Financial Conduct Authority 25 The North Colonnade Canary Wharf London E14 5HS 26 January 2018 (Uploaded at the Financial Conduct Authority s website) Dear Sir/Madam, Standard Chartered s Response to the Financial Conduct Authority s (FCA) consultation paper CP/17/37, on Industry Codes of Conduct and Discussion Paper on FCA Principle 5 Standard Chartered welcomes the publication of the FCA s proposed approach to recognising industry codes of conduct and the opportunity to provide comments on the consultation. We support the work of the FCA in increasing conduct standards across both regulated and unregulated markets/activities. Industry codes represent a positive step for the financial sector as they allow the industry to drive improvements in its own practices. Their development leads to a necessary level of buy-in, which provides for effective adoption, clarity of expectations and peer-level monitoring. Industry codes tend to be principle-led in nature, rather than wholly prescriptive, which can allow some flexibility in approach and implementation. Industry codes can also be positive for supervisors and regulators as an additional tool for monitoring industry practices. Standard Chartered takes part in the following unregulated activities: FX spot Bullion / precious metals Physical commodities Money markets Loans and deposits Structured finance We have helped to develop, and subsequently signed up to, the following industry codes of conduct: The FX Global Code Precious Metals Code UK Money Markets Code FMSB Standards and Statements of Good Practice Broadly, the proposals set out in the consultation paper are welcome. However, we recommend that the FCA provides further clarification and guidance in the following areas: Standard Chartered Bank 1 Basinghall Avenue London EC2V 5DD Tel +44 (0)20 7885 8888 www.standardchartered.com Standard Chartered Bank is incorporated in England with limited liability by Royal Charter 1853 Reference Number ZC18 The Principal Office of the Company is situated in England at 1 Basinghall Avenue, London EC2V 5DD Standard Chartered Bank is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority
1. The approach to supervision and enforcement We understand that the FCA does not intend to supervise firms adherence to industry codes and that it will not enforce directly against firms or individuals for breaches of industry codes that have been adopted. Some of the drafting in the consultation paper, however, appears to contradict the FCA s high-level objectives that it will not directly supervise and enforce adherence to industry codes. This has led to confusion within the industry. It is important that it is clear to market participants that: (a) compliance with particular codes remains voluntary, and (b) compliance with codes is not the only way of demonstrating proper standards of market conduct. 2. Surveillance and reporting requirements for breaches Related to the point above, adherence to industry codes often involves significant front office, legal and compliance resources; in most cases analogous to compliance with regulatory requirements. Firms take reasonable steps to ensure compliance with industry codes, including internal monitoring of compliance. We are concerned that, should the proposed approach lead to automated surveillance obligations such as those akin to requirements under the Market Abuse Regulation, this may undermine the best-efforts basis for adherence to industry codes and, further, introduce a significant disincentive to the production, take-up and implementation of industry codes. 3. Treatment of unrecognised codes We appreciate that the proposed approach focuses on positive recognition for industry codes that define proper market conduct. However, the approach is less clear on the treatment of unrecognised codes. The consultation states that the FCA may use unrecognised codes to determine proper market conduct when enforcing obligations under the Senior Managers and Certification Regime (SM&CR). We would welcome confirmation that this applies to industry codes that have not sought FCA-recognition, and does not apply to codes that have sought recognition but been rejected by the FCA. Related to this, we recommend that the FCA maintains a publicly accessible repository of codes which have sought recognition and have been rejected, as well as the FCA s reasons for non-recognition. This will provide guidance to firms as to expectations of market conduct in unregulated markets/activities that are not covered by an FCA-recognised code. 4. Territorial scope The territorial scope of the proposed approach is unclear. Given our business model and structure, we recommend that the FCA provides further clarity on whether it will expect firms non-uk entities to adhere to FCA-recognised industry codes when demonstrating compliance with the SM&CR, which applies on a Group-wide basis. If UK entities operating overseas are held by materially different standards than local market competitors, they may face a competitive disadvantage. Further, we would welcome further guidance on the FCA s approach to recognising industry codes that are developed outside of the UK. In particular, we would highlight the need to consider whether the code is fit for UK markets. 5. Detailed and exampled guidance on recognition process and criteria We broadly agree with the process and criteria for recognition set out in the consultation paper. However, we recommend that the FCA amends its approach to time-limitation for code recognition to avoid cliff-edges in implementation. We also recommend a process whereby a code can be updated in light of recent market developments without losing its formal recognised status. Further, we recommend that the FCA provides detailed guidance on the criteria for recognition, specifically on what would be deemed sufficient for meeting conditions on public consultation and all relevant stakeholders. In doing so, it would be helpful if the FCA could reference existing industry codes that it considers have met these criteria. 2
