Consultation on New Benchmark Powers

The FCA authorized administrator of LIBOR, ICE Benchmark Administration, has announced it will consult on its intention that the Euro, Sterling, Swiss Franc and Yen LIBOR panels would cease at end-2021. The FCA has therefore set out a potential approach on how proposed new powers may be used to ensure an orderly wind down of LIBOR.

The FCA has further published consultations about its proposed policy in relation to some of the new powers granted to it under the Benchmarks Regulation, as amended by the Financial Services Bill, subject to the bill passing in its current form.

One consultation demonstrates how the FCA would use the proposed new powers to require continued publication of critical benchmarks, on the basis of a changed methodology in certain circumstances. Another consultation focuses on the circumstances in which these powers would potentially become relevant. Policy Statements will be produced once these consultations are concluded.

If these proposed policy changes to the LIBOR settings are adopted, there would be a case for using the proposed new powers to require a change to the LIBOR methodology where:

  • LIBOR currency-tenor settings are widely used in outstanding contracts and/or instruments that cannot practicably be transitioned away from the benchmark rate by actions or agreements by or between contract counterparties themselves;
  • using the powers would contribute to protecting consumers or preserving market integrity.

Any decision to use the powers to require a methodology change in respect of LIBOR settings would factor in evidence and views from market participants and the FCA’s counterpart global authorities and will be consulted on in due course. Holders of legacy LIBOR contracts could be assisted by powers proposed under the Financial Services Bill, an aim of which is to enable the continued publication of LIBOR under a new methodology to assist legacy contract holders.

For further information please read the full article here.

Working Group to Facilitation Investment in Productive Finance

The Treasury, the Bank of England (Bank) and the FCA have announced an industry working group to agree the necessary foundations to facilitate investments in productive finance. This working group will be co-sponsored by the Treasury’s Economic Secretary, Andrew Bailey, the Governor of the Bank, and Nikhil Rathi, the CEO of the FCA. Membership of the working group will be from a wide range of market participants including asset management firms. In addition, membership will be by invitation only and will be based on a number of criteria including market footprint in the UK.

An investment in productive finance may expand capacity (helping businesses achieve scale) and further sustainable growth (research and development and green technology). Such investments will usually necessitate a longer-term commitment from investors, which is particularly relevant given the economic uncertainty created by Covid-19 and the need to foster a more long-term investment culture as a result.

The key aims of the working group will be to:

  • Propose solutions for barriers to investment.
  • Propose a roadmap, timetable and set of actions.

Further details will be announced during 2021.

The FCA’s press release can be found here.

Building Trust in Sustainable Investments

Richard Monks, Director of Strategy at the FCA, delivered a speech at SRI Services and Partners ‘Good Money Week’ panel discussion, on October 21, 2020, which focused on the work that the FCA are carrying out on sustainable finance.

Monks said that the FCA is seeking to build a regulatory framework to achieve two key aims: helping firms deliver reliably sustainable investment products that consumers and investors desire, and helping consumers make better informed choices. With these aims in mind, Monks emphasised the importance of ensuring messaging about ESG products is clear, consistent, fair and not misleading.

The regulator is looking into corporate reporting on sustainability. Monks stated that there are some promising initiatives in this area, which it is hoped will form the basis for a common international corporate reporting standard. Additionally, the FCA wants to improve firms’ disclosures to clients on how they are managing sustainability factors.

Monks also confirmed that the regulator is considering outlining a set of guiding principles to help firms with ESG product design and disclosure. The FCA has five areas for potential principles in mind, as follows:

  • Consistency in messaging and approach.
  • The ESG focus of a product being clearly and fairly reflected in its objectives.
  • Documented investment strategies clearly articulating how sustainability objectives will be met.
  • Firms reporting, on an ongoing basis, on its performance against its sustainability objectives.
  • The firm should ensure ESG data quality, understand its source and derivation, and articulate clearly to investors how it is used.

Duff & Phelps is developing a toolkit for Sustainable Finance and will be happy to assist you with any questions you may have.

To read the speech in full, click here.

Enforcement Action Against FX Option Broker for Market Misconduct

The FCA has announced that it has fined an FX options broker £3.44 million for carrying out the practice of ‘printing trades’ between 2008 and 2015.

‘Printing trades’ involved the firm’s brokers misinforming its clients that a trade had taken place at a specific price or quantity, when in fact no such trade had occurred. This type of action influenced clients to make trades they may not have necessarily made otherwise.

The FCA has said that the firm did not observe proper standards of market conduct, nor react to warning signs that the practice may have been taking place, resulting in a failure to act with due care and diligence.

Furthermore, the firm was found to have failings in its compliance arrangements and oversight to detect and prevent the risk of brokers providing price or quantity information of trades that had not taken place.

As the firm agreed to resolve the case with the FCA, they qualified for a 30% discount on the overall penalty imposed which would have otherwise resulted in a fine of £4.92 million.

To read the FCA’s press release please click here.

Benefits of New Data Collection Platform - RegData

The FCA has started the migration of firms from Gabriel to RegData, which uses advanced technology and data analytics, to provide three main areas of improvement in data collection:

  • Speed of access.
  • Improved reporting schedule layout and submission history.
  • Better guidelines when making data submissions and enhancements to the data validation feature.

The FCA announcement can be read in full here.

The Business of Social Purpose

On the November 26, 2020, The FCA Executive Director of Supervision of Retail and Authorizations, Jonathan Davidson, gave a speech focused on culture and conduct.

In the address, Mr. Davidson initially outlined that culture remains a key focus area for the FCA and that they consider healthy cultures to be, “purposeful, diverse, safe and inclusive” rather than about “making money and avoiding regulatory censure”.

The speech then moved on to cover social and economic factors that have affected the financial services industry during 2020. Specifically, given the Covid-19 crisis, financial services firms have helped to rebuild the public’s trust in financial services by acting quickly and responsively to the unprecedented need to change the way they operate and support consumers during this pandemic.

Mr. Davidson concluded his address by outlining that the financial services industry has the opportunity to make real progress, driven by social purpose, and that the financial services industry has “reached a tipping point in the journey to healthy, purposeful, safe, diverse and inclusive cultures that create healthy returns for shareholders”.

To read the address in full, please click here.

IBA’s Consultation on Intention to Cease USD LIBOR

ICE Benchmark Administration (IBA) announced its intention to cease USD LIBOR. IBA intends that one week and two-month LIBOR settings will cease at end 2021 and the USD LIBOR panel will cease from end of June 2023. FCA previously issued a statement setting out its potential approach to ensure an orderly wind-down of LIBOR.

FCA is encouraging market participants which are parties to legacy LIBOR contracts to continue work to convert these contracts or adopt robust fallbacks.

Full details can be found at this link.

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