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Ensuring appropriate conduct and culture in the financial services industry - New trends in the financial sector

Improving culture to safeguard the integrity of markets

By Blunt David - Head of Conduct Specialists Department, Financial Conduct Authority (FCA)

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Capital markets contain a wide variety of FCA regulated firms – including but not limited to investment banks, trading venues, wholesale brokers and proprietary trading firms. Poor conduct standards in wholesale markets, such as benchmark manipulations, traders not achieving best execution for their clients and market abuse offences, lead to an increased likelihood of behaviours that harm market integrity and result in poor outcomes for clients and consumers. The FCA sees poor culture as a root cause of many of those issues, including poor identification and management of conflict of interests, or incentives encouraging the inappropriate pursuit of profit at the expense of clients or other market participants.

The FCA places significant emphasis on conduct and culture and we seek to drive a positive shift in firm behaviour and individual accountability. Senior management has a critical role in setting the ‘tone from the top’ and we expect them to take responsibility for the culture of the firm. It is important that our markets are open, transparent and resilient with respect to price formation and trade execution, so that market participants can trust and have confidence to transact in them. The FCA continues to focus on strengthening and improving standards of market conduct in the UK financial services industry, particularly areas where we believe market participants are conducting themselves in a way that may threaten the integrity of the markets.

FCA continues to focus on strengthening and improving standards of market conduct.

Our supervisory work aims to understand better the conduct risks in regulated firms operating in the wholesale markets and take action to remediate where appropriate. We undertake this through individual firm assessments, looking at elements such as governance, control frameworks, culture and systems; thematic and other multi-firm reviews; and policy initiatives. For example, we have conducted thematic reviews focusing on conduct in best execution & payment for order flow; trader controls around financial benchmarks; flows of information in investment banks; and conflicts of interest in dark pools.

The FCA plays a leading role in domestic and international initiatives to raise regulatory standards. We have introduced a supervisory regime for 8 major UK-based financial benchmarks, including LIBOR, to improve market integrity following cases of manipulation. The administrators and submitters are now subject to the FCA’s standards of governance, controls, accountability, management of conflicts of interest and record keeping. Crucially, the recent Fair and Effective Markets Review highlighted that as wholesale markets span across the globe, international regulators must work together to raise standards and improve market integrity. The FCA is committed to working with other regulators and the industry alike to advance widely understood and practical standards of good market practice.