Banks could face a significant new regulatory crackdown on their wholesale market activities as the financial authorities seek to prevent a repeat of the scandals that have destroyed the reputation of the sector in recent years.
The Bank of England – in conjunction with the Financial Conduct Authority and the Treasury – yesterday published a wide-ranging consultation document which holds out the possibility of a radical tightening of the supervisory regime for City institutions that trade in the foreign exchange, interest rate derivatives, commodities and also bond and equity markets.
The proposals include a beefing up of electronic surveillance tools to monitor traders’ activities and a new regime of fines on employees who breach internal guidelines on abuse. Another bold suggestion is to overhaul the infrastructure of capital markets, forcing open new electronic trading platforms to increase competition in markets that are often dominated by a relatively small number of firms.
The Fair and Effective Markets Review was established by George Osborne earlier this year and will report its final conclusions next June. It is being led by the Deputy Governor of the Bank of England, Nemat Shafik.
In a speech yesterday Ms Shafik said that it was no longer credible for bank managements to argue that crimes such as rigging of the interbank interest rate known as Libor were the result of “a few bad apples”. “Perhaps there is also something wrong with the barrel,” she said. “We need to make sure that [regulatory reforms] add up to a comprehensive solution to fix the barrel and get rid of the bad apples.” She asked how the industry’s code of conduct can be given “real teeth”.
Considerable regulatory reform of wholesale financial markets has already begun. Libor is now overseen and administered by the FCA rather than private banks. The 2012 Financial Services Act has also made it a criminal offence to make false or misleading statements in relation to benchmark setting. The Financial Stability Board, a global financial oversight body, and the European Union are also working on their own reform directives for wholesale markets.
But Ms Shafik said that her review was needed to evaluate whether these reforms were sufficient.
Regulators stressed yesterday that the UK was ideally placed to address these questions since the City is the venue for a large share of global wholesale markets activity, including 70 per cent of the world’s bond trading; almost 50 per cent of interest rate derivative trading; and 40 per cent of foreign exchange trading.
Regulatory investigations into a host of abuse scandals in wholesale markets are on-going. Since 2010 the FCA has issued 15 final notices for misconduct and imposed more than £700m in penalties on firms. Fines imposed by the UK, the US and Europe globally have amounted to nearly £4bn so far.
The Chancellor welcomed yesterday’s consultation and said it “asks all the right questions”. The consultation is soliciting the views of anyone with an interest in wholesale capital markets including academics, international regulators and the banks themselves. It will be open for three months.Reuse content