Independence, confidence and fairness

Speech by Tracey McDermott, Acting Chief Executive, FCA, delivered at Bloomberg, in the City of London, on 4 February 2016, London. This is the text of the speech as drafted, which may differ from the delivered version.

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Thank you. And let me thank Bloomberg for the opportunity to speak today.

This is, as you know, a critical period for the UK’s financial sector.

We are just a few weeks away from implementing one of the most important reforms in financial services since the crisis – the Senior Managers Regime.

Alongside this, we are reviewing responses to the Financial Advice Market Review. We are consulting on PPI.

And on many of the most significant social and economic issues of our time – pensions, savings and mortgages included – we can expect to see further strides forward over the next 12 months.

For consumers, this is therefore an enormously important year. A defining year.

For financiers, this is a year that will re-orientate professional lives. Personal accountability will become an everyday, working reality.

For the FCA, it is a year that will continue to demand great tenacity in our push for real and enduring reform across the City

And for the FCA, it is a year that will continue to demand great tenacity in our push for real and enduring reform across the City.

That push, as has been amply demonstrated over the last few weeks, will continue to be conducted under intense scrutiny.

This is quite right and proper. Indeed, I would be far more worried if there were no political or public interest in financial conduct.

We have been entrusted by Parliament with the responsibility of regulating a sector which plays a critical role in the lives of every single person in the UK and without which the modern economy could not function. It is our job to make markets work well – delivering for individuals, for businesses – large and small, and for the economy as a whole.

And that is a challenging task. My team at the FCA make difficult and important decisions every day and we are acutely aware that all of these decisions have real life costs and impacts not only on those we regulate but, more importantly, on the consumers and end users of their service.

So, while I cannot pretend it is always comfortable we do welcome scrutiny of our decisions and actions. The focus on what we do, and what we do not do. That scrutiny is an important part of ensuring that we, as a relatively new regulator, continue to learn, and remain focussed on how we can build on what we do well and what we can improve on for the future.

It is important, however, that we listen and take into account external comment but we do not allow that to become the key driver in our decision making.

I have talked before about the need for sustainable regulation, the need to leave behind the regulate, deregulate, repeat cycle that has served us so poorly in the past.

There are many facets to delivering that but at the heart is the need for an independent, confident regulator who makes decisions based not on what will please a particular group or be politically expedient in the short term but on the basis of a fair and objective assessment of the facts and what will deliver the right long term solutions.

And, given that in many issues we consider there will be diametrically opposed views as to what the right answer is, the one thing we can be sure of is that we will not please all of the people all of the time. But fortunately that is not our job. We are not here to adjudicate between competing views. We are not here to be popular. We are here to make independent, informed decisions on how to deliver against the important task Parliament has set us. And that is what we will continue to do.

So we will not deviate from the work we are doing to raise standards across the sector.

Our regulatory priorities and, in particular, the importance we place on incentives, accountability and culture has not, and will not, change.

But we will continue to look for the most effective ways of delivering the outcomes we seek and be prepared to change approach if we think there is a better way to deliver those outcomes. Which is precisely what we have done with culture. We reflected on what we and others were doing and reshaped and refocused our work to make it more effective. Which is what I think you should expect your regulator to do.

And we will continue to do that – to adopt a disciplined approach to our regulatory activity.

  • not tough for the sake of being tough;
  • not making rules for the sake of introducing rules;
  • not activity for the sake of being seen to be active.

But interventions and actions which are robust, well thought through and designed to deliver that overarching aim of markets working well.

And this discipline will be particularly important in relation to wholesale markets, my topic for today, where we are carrying forward a significant and serious programme of work.

Wholesale strategy

No-one, of course, disputes the importance of the City. There is plainly much that the UK’s financial services industry does very well at the wholesale level.

The City is the second largest capital market in the world. It is home to the biggest FX market in the world. It is the third biggest insurance market in the world. And it has the second largest asset management industry in the world.

At its best, it supports growth and innovation; allows businesses to plan and invest for the future and protect themselves against the unexpected. It is also one of our most important net exporters and economic contributors.

At its worst, however, the industry has exploited clients, colluded to seek cheat the market for the benefit of individual traders, and has required taxpayer bailouts as a result of poorly controlled risk taking in pursuit of profit.

