UK: Chancellor announces joint review of how wholesale financial markets operate by HM Treasury, FCA and the Bank of England

The Chancellor has today announced the launch of a joint review by the Treasury, the Bank of England and the Financial Conduct Authority (FCA) into the way wholesale markets operate.  The Fair and Effective Markets Review will focus on the wholesale markets in which the majority of recent concerns about potential misconduct have arisen (namely fixed income, currency and commodity markets) but may have application across a wider range of wholesale markets.  It will cover:

• trading practices in both regulated and unregulated markets, differences across asset classes and the drivers of behaviours
• the scope of regulation, including how best to bring currently unregulated markets (e.g. FX, precious metals) and activities within regulatory scope, and which benchmarks should be brought into the scope of existing UK regulation
• the impact of recent and forthcoming regulation, and whether further action in needed
• the implications for supervision of firms and markets in terms of regulatory powers and resources 

The Review will be led by Minouche Shafik of the Bank of England, with Martin Wheatley (FCA) and Charles Roxburgh (HM Treasury) as co-chairs.  All executive decisions of the review will be the responsibility of the leadership team.  However, a panel of market practitioners will be appointed to involve and reflect the views of the financial services industry in the Review, which will be chaired by Elizabeth Corley, CEO of Allianz Global Investors.  The Panel (comprising around 12-15 senior industry leaders representing sell-side and buy-side firms, market infrastructure providers and major corporate users of financial markets) acting in a personal capacity, will feed into the work of the review. 

The review will need to identify regulatory interventions that require international co-operation, and co-ordinate with the relevant international authorities in respect of its work.  It will take into account the impact of its recommendations on the stability of the financial sector, its capacity to contribute to the growth of the UK economy, the need to maintain competition within wholesale financial markets, the  competitiveness of the UK financial and professional services sectors and the wider UK economy, and the resources needed for implementation.  The Government expects the review to produce a recommended list of additional benchmarks to be brought into regulatory scope in the UK legislation as an interim deliverable (in the  autumn),

A substantive consultation document will be produced in the autumn, which will also consider:

• extending the new legislative provisions (in place to regulate LIBOR) to cover further benchmarks in the foreign exchange, fixed income and commodity markets, based on an early recommendation of the Review
• extending the Senior Managers and Certification Regime to cover all banks that have a presence in this country, by bringing in foreign banks that have branches in the UK
• expanding the tough UK criminal regime for market abuse.

 The Final report, due by June 2015, will make recommendations on:

• principles to govern the operation of fair and effective markets
• reforms to ensure bring standards of behaviour into alignment with the principle
• tools to strengthen the oversight of market conduct (both regulated and unregulated markets)
• possible extension of the regulatory perimeter
• additional reforms to strengthen the infrastructure supporting those markets. 

The Government has also confirmed that whilst the UK will not opt in to the EU Criminal Sanctions (Market Abuse) Directive, the UK's own provisions will be as strong or stronger than those in the EU, but will preserve flexibility to reflect specific circumstances in the UK’s globally important financial sector.

Since the announcement of the Review, the following correspondence regarding the extension of the senior managers & certification regime to UK branches of foreign banks has been published, which makes clear that the regime is to be extended on a proportionate basis, and that the PRA is well aware that it will not able to apply such a regime to branches of banks that are incorporated in EEA member countries, given that prudential supervision of such branches remains the responsibility of the home supervisory authority:

• a letter from George Osborne to the Governor of the BoE, together with the Governor's letter in reply; and
• a letter from George Osborne to the Chairman of the FCA, together with the Chairman's letter in reply.