FCA review finds companies still failing to fully manage benchmark risks

Firms still have to do further work to identify the full range of their benchmark activities and improve their management of the associated risks

Firms still have to do further work to identify the full range of their benchmark activities and improve their management of the associated risks

According to the Financial Conduct Authority’s (FCA) thematic review of oversight and controls of financial benchmarks, companies still have further work to address in order to identify the full range of their benchmark activities and improve management of the associated risks.

Robust financial benchmarks play a significant role in the global economy and impact a multitude of financial instruments and contracts used by companies, Governments and consumers.

The FCA conducted a thematic review between August 2014 and June this year to derive an early assessment of the extent to which businesses have learned the lessons from previous failures around benchmark activities and taken appropriate action in response.

The FCA states that some progress has been made on improving the oversight and controls around benchmarks.  However, application of the lessons learned from the LIBOR, Forex and Gold cases to other benchmarks is said to be “uneven” across the financial services sector and “often lacks the urgency required” given the severity of recent failings in the system.

In its detailed report entitled ‘Financial Benchmarks: Thematic Review of Oversight and Controls’, the FCA has discovered that companies are failing to identify a wide enough scope of benchmark activities by interpreting the IOSCO definition too narrowly. Also, some firms have not made sufficient effort to properly identify the conflicts of interest that could arise from their businesses and benchmark activities.

Tracey McDermott, director of supervision for investment, wholesale and specialists at the FCA, commented: “We’ve seen widespread historic misconduct in relation to benchmarks. It’s now absolutely critical that firms act to restore trust and confidence in the system. Companies should have in place systems designed to manage the risks posed by benchmark activities and address those weaknesses that have previously been identified.”

McDermott continued: “We recognise that this is a significant task and that businesses have made some improvements, but the consistency of implementation and speed at which these changes have been taking place is disappointing. Firms should take our findings on board and consider further steps to improve their oversight.”

Strengthened governance and oversight

In the wake of this thematic review, the FCA has adopted the view that companies need to:

*continue to strengthen governance and oversight of benchmark activity

*continue to identify and manage conflicts of interest

*fully identify their benchmark activities across all business areas

*establish oversight and controls for any in-house benchmarks where they have not already done so

*implement appropriate training programmes

The FCA is now writing to all those companies involved in the review process to provide individual feedback and will be following up on this work as part of its regular supervision of companies.

There’s an expectation from the FSA that firms will “instil a culture in which market integrity and consumers interests are at the heart of how they run their businesses”.

In response to the FCA’s review, Simon Hunt (PwC’s UK banking and capital markets leader) said: “The identification of a complete population of benchmarks subject to the IOSCO definition is a significant challenge with which firms have been grappling for some time. Companies that have introduced centralised governance and an oversight body for these benchmarks have been able to strengthen significantly the control infrastructure and understand and manage the risks that they face as an organisation. Those firms that have been under greater scrutiny have typically done more than others, but the industry does still have some way to go in order to ensure consistency in the quality of the control infrastructure that’s established.”

 

About the Author
Brian Sims BA (Hons) Hon FSyI, Editor, Risk UK (Pro-Activ Publications) Beginning his career in professional journalism at The Builder Group in March 1992, Brian was appointed Editor of Security Management Today in November 2000 having spent eight years in engineering journalism across two titles: Building Services Journal and Light & Lighting. In 2005, Brian received the BSIA Chairman’s Award for Promoting The Security Industry and, a year later, the Skills for Security Special Award for an Outstanding Contribution to the Security Business Sector. In 2008, Brian was The Security Institute’s nomination for the Association of Security Consultants’ highly prestigious Imbert Prize and, in 2013, was a nominated finalist for the Institute's George van Schalkwyk Award. An Honorary Fellow of The Security Institute, Brian serves as a Judge for the BSIA’s Security Personnel of the Year Awards and the Securitas Good Customer Award. Between 2008 and 2014, Brian pioneered the use of digital media across the security sector, including webinars and Audio Shows. Brian’s actively involved in 50-plus security groups on LinkedIn and hosts the popular Risk UK Twitter site. Brian is a frequent speaker on the conference circuit. He has organised and chaired conference programmes for both IFSEC International and ASIS International and has been published in the national media. Brian was appointed Editor of Risk UK at Pro-Activ Publications in July 2014 and as Editor of The Paper (Pro-Activ Publications' dedicated business newspaper for security professionals) in September 2015. Brian was appointed Editor of Risk Xtra at Pro-Activ Publications in May 2018.

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