6. Consideration of extending Principle 5 to unregulated markets/activities Standard Chartered supports the FCA in its aim of increasing conduct standards in regulated and unregulated markets/activities. Accordingly, we believe that extending Principle 5 to unregulated markets/activities is worthy of further consideration. We would, however, recommend that the FCA considers how this would work in practice, in particular in the absence of regulatory standards or guidance which would provide sufficient clarity for firms on expected levels of market conduct. Such an extension of Principle 5 and related enforcement powers is a significant extension of the FCA s powers and scope and as such may require the approval of Parliament. Finally, in order to aid compliance efforts and the consideration of the impact arising from the proposed approach set out in the consultation paper, it would be helpful if the FCA could articulate clearly a list of unregulated markets/activities in which the FCA takes an interest, beyond that provided in the Perimeter Guidance (PERG) in the FCA Handbook. This would also foster a greater understanding within the industry of the activities and businesses that the FCA intends to capture within this proposed framework. The accompanying annex to this letter details our comments in response to the specific questions outlined in the consultation paper. We would be happy to discuss any of the points raised in more detail. Yours sincerely, Daniel Trinder Global Head, Regulatory Reform Compliance 3
ANNEX Responses to the questions outlined in the Consultation Paper Please note that due to a discrepancy in the consultation paper between the questions given in the body and in the Annex, we are responding to the questions provided in the Annex. 1. Do you agree that the FCA should support the take-up of industry codes through the general approach described? If not, how should the FCA consider codes for unregulated markets developed by industry practitioners? We agree with the broad approach that industry participants should pay regard to voluntary industry codes of conduct that seek to raise conduct standards in that market or activity. We support the guidance that the proposed approach would provide to firms and individuals operating in unregulated markets/activities in meeting their obligations under the Senior Managers and Certification Regime (SM&CR), in particular as those markets/activities are not covered by regulation or regulatory guidance that set out expected standards of proper market conduct. Standard Chartered has taken a global approach in its application of the SM&CR, which applies to regulated and unregulated activity. While we are aware that other jurisdictions have implemented legislation to grant powers to legally prescribe industry codes, we firmly believe that industry codes should remain voluntary. We would highlight that any moves to heighten the status of industry codes, or make their creation and compliance more burdensome, risks becoming a significant disincentive to their development, subsequent take-up and overall effectiveness. Accordingly, we recommend that the FCA strengthen its wording in the proposed approach on the voluntary nature of industry codes. We support the approach to enforcement set out in the consultation paper and welcome the further clarity that has since been provided through industry engagement. Any enforcement action would need to be based on a demonstrable breach of the FCA s Individual Conduct Rules, the obligation to observe proper standards of market conduct under the SM&CR, and/or a failure of a Senior Manager to exercise Reasonable Steps, rather than a breach of the conditions of an industry code. In that respect, we welcome the acknowledgment that even recognised industry codes are only one way of meeting relevant standards and as such there would be no presumption that failure to adopt or meet the standards of a particular code automatically indicates non-compliance with SM&CR. We note, however, that the wording in 3.31 appears to contradict the certainty that the FCA intends to provide to market participants in this section, when stating that the FCA may not take action for every breach of the individual code rules, and a technical failure to follow a market code may not itself be a breach of proper standards. While the FCA has set out its approach to supervision and enforcement, we would welcome more clarity on the reporting of breaches of industry codes. A strict regime for reporting of breaches may undermine the take-up of industry codes. We would also encourage the FCA to consider whether this may give rise to an increased risk of speculative civil cases arising from any such breaches. Related to this, we would welcome clarification on whether the FCA envisages that it would be able to impose a requirement on firms to establish a consumer redress scheme following a breach of an industry code. Finally, we would welcome clarification from the FCA on whether it intends to include compliance with industry codes as part of any future thematic work. 2. Do you agree with our proposal to recognise certain industry codes of conduct in unregulated markets? If not, please provide your reasons. In general, we agree with the FCA s proposal to recognise certain industry codes of conduct that cover unregulated markets/activities. The proposal helps to provide clarity for firms in meeting obligations under the SM&CR to observe proper market conduct in the absence of regulatory standards or guidance. It also 4