I believe that any lingering hope those involved in this activity might have clung on to, that time – rather than reform – would heal scars, is now long gone.

Our wholesale financial sector is simply too important to the UK economy, and its society, not to have the highest standards of conduct.

Most of the largest market participants are established here. Most of the key global markets are based here. And as we all know, that concentration of activity fuels an enormous array of satellite service organisations providing everything from data to legal advice to IT to accounting and so on.

Some argue that this activity is protected, at least in part, by context. The benefit of time zones, history, language, culture and so on. In other words, there is a basic need and demand for wholesale services to be centred in the City.

And that is, in part, true, but it is also important to stress that London is today, and will remain in future, a destination of choice for global markets. Not necessity.

This is an important distinction. Choice means competition for capital. Capital that will, all other things being equal, tend to flow towards centres of stability, professional excellence and integrity.

It follows then that the City’s objectives to attract activity are supported, not hindered, by effective regulation which ensures relevant markets work well.

Here in the heart of London’s financial district, I think it is important to be clear that much does indeed ‘work well’.

While strong, sought after and, in many ways, the epitome of competitive capitalism, the City is not without opportunity for improvement

But while strong, sought after and, in many ways, the epitome of competitive capitalism, the City is not without opportunity for improvement.

The basic task of the FCA in making wholesale markets work well is to identify where those improvements need to be made and drive their delivery. And they fall into three broad categories.

The first is managing integrity risk – the risk that confidence in the functioning of markets diminishes as a result of too many examples of market abuse or misconduct by key players.

The second is managing the risk of poor treatment of end users – for example, consumers and clients losing out as firms fail to properly manage conflicts of interest.

And the third is managing competition risks – where clients across the board might face reduced choice, innovation and increased cost, where market structures and practices work for the few but not the many.

The FCA and industry will not, of course, always be in accord on what issues need to be tackled. Nor on the level of pain acceptable to tackle them.

Ultimately, however, in most of what we do, we want the same things. And I don’t see much debate over the value of the FCA’s primary wholesale aim: to pursue markets that are fair and effective.

This means encouraging markets that operate to consistently applied and high standards of market practice, transparency, access, effective competition and integrity.

It also means promoting efficiency in the guise of end-users being able to undertake investment, funding, risk transfer and other transactions in a predictable way. And having robust infrastructure that supports liquidity sourcing, price discovery and proper allocation of capital and risk. None of which strikes me as being too controversial.

Of course as a way of avoiding ever more interventionist regulatory action achieve these goals, firms need to take greater responsibility and accountability themselves. The senior managers regime is a key aspect of this. But it is not alone. The new FICC Markets Standards Board is an important step forward in this regard and real opportunity for the industry to rebuild trust in itself.

Work to implement the Fair and Effective Markets Review recommendations is ongoing as is the FCA’s Investment and Corporate Banking market study and our asset management study.

And, of course, our work with industry on MIFID II - your focus this morning – and while I make no apology for first setting this in the context of our overall approach to wholesale markets, I fear you might feel short changed if I did not say a few words about the technical detail of MIFID II.


And the obvious place to start is ongoing speculation around the timetable for implementation.

Like many here, the FCA shares ESMA’s concerns around the practical implications of the existing timetable. Significant system changes clearly take time.

The good news is we expect to see a legislative proposal to delay the date of application.

If there is, however, the purpose will be to allow time for those changes to be made. Not to provide an excuse to reduce the intensity of preparation for implementation. And this is exactly as it should be.

The sooner we can unlock the practical benefits of MiFID, the better. Not just in equity and FICC markets, post-trade processing, infrastructures and so on but, also, of course, in terms of improvements to retail and wholesale conduct, which are both part of that wider drive to reform financial markets.

Indeed on retail conduct, we see a very good fit between MiFID’s provisions on product governance, remuneration of sales staff and so on, and our own policy and supervisory work. There are significant crossover themes, for example, between MiFID’s product governance rules and our work on structured products.

None of which is to suggest that compliance on retail conduct issues will be a stroll in the park. Firms shouldn’t underestimate the extent of the changes involved here. Nor the importance of carefully managing future compliance.

On wholesale conduct the same applies. We’re all familiar with the broad thrust of MiFID II. And I don’t think anyone here seriously questions its emphasis on firms acting honestly and professionally in dealings with all clients.

This is entirely consistent with the messages coming out of the Fair and Effective Markets Review - although we do appreciate that MiFID II goes further in a few key areas. Prohibiting payment for order flow being one. Introducing a harmonised EU regime for the funding and supply of research being another.

Now, this will enhance the rigour with which these services are consumed and paid for, and should help manage conflicts of interest; neither of which are bad things.

But the area of MiFID II that has perhaps provoked more discussion is the market structure and transparency reforms for bond and derivatives markets.

This is an area where there remains significant uncertainty. As well as important interpretative issues around the operation of different types of trading venue, we are still waiting for the finalisation of the technical standards dealing with pre and post-trade transparency.

Plainly, those conclusions will be very important. More transparency and, for certain derivatives, a requirement to trade on organised venues, should strengthen the price formation process and resilience of trading.

And from looking at the data extracted from similar reforms in the US, I know our policy teams believe there’s potential here to make UK and European markets more effective.

But we have always insisted that there is a balance to be struck between transparency in support of price formation, and encouraging the provision of liquidity.

That is a difficult equation of course. Arguments today abound that pre-crisis liquidity was illusory. Or at least driven to artificially high levels by the implicit subsidy of ‘too big to fail’. Everyone agrees that it tends to disappear, like a bad friend, when you need it most.

But there is no doubting here where the impetus lies at the global level. A crude measure maybe – but the original G20 communique from Pittsburgh included some 21 references to transparency. Just two on liquidity.

MiFID II does seem to offer the means to strike such a balance through its provisions to calibrate transparency obligations.

Nonetheless, I think it would have been helpful if the framework legislation had allowed for the phasing in of the transparency regime.

The ability to learn from experience would have given markets a better shot at adapting smoothly to the new regime. As it is, it will be important to keep the functioning of the transparency regime under close review.

But I should say this is not the only challenge we have here. Transaction reporting, by way of example, is also on our radar.

The need for accuracy and completeness of transaction reports, as MiFID II makes clear, is crucial and something we have focused on in our own supervisory work. Having firms zeroed in on getting their transaction reporting right will be one of our key supervisory priorities, particularly when it comes to seeing how successfully they’re implementing the legislation.

Notwithstanding this, one area where we do have concerns about the regime is on position limits and reporting for commodity derivatives.

As a regulator of some of Europe’s biggest commodity derivatives markets, we support steps to strengthen their integrity and efficiency. Indeed, the strengthening of position management and principle of position reporting in MiFID II are helpful in this regard.

But we do not believe that it is necessary, as MiFID II requires, to have position limits for every single one of the hundreds of commodity derivatives contracts traded in Europe. Including the least significant. And I know there are concerns, frankly, that the practical details of position reporting were not adequately thought through in the negotiations on the framework legislation.

I do want to finish, however, by making the point that throughout the process of producing MiFID II we have committed significant resource to positively engaging with colleagues in Europe. And this is continuing.

We are heavily involved in the practical and interpretative work of ESMA. Domestically we are working on updating our systems, preparing to process the necessary authorisations, and updating our Handbook.

In December we published our first consultation paper on MiFID II implementation. We will seek to complete our Handbook changes as quickly as the European policy process and the need to have proper consultation allow.

We will also continue to engage with industry to assist with your implementation.

This involves a wide range of activity including website updates, roundtables, bilateral meetings and speaking at important conferences – like today’s.

But firms should not be looking to us to provide them with all of the answers.  They will need to exercise their own judgement and, if approaching us, to have thought not just of questions, but also possible solutions.


Indeed, this is precisely the kind of collaboration that is essential to the future of the City and its reputation.

Conduct infringements in the markets can, as we all know, ultimately deprive retail customers at the end of wholesale chains of enormous aggregate sums. Just as the same markets can – in their capacity as a transmission mechanism between economic policy and actual activity – underpin the most significant societal objectives of our day.

It is an imperative, therefore, that we get this right. And if we want London to remain a destination of choice for the global markets, that means it is in all our interests for the FCA to continue to pursue its wholesale strategy positively, independently and with tenacity.  And we look forward to doing so.

Thank you.