The Fair and Effective Markets Review report

Posted on 30 September 2015

The fair and effective markets review reports

In June 2014, the Chancellor and the Governor of the Bank of England launched the Fair and Effective Markets Review ("FEMR").  The FEMR seeks to address the perceived lack of confidence in the UK Fixed Income, Currency and Commodities ("FICC") markets, stemming from regulatory findings of serious misconduct in recent years.

A year on and the final report has been produced.  On a macro-level, it is interesting to see how the report seeks to reconcile a "light touch" approach (for which the FSA was criticised in the past), with a threat of greater and more detailed regulation if real change is not implemented.

The report speculates that perceived gaps in the existing framework of criminal sanctions may have created the "sense of impunity" from sanction that prevailed before the financial crisis.   Some of these existing gaps will be plugged in due course when the new Market Abuse Regulation comes into force on 3 July 2016 (e.g. MAR will create a new offence of benchmark manipulation).  The report's recommendations are therefore focussed on some areas that MAR will not address.  Similarly, the report also seeks to address perceived discrepancies in the treatment of firms and individuals by the existing market abuse regime – in particular that there is no criminal liability for firms engaged in insider dealing. It suggests that the Ministry of Justice[1] review the criminal liability of firms in relation to market abuse offences, making it mirror the scope of the regime for individuals.

One of the report's recommendations (the regulation of certain FICC benchmarks) has already been implemented.   We summarise some of the others below.

The report sets out a series of policy recommendations, within which there are more specific proposals.  One of the policy recommendations is to "raise standards, professionalism and accountability of individuals".  The report approaches this policy goal by recommending both soft goals and concrete legal reform.  The former focuses on crystallising internationally recognised conduct standards for FICC markets and better standards of training for those working in that market.  The latter recommendations include:

  • Lengthening the maximum sentence for "criminal market abuse" from 7 to 10 years.
  • Extending criminal sanctions for "criminal market abuse" for individuals and firms to a wider range of FICC instruments.

Another interesting policy recommendation relates to strengthening regulation of FICC markets.  Of particular interest are the proposals to achieve this by:

  • Creating a new statutory civil and criminal market abuse regime for spot foreign exchange.
  • Extending the Senior Managers Regime and Certification Regime to a wider range of firms operating in FICC markets (such as inter-dealer brokers and asset managers).  Although the "presumption of responsibility" for Senior Managers will not be applied.
  • Using the Senior Managers Regime and Certification Regime to ensure compliance with all formal and voluntary standards.
  • In reaction to the perceived inadequacy of the system of regulatory references under the current approved persons regime, requiring FICC firms to provide detailed regulatory references for employees to prevent the recycling of individuals with poor employment records (so called "rolling bad apples").

In relation to "rolling bad apples", the report notes that under the current approved persons regime, firms are increasingly persuaded to give bland references as part of an overall compromise agreement when the individual exits, or out of plain fear that the individual may sue if described prejudicially.  It also notes that under the Certification Regime, firms will be required to make their own assessment of candidate fitness, increasing the importance of such references.  The report's answer is that FICC firms ought to be required to give regulatory references on a prescribed form, containing more information than is currently required for such references (e.g. upheld client complaints or details of incomplete investigations).  The report recommends that the FCA and PRA consult on these changes in enough time for the new senior management regime coming into force in March 2016.

All told, this is a wide-ranging, ambitious and interesting report, with potentially far reaching consequences for enforcement action in the future.


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