preserves a strong role for industry participants in leading and articulating practices in the markets in which they operate. In order to aid compliance efforts across the industry, we strongly support the FCA s proposal to maintain a publicly accessible repository of recognised codes. While we support the general direction of the proposal, we recommend that the FCA provides further clarity in the following areas: Reporting breaches of an industry code: We recommend the FCA provides clarity that it is not extending the reporting of breaches under the Conduct rules, and that the proposed approach does not give rise to reporting requirements that are analogous to those contained in regulatory frameworks, such as the suspicious transaction and order report (STOR) regime under the Market Abuse Regulation (MAR). One reason for this is that a breach of a code may not be a breach of market conduct regulation. For example, under the FX Global Code misleading your counterparty about trading in full size amounts to a breach of the code, but not of regulatory requirements under MAR. Surveillance requirements: Linked to the point above, we believe that it is not the intention of the FCA to impose de facto surveillance requirements on market participants in their adherence to industry codes. Where such de facto requirements would mirror existing regulatory requirements, such as those under MAR, implied costs and burdens would increase significantly. As codes should remain voluntary, and the FCA recognises that firms can demonstrate that they are observing proper market conduct in ways other than adhering to recognised industry codes, such expectations would create a disincentive for the production and take-up of industry codes, and in doing so undermine their effectiveness. Territorial scope: Given Standard Chartered s business model and structure, we would recommend the FCA provides clarity on whether it would expect overseas entities of UK firms to consider FCA-recognised industry codes in demonstrating compliance with SM&CR in unregulated markets/activities (within those overseas jurisdictions). As explained above, we have taken a global approach to implementing the SM&CR to ensure high levels of conduct in the markets in which we operate, but note that should overseas entities be held to significantly different standards when compared with local competitors, those entities may face a competitive disadvantage in that local market. In addition, we would welcome clarity on whether the FCA intends to recognise industry codes that are drafted by overseas bodies. In such cases, we would highlight the need to consider whether that code accounts for UK market or industry participant specificities. Unrecognised codes: We strongly believe that the FCA should maintain a publicly accessible list of codes where recognition has been sought but not granted, as well as the reasons for nonrecognition. This would facilitate firms in their understanding of the FCA s expectation of proper market conduct, such as in situations where codes have not been recognised purely for administrative or procedural reasons. It will also assist code authors in their efforts to amend codes with the aim of achieving FCA-recognition, should they so wish. 3. What challenges do you foresee for the FCA or industry with recognising certain industry codes? The primary challenge for the industry will be a significant increase in required resources on several fronts. First, firms will need to increase their understanding of industry bodies that produce such codes and ensure that they are appropriately represented on each. The power of the FCA to recognise industry codes will also likely lead to more internal resources being devoted to the development of such codes. Second, the recognition of codes will significantly increase resources required from front office, legal and compliance, to map FCA-recognised code recommendations and/or requirements against internal controls, policies and procedures, as well as ensuring ongoing compliance. We note the significant implementation costs that have arisen due to the FX Global Code which applies across all our major jurisdictions. Adherence to industry codes, in many cases, requires efforts analogous to compliance with regulatory requirements. 5
One recommendation for alleviating this burden is to ensure that recognised industry codes have effective timelines for the completion of internal due diligence. The FX Global Code, for example, provides 12 months for a statement of commitment. It was also widely consulted upon prior to publication, in effect giving industry participants longer to implement, which is positive. A common challenge in the creation of industry codes is the difficulty to finalise a position that is agreeable to all impacted stakeholders. In such cases intervention from the FCA (or other, relevant regulatory bodies) may be required to broker a compromise. We note here the strong role that the Bank of England played in the finalisation of the FX Global Code and would support such a role for the FCA on future code developments. Accordingly, we recommend that the FCA reconsiders its view that it will not involve itself in the production of industry codes. However, this should not be misunderstood to read as support for a more formal regulatory status being given to industry codes. A wider challenge for the industry resulting from the proposed approach will be on interpretation of industry codes. Often industry codes contain language such as best efforts or most appropriate. We would welcome clarification that the FCA is content with a firm s reasonable approach to interpretation, noting that interpretations may vary between firms, in meeting its obligations under the SM&CR. Situations where competing codes (codes covering the same or overlapping markets/activities) do not achieve recognition will also provide a challenge for the