Readers will no doubt be familiar with the many column inches devoted to the Libor, FX and gold benchmark affairs in recent times. Readers will also no doubt know that, since the furore erupted, the Government has passed legislation to regulate 8 benchmarks, and that the FCA has implemented rules concerning benchmarks.
Between August 2014 and June 2015, the FCA conducted a thematic review to assess the extent to which firms had acted in response to the concerns, problems and failings highlighted by benchmark enforcement cases. It published its findings in July 2015. The FCA had wanted to understand whether firms had implemented appropriate oversight and controls to manage the risks posed by their involvement in wider benchmark activities. All benchmarks were within scope with the exception of Libor and FX.
The results were somewhat mixed. Although the review found that firms had made a number of positive changes, the FCA considered that significant further work was needed to ensure all of the risks were managed appropriately. It highlighted in particular that it was essential that firms' senior management paid heed to the findings and messages outlined in the review and took the steps necessary to identify and resolve any outstanding issues. There is a real sense that the FCA requires firms to look at matters more comprehensively than they do currently.
One of the interesting features of the review is its analysis not only of activity in relation to the 8 regulated benchmarks, but that it also considered that firms should adopt the broad IOSCO definition of benchmarks and then consider their business activity, business practices and controls accordingly.
It is difficult to assess whether enforcement action is likely to follow in relation to oversight and controls of benchmarks in future, but firms would be well advised to study the paper carefully. The six key messages of it are:
- to ensure that firms identify all of the activities that constitute a benchmark activity or that could affect a benchmark;
- firms' senior management need to act quickly to improve any outstanding gaps in their approaches to benchmark activities;
- firms need to strengthen their governance and oversight of benchmark activities;
- firms need to continue to identify, raise awareness of and manage conflicts of interest in relation to benchmark activities;
- firms should ensure they establish robust controls and oversight for any in-house benchmarks being used;
- when exiting benchmark activities, it is essential that firms give consideration to the wider impact of their actions.
Firms would be particularly well advised to refer to the many examples of good and poor practice. If enforcement actions are to follow, these may well become significant reference points.
You can read the FCA's report here.
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