Principle 5 requires a firm to observe proper standards of market conduct, but currently only applies to regulated activities and ancillary unregulated activities. The FCA proposes to extend the application of Principle 5 to cover unregulated activities that are not ancillary to regulated activities.

    Comments on the consultation and views on the extension of Principle 5 are invited by February 5, 2018. Comments must be submitted via an online response form.

    View the FCA Consultation Paper (CP 17/37).

    View the Online Response Form.

    View the Final Report of the Fair and Effective Markets Review.