industry in terms of increased uncertainty. While we understand that the FCA does not want to risk giving a regulatory opinion on standards related to unregulated markets/activities, the position that neither code will be recognised does not aid market participants further their understanding of expected market conduct. In cases of competing or conflicting codes, market participants may prefer to be covered by one of those codes, rather than for all to operate outside of both codes. We don t believe this contradicts the FCA s stated intent that industry codes remain voluntary and that there is more than one way to demonstrate the observance of proper market conduct. A significant challenge for industry, which arises from the proposed approach, is the FCA s position that unrecognised codes may still be used to determine proper market conduct (4.14 and 4.15). We recommend that the FCA provides detailed guidance to the industry on how this would work, or reassess this intention. Providing a public repository of codes where recognition has been sought but subsequently rejected, and the reasons for non-recognition, would partly mitigate this challenge. Such a register may provide firms some guidance for meeting obligations under the SM&CR. Similar to the increase in resources for market participants, the FCA will also face a resource burden arising from the proposed approach, albeit to a lesser degree than when applying and enforcing regulation. It is not clear how this will be funded, in particular as firms that pay regulatory fees to the FCA may not operate in unregulated markets/activities. 4. Do you agree with the proposed changes to the FCA Handbook designed to give effect to our proposals? If not, please provide your reasons. We have not set out suggested amendments to the proposed FCA Handbook text. Should the FCA agree with recommendations that we have made, we would be happy to provide suggested amendments. 5. Do you agree with our proposed process for recognising certain industry codes? If not, how should we amend it? The FCA could amend the process for recognising industry codes, to provide certainty to market participants and to avoid the risk of disruption. Our recommendations are as follows: A stronger role for the FCA: We fully support that industry codes are drafted by market participants and remain voluntary. In keeping with this, while the FCA rules out direct participation 6
in the drafting of codes (5.4), a stronger role as an arbiter may be required. Here we reference the role played by the Bank of England (BoE) in the development of the FX Global Code. Further, a stronger oversight role may be necessary to ensure fairness in the code drafting process. For example, while noting the criterion for the consultation of stakeholders when drafting a code, it may be that larger firms can exert more of a dominant influence in the development of a code than smaller firms, which may have a distorting impact on competition within that market. Increased feedback: We appreciate the FCA does not wish to become involved in commenting on various drafts of industry codes (5.5). However, we recommend that the FCA provides guidance on the shortcomings of codes upon which it conducts an interim assessment. This would be beneficial for market participants in their efforts to observe proper standards of market conduct under the SM&CR, ahead of a code being finalised and ultimately becoming FCA-recognised. The FCA should provide feedback in a transparent way to the whole market, to avoid a situation where, for example, only paying members of an organisation responsible for developing a code are privy to feedback. Time limitation: While we understand that an industry code will not reflect proper market conduct for an indefinite period, we highlight that three years may be a relatively short period for a code to be recognised given a possibly lengthy consultation period that may have preceded its recognition, such as the FX Code that took over three years from inception to publication. We strongly recommend that codes either be recognised until they are deemed to no longer represent proper market conduct, or an appropriate period of recognition be determined on a case by case basis at the point of recognition. We would also support such a determination be made jointly between the FCA and code author, and provide for the ability to amend the code taking into consideration market developments without that code losing its formal recognised status. Avoiding cliff-edges: Related to the point above, if the current proposal for a three-year period is maintained, we recommend introducing a framework whereby codes can be updated, published and re-recognised before the expiry of that period. The current wording of 5.10 may complicate compliance efforts and lead to confusion, as it proposes extension of a code only after the expiration of the three-year period. This applies equally to the FCA s proposed approach to withdrawal of recognition (5.11), where we would support a phased-approach to avoid cliff edges and to allow for amendments to a code to avoid such a withdrawal, given the required compliance effort attached to adherence to industry codes, including amending internal controls, policies and procedures etc. Unrecognised codes: In line with recommendations made elsewhere in this response, we support further clarity from the FCA on codes that are not successfully recognised. Specifically, it would be helpful if the FCA could provide clarification that following an unrecognised code does not, in of itself, suggest non-compliance with the obligation to observe proper market conduct. We note that many industry participants will currently adhere to industry codes that may not become recognised by the FCA. 6. Do you agree with the criteria proposed for deciding which codes to recognise? If not, what additional or alternative criteria should we consider? We agree with most of the criteria proposed for deciding which codes to recognise. However, we believe that the FCA should provide more guidance on criterion ii. (The code represents an effort to raise standards taking into account the views of all relevant stakeholders during its development). Specifically, we recommend that the FCA provides detailed guidance setting out its expectations on the terms all relevant stakeholders and taking into account. For example, it is not clear whether considered but rejected feedback from a stakeholder during the development of a code would be sufficient for satisfying the condition that feedback has been taken into account. We would also welcome clarity on whether the FCA 7
would expect feedback to be provided on consultation responses from code authors, noting that such feedback may not typically be provided by industry associations, for example. We also recommend that the FCA provides further clarity on the concept of public scrutiny in criterion iii. (The code has been subject to public scrutiny that has allowed alternative views to be expressed and taken into consideration, including from firms, public authorities, consumer groups and academics). We recommend that the FCA sets out detailed guidance on what it would seem as sufficient for meeting this criterion. In doing so, the FCA may wish to set out its views on whether the approach followed for the FX Global Code or the Precious Metals Code, for example, constituted sufficient public consultation. We note that industry-funded organisations that may seek to develop codes, might be conflicted in seeking input from non-fee-paying stakeholders, such as consumer groups. Finally, we would welcome more clarity in cases where an industry code covers both regulated and unregulated markets/activities. For example, we see this today with the FX Global Code covering derivatives, which are also covered by the European Market Infrastructure Regulation and the Dodd-Frank Act. While we support the FCA s approach that it will not recognise industry codes that cover regulated markets, as it has set regulatory standards that define proper market conduct for these areas, the FCA s approach is not clear in cases where the code covers both. We would recommend, in such instances, that sections or chapters of codes could be recognised, providing that they meet the criteria set out in the consultation paper. Questions for Discussion 7. Do you believe the FCA should consider extending the application of Principle for Businesses 5 (A firm must observe proper standards of market conduct) to unregulated as well as regulated activities? If not, please state why. Standard Chartered supports the FCA s aim of increasing standards of market conduct in both regulated and unregulated markets. Extending the application of Principle for Business 5 to unregulated markets/activities is worth consideration. We note that the FCA has enforced against various conduct breaches in unregulated markets and activities but has done so under different powers, and the last few years have seen substantial fines imposed on the financial services industry for conduct breaches in unregulated markets/activities. In its consideration, we recommend that the FCA pays regard to how such enforcement powers under Principle 5 would interact with the FCA s existing competition powers, which can be used to take action in unregulated markets/activities. We would also request that the FCA takes into consideration whether enforcement action for a breach of Principle 5 could give rise to litigation from clients. This may arise where there is alleged to have been consumer detriment arising from unregulated activity, although regulatory requirements may not have been breached. Going further, we also ask whether the FCA would give formal consideration to extending the regulatory perimeter, which may require approval from Parliament. We are aware that previous work in this regard has been undertaken following the Fair and Effective Markets Review. Extending Principle 5 on its own, without the requisite regulatory standards defining proper market conduct, may leave firms uncertain as to supervisory expectations and open to enforcement action. We would be uncomfortable should this proposal be conflated with the proposed approach for the recognition of industry codes, which could result in a situation where the FCA takes enforcement action against a firm for not adhering to a voluntary market code drafted by the industry. 8
8. What benefits and challenges do you believe this would pose to FCA authorised firms, the FCA or financial markets more generally? In terms of benefits, we believe that such an extension would encourage higher standards of market conduct in all activity performed by regulated and unregulated firms. It will also likely trigger regulated firms to scrutinise their conduct in unregulated activity to a similar standard as for regulated activities. An extension would also be in line with the conduct requirements under the SM&CR, which apply across both regulated and unregulated markets/activities. In terms of challenges, many of those outlined in this response apply, in particular including the significant additional resources from front office, legal and compliance that would be required to comply with new requirements. While the SM&CR has been applied across both regulated and unregulated activity, such an extension of Principle 5 to unregulated activities would also risk blurring the status of regulated and unregulated activity. The extension of Principle 5 and associated FCA enforcement powers over unregulated markets and activities, where there exists no regulatory standards or guidance defining proper market conduct, introduces significