Conduct Risk

Are traders free from bad conduct action?

Conduct risk is a highly topical area as it is less about a single piece of legislation and more about elements of others such as MiFID and the Markets Abuse Directive (MAD) in the EU or Dodd-Frank in the US, or indeed codes of conduct that have been published by the authorities in their jurisdictions. Many firms have already signed up to the new FX Global Code or are planning to imminently. The wider OTC markets have similar codes of conduct. 
 

Following the fines and other sanctions that are attached to the LIBOR investigations, the wave of fines following the investigation in the FX fixings area, the Class action cases being litigated in the US and the 'last look' cases that are also being litigated; the behaviour of front office staff is under a focused scrutiny. Coupled with the new more high-profile approach that regulators are taking around the world, with record fines and the threat of management being held personally responsible (such as under SMCR in the UK), it is no surprise that conduct risk is high on the agenda. The Bank of England/HMTreasury/FCA Fair and Effective Markets Review took a lead for the G20 jurisdictions in tackling some of the thornier issues that have come into focus following the LIBOR and WMR Fix scandals. Whether it is clarity around the agency/principal role, or how 'last look' is being implemented, the regulators are looking for the industry to take a lead on remediation.

It is no longer acceptable to approach the markets with an attitude of 'what can I get away with?'... The new approach has to be 'is this the correct way to behave?'

Putting in place a programme to ensure that best behaviour becomes the norm is far more than simply a few weeks work to ensure training of a code of conduct. Putting in place a demonstrable culture change is a different order of magnitude.

Changing culture is of course not a simple or short term piece of work, however with the correct programme and continual reinforcement, this is possible - as well as being a mandatory action!

 

The industry is at a crossroads. There are clear signals from regulators and central banks in recent speeches :
 
“Think about it like this. The risks arising from misconduct is one of the largest contingent risks on a firm’s balance sheet. It rarely matures, can’t be sold or hedged using normal market instruments. Any other risk this large, with these characteristics, would be managed and mitigated to within an inch of its life. Yet stick the word ‘conduct’ in front of it and suddenly it is not. We treat conduct risk like any other risk, and with a risk this big, you need to give us a very good reason why you are not taking proactive steps to manage it.”

Tracey McDermott, previously director of supervision, investment, wholesale and specialists, at the Financial Conduct Authority, 24th July 2015.

"Senior management commitments to change need to become a reality in every area of their business. But this is not just about enforcement action. It is about a combination of actions aimed at driving up market standards across the industry. All firms need to work with us to deliver real and lasting change to the culture of the trading floor."

Mr Wheatley, Chief Exec (previously), FCA.
 

If we in the industry are unable or unwilling to engage proactively in change and demonstrably grasp the nettle - the regulators will do that for us. The imposition of conduct regulation rather than self-regulation, will make the current ongoing changes seem like a holiday in comparison. Do not begin to believe that this will 'just go away if we tick some boxes'!

 

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