FCA PRIORITIES FOR BUY-SIDE AND SELL-SIDE INSTITUTIONS
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FCA PRIORITIES FOR BUY-SIDE
AND SELL-SIDE INSTITUTIONS
FINANCIAL SERVICES
The recently-published FCA Business Plan1 and Risk Outlook2 Controls over flows of information in investment
for 2014 contain some instructive pointers for institutions on banks: how firms effectively ensure that the significant
both the buy-side and the sell-side – in particular, highlighting confidential information they receive in one area of the
some of the specific areas of forthcoming thematic focus. business is not used by another area of the business in an
improper manner.
CONTINUING THEMES
Trader controls around benchmarks: how firms are
Culture reducing the risk of traders manipulating prices.
The FCA will continue to expect to see firms embedding a
culture that promotes clients’ best interests and market integrity. Visibility of resilience and risks at board level:
In particular, the regulator will wish to observe demonstrable assessing how far individual firms have progressed against
evidence that clients’ interests feature sufficiently prominently the feedback they were given after the FCA’s 2012 “dear
in firm’s business models and strategies; and are a central chairman” exercise, including assessing how well firms
consideration when, for example, a new product or business line manage their own exposure to risks, to what extent IT risks
is being contemplated. are discussed at board level, and whether boards have the
skills and expertise to challenge executive decisions.
By its nature, culture can be an inherently difficult concept to
measure and gauge. In assessing culture, the FCA will look for Now that the thematic agenda for 2014/15 has been revealed,
certain signs that are often regarded as culturally indicative – for firms might usefully consider how they would fare, if selected to
example, how a firm responded to a known material regulatory participate in one of these reviews – for example:
issue. The attached annex suggests some key cultural indicators
– providing a practical framework against which firms might How robust and comprehensive are our relevant procedures
usefully benchmark themselves. and processes in this area?
––When was the last time these were reviewed?
FORTHCOMING FOCUS AREAS
––Do we need to obtain some form of external assurance
Forthcoming thematic reviews for asset managers and / validation?
investment banks ––Should we be taking any pre-emptive remedial measures?
The Business Plan and Risk Outlook together run to over 130
pages. However, possibly the single most informative section Have we had any recent issues in this context? If so, have
is Annex 1 to the Business Plan; which sheds some light onto they been resolved satisfactorily?
areas of imminent regulatory focus.
Do we have any known weaknesses / vulnerabilities, which
Thematic reviews are already underway in relation to fund are yet to be resolved?
charges governance, the use of dealing commissions and
best execution. For asset managers and investment banks, Do our relevant governance and control arrangements
forthcoming reviews will also cover (amongst other things): remain “fit for purpose” and in line with prevailing regulatory
expectations?
Agency responsibilities of asset managers: ensuring
that asset managers are acting as trusted agents and Would our CEO be comfortable attesting to full regulatory
taking proper account of investor interests. compliance in this area?
Market abuse controls in asset managers: how firms Would any relevant senior individuals be sufficiently “on
ensure that trading activity is consistent with the FCA’s message” and “in the know”, if selected as interviewees?
market conduct expectations.
The next section suggests, by way of illustrative example, some
Conflicts of interest in investment banks: looking at specific potential action points in the context of: (i) market abuse
how firms control conflicts of interest which may exist controls within asset managers; (ii) information flow controls
between their obligations to clients and sales and trading within investment banks; and (iii) conflicts of interest within
positions firms take. investment banks.
1
http://www.fca.org.uk/your-fca/documents/corporate/business-plan-2014-2015
2
http://www.fca.org.uk/your-fca/documents/corporate/fca-risk-outlook-2014POTENTIAL ACTION POINTS
Market abuse controls in asset managers Review relevant risk assessments – to ensure up-to-date
and appropriately comprehensive
Review policies relating to, and the use of, the restricted
dealing and watch lists; including: Review PA dealing rules
––Internal availability of the contents of such lists Review quality and regularity / frequency of market
Review adequacy of policies / procedures / controls in conduct training for relevant personnel – for example:
relation to: ––Is it appropriately tailored and practical?
––Participation in company meetings ––Adequacy of induction training
––Pre-soundings / wall-crossings Review whistle-blowing policy / procedure
––Information handling; including (where appropriate) use Review sufficiency of monitoring activity and 2nd/3rd line
of insider lists – including: assurance
yy“Insider” determinations
Re-visit the 1st line of defence arrangements, including
yy“Cleansings” desk supervision and appropriate desk limit controls
yyAccidental receipt or disclosure
Review IT control systems and current internal surveillance
––Rumours capability – including, for example:
––Verbal orders ––Considering whether current lexicons are appropriately
––Use of “expert networks” up-to-date
––Use of chat-rooms Review any usage of high frequency trading; and related
––Documenting of investment rationale(s) policies and procedures
––Signing of non-disclosure agreements Remedy any known issues or deficiencies
––Making suspicious transaction reports Review relevant governance arrangements
––Operation / integrity of any information barriers Consider any relevant breach trends and underlying
––Use of social media cause(s)
2Controls over flows of information in investment banks Review whistle-blowing policy / procedure
Review adequacy of policies / procedures / controls in Remedy any known issues or deficiencies
relation to:
Review related governance arrangements
––Operation / integrity of information barriers
Review appropriateness of list of “permanent insiders” and
––Bespoke “ring-fencing” arrangements, including “above-the-wall” personnel
“Chinese boxes”
Consider any relevant breach trends and underlying
––Handling of sensitive information – including:
cause(s)
yy“Insider” determinations
yy“Cleansings” Conflicts of interest in investment banks
yyAccidental receipt or disclosure Review conflicts of interest policy
––Operation of “need-to-know” and “clear desk” principles Review conflicts register / log to ensure up-to-date and
––Wall-crossings (both internal and external) sufficiently comprehensive
––Pre-sounding protocols Review relevant risk assessments – ensure up-to-date and
––Maintenance of insider lists appropriately comprehensive
––Execution of NDAs Review the following policies:
––Usage of taped lines / mobile phones ––PA dealing
––Rumours ––Breaches and errors
––Use of chat-rooms / bulletin boards ––Allocations
––Use of social media ––Gifts and entertainment
––Attendance at company meetings ––Inducements (if separate)
––Contact with research analysts Review operation of 1st line of defence
Review sufficiency of monitoring arrangements and 2nd / Review sufficiency of monitoring activity and 2nd/3rd line
3rd line assurance assurance
Review relevant risk assessments – to ensure up-to-date Review relevant governance arrangements / framework; to
and appropriately comprehensive ensure consistent with regulatory expectations – including,
Review PA dealing rules for example:
––Relevant management information and flows
Review IT control systems and current internal surveillance
capability – including, for example: ––Escalation channels
––Considering whether current lexicons are appropriate Remedy any known issues or deficiencies
and up-to-date
Review quality and regularity / frequency of conflicts-
Review any usage of high frequency trading; and related related training – for example:
policies and procedures ––Is it appropriately tailored and practical?
Review quality and regularity / frequency of information ––Adequacy of induction training
handling / market conduct training for relevant personnel
– for example: Review whistle-blowing policy / procedure
––Is it appropriately tailored and practical?
––Adequacy of induction training
3CONCLUSION Asset managers and investment banks are now firmly “on notice” of forthcoming areas of FCA thematic focus. For many firms, this will be seen as an opportune moment to reconsider (as objectively as possible) whether their existing approaches in relevant areas remain in line with prevailing regulatory expectations. Hopefully, the guidance in this article will represent a helpful starting point. Any firms falling short should at least have some time to take some meaningful pre-emptive remedial action. In the current regulatory environment, there is little (if any) room for complacency.
CULTURE
ANNEX
“Culture is like DNA. It shapes judgements, ethics and Complaints handling
behaviours displayed at those key moments, big or small, that How seriously is the firm treating complaints? For example:
matter to the performance and reputation of firms and the
service that it provides to customers and clients. Are any trends being monitored effectively and actioned
accordingly? By whom?
In many cases, where things have gone wrong…a cultural issue
is at the heart of the problem. Is the complaints-handling process sufficiently transparent
and designed to give the complainant a “fair hearing”?
We will draw conclusions about culture from what we observe
about a firm…1” What complaints-related MI is being generated?
––To whom is it circulated?
The above quotations represent a small (albeit instructive)
selection of recently-published regulatory pronouncements Incentive structures
concerning culture – a topic of concerted FCA focus. Is an appropriate balance being struck between the interests of
clients and the firm?
The regulator has expressed readiness to draw cultural
conclusions from its observations of a firm. This note suggests To what extent (if at all) is the emphasis on clients’
some2 practical indicators, to which the regulator is likely to interests / good regulatory compliance conduct, as
have regard in this context; and may therefore serve as a useful opposed to revenue generation?
reference point for any cultural self-assessment.
––Where is this evidenced?
CULTURAL INDICATORS ––What (if any) claw-back mechanisms exist?
Response to issues / incidents (including “near misses”) Performance management
A firm’s response to an incident or issue can often prove to be Are appropriate metrics being used to assess individuals’
a key cultural indicator – after all, actions speak louder than performance? How seriously are contraventions treated in
words. For example: practice?
Was the response sufficiently credible? Did it indicate a Is “good citizenship” being afforded sufficient weight?
resolute determination on the firm’s part to “do the right
thing”? Is there an “over-focus” on revenue generation?
––To whom was it escalated?
What sanctions are employed for: failure to complete
––Who is responsible for dealing with the identified issue? mandatory compliance training; and material and/or
––How robustly was it handled? repeated breaches of internal policies and procedures?
––Was it prioritised appropriately, with the requisite sense ––Are they credible? Is there a true incentive to “do the
of urgency? right thing”?
––Was the regulator informed in a timely manner?
Board / senior management engagement
––Has an action / remedial plan been instituted? Are Is the correct “tone from the top” being conveyed? Does it
deadlines appropriate (and not too far out)? pervade throughout the organisation?
––Was a wider internal investigation appropriate in the
circumstances? How (if at all) have the Chief Executive Officer (CEO) /
––Were any lessons to be learnt? If so, how in practice? senior management articulated their cultural expectations?
––Where is the evidence? For instance, when did
the CEO last issue a relevant communication to all
personnel, setting out his or her clear expectations?
1
“The Importance of Culture in Driving the Behaviour of Firms and How the ––Is it time for a “re-articulation”?
FCA will Assess This”, Clive Adamson, Director of Supervision, FCA, April 2013.
2
Albeit not an exhaustive list. ––Is the articulation of the firm’s cross-selling approach
consistent with TCF and clients’ best interests? Are they demonstrably practising what they preach? Are new joiners provided with appropriate induction
training?
To what extent (if at all) will the board / senior
management become (and remain) involved in any material Is completion of all required training modules an important
regulatory compliance issues? Through what channel(s)? factor in appraisals? For example:
––Has there been a recent example? If so, how did it play ––Are bonuses withheld from any individual who has not
out? successfully completed their training?
What relevant MI is provided to the board / senior Response to legal or regulatory developments
management? Does this, for instance, include any TCF- Is the firm sufficiently responsive to regulatory pronouncements
related information? and developments (including relevant published Final Notices)?
Quality of MI How does the firm monitor for relevant pronouncements
MI will be a key evidential indicator of cultural awareness and developments?
throughout an organisation {linking into several of the other
areas covered in this note}. Who is responsible for ensuring that the firm remains
in line with prevailing regulatory expectations and
Is MI sufficiently informative in the context of customer- developments?
facing issues?
Approach to contraventions of internal requirements
Is MI being provided to the right bodies / individuals within The manner in which breaches of internal requirements are
the firm’s governance framework? treated will be an important cultural indicator. The Breach
––Is MI receiving appropriate challenge? How is this Register will often be an obvious first port of call for a regulator.
evidenced? What is the process for investigating policy / procedure
breaches?
Is MI prepared to the right level of detail to ensure a proper ––To whom might issues be escalated?
understanding of issues? Is this periodically reviewed?
How are repeated contraventions dealt with?
Is MI sufficiently meaningful in its content?
What “flow-though” is there into appraisals / bonus
Approach to training
determinations?
A firm’s approach to training and education can be a good
indicator of its attitude towards good compliance conduct.
Is the firm practising what it preaches?
What is the firm’s general approach to training its
What does the Breach Register look like? What story does
personnel?
it tell?
What does the training programme look like? Who is Decision-making and escalation
responsible for this?
Are decisions being taken at the right levels and issues
––Does it appropriately reflect regulatory expectations escalated appropriately?
and evolve over time?
––Is it sufficiently tailored and practical? Customer experience
––Is it undertaken frequently enough? How customer-friendly was the front-line sales
experience?
Is training mandatory? What checks are in place to ensure
that all required participants do in fact attend?Approach to product development and on-going product Relationship with regulators
monitoring Does the firm enjoy a healthy and constructive relationship with
Is sufficient weight being attached to TCF and clients’ interests the FCA / PRA?
throughout the product development process and beyond into
post-sale? Does the firm endeavour to remain “on the front foot” with
the regulator?
Do internal templates and New Product Committee
minutes adequately reflect customers’ interests; or are they Has the firm consistently shown itself to be open and co-
solely focused on commercial considerations? operative?
Are trends actively monitored; and by whom? For example:
––Products exceeding all expectations – is there an CONTACT DETAILS
“untoward” reason for this? If you would like further information or specific advice please contact:
DAVID BERMAN
––Products attracting an unusually / inordinate number of DD: +44 (0)20 7849 2733
complaints or queries david.berman@macfarlanes.com
EMMA CARRINGTON SMITH
––Are products being sold to the type of customers for DD: +44 (0)20 7849 2352
whom they were originally intended? emma.carringtonsmith@macfarlanes.com
What post-sale MI is generated? How is this considered? APRIL 2014
By whom?
Role / status of Chief Compliance Officer (CCO) and Chief Risk
Officer (CRO) within organisational framework
Where do the CCO / CRO feature within the governance
framework?
Do the CCO / CRO have a meaningful voice?
Extent of day-to-day contact with senior management
Internal perception of Compliance / Risk – business
prevention versus commercial facilitation
MACFARLANES LLP
20 CURSITOR STREET LONDON EC4A 1LT
T: +44 (0)20 7831 9222 F: +44 (0)20 7831 9607 DX 138 Chancery Lane www.macfarlanes.com
This note is intended to provide general information about some recent and anticipated developments which may be of interest.
It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.
Macfarlanes LLP is a limited liability partnership registered in England with number OC334406. Its registered office and principal place of business are at 20 Cursitor Street, London EC4A 1LT.
The firm is not authorised under the Financial Services and Markets Act 2000, but is able in certain circumstances to offer a limited range of investment services to clients because it is authorised and regulated by the Solicitors Regulation Authority.
It can provide these investment services if they are an incidental part of the professional services it has been engaged to provide. © Macfarlanes April 2014You can also read
