On 24 February 2015 the Bank of England (BoE) published a speech by Andrew Hauser, Director of Market Strategy at the BoE and head of the Fair and Effective Markets Review (FEMR) secretariat. The speech was aimed at identifying the key issues raised in the FEMR consultation concluded in January 2015 regarding the fairness and effectiveness of fixed income, currency and commodities markets (FICC). The FEMR’s aim is to resolve three key questions:

  • what were the real root causes of misconduct in recent years;
  • how far have firms and regulators put in place the changes needed to put things right; and
  • what remains to be done.

Taking the above into account, Mr Hauser highlighted four areas where the responses to the FEMR consultation have identified scope for change.

1. Improved understanding of what ‘acceptable market practice’ means in FICC.

The collective understanding of and adherence to appropriate standards of market practice was identified as being inadequate in key FICC markets. The following four reasons were given for this:

  • codes, regulations and other sources of information across activities, geographies and types of firms were overlapping, contradictory, difficult to navigate and/or not fully consistent;
  • there was limited interpretation of high-level principles into practical guidance;
  • firm-led communications and training on codes, policies and procedures was not always sufficiently robust; and
  • adherence to standards was not adequately reflected in firms’ incentive and promotion policies or decisions.

The respondents to the FEMR consultation agreed that in order to address the above-mentioned issues new market standards need to be agreed upon instead of engaging in structural changes. Engaging in further regulatory-driven structural changes was considered as an inadequate alternative for achieving positive results at this time for the following reasons:

2. Standards of individual professionalism

The standards of individual professionalism in some circumstances were identified as insufficient and therefore creating higher risk of market misconduct and undermining the fairness and effectiveness of the FICC market. Proper standards of behaviour need to be defined and there needs to be tools to ensure that individuals behave according to those standards. In this area there was a focus on the following two matters:

  • the scope for professional FICC market qualifications – there was debate in regards to whether a professional qualification should be a means of acquiring a ‘license to trade’; and
  • without full disclosure of their professional history.

3. Governance, controls and incentives (‘culture’) within firms

Deficiencies in the areas of governance, controls and incentives, and in Firms’ cultures in general, have played an important role in past abuse, and hence pose a serious risk to continuous market misconduct. Although much has been done to address those gaps, there remains room for further development to ensure that ‘best practices’ become ‘normal industry practice’ and is thus embedded in a firm’s culture. While defining ‘culture’ is very firm specific, the following high-level priorities were identified from responses as being key when doing so:

  • Improving Board level oversight of conduct risks;
  • Engaging key management staff;
  • Embedding conduct in a wide range of Human Resources processes; and
  • Improving firms’ ability to draw out the lessons of past failures for other parts of the business.

4. Ways for firms to catch misconduct.

Insufficient firm-based surveillance enhances risks of market misconduct and abuse. Although regulatory enforcement is vital against the most egregious behavior, firms should not rely solely on regulatory enforcement as a safeguarded measure. Many respondents accepted that firms also needed to take on a more active role in catching and acting upon unacceptable activity at an earlier stage. The responses identified a number of ways in which this could be done:

  • to strengthen the surveillance responsibilities of those closest to the front line: heads of trading or business;
  • to recognise that second-line surveillance resources should be focused, not just on ensuring regulatory compliance, but on detecting misconduct wherever it might arise, including in less heavily-regulated markets; and
  • firms to support a more effective culture of challenge.


Although identified as ‘key’, the above issues are not conclusive of the scope of issues covered in the thousand responses received. Other issues that arose included (i) the scope of the regulatory perimeter, (ii) whether there is need for benchmark reform, and (iii) whether to strengthen tools for imposing criminal sanctions.

It should be noted that no decision has been made yet so far as to what the FEMR will recommend. The final recommendations will be set out by June 2015 and the issues discussed above will not necessarily form a basis for the recommendations. Firms should keep track of the development of this review, prepare to adapt to any future changes in the area and ensure that they have necessary systems and controls in place to avoid market misconduct and abuse.

To view the full “From darkness cometh light? Some early messages from the Fair and Effective Markets Review consultation responses” speech, please follow this link.

Should you require any further advice or information on the above, Cleveland & Co, your external in-house counsel, are here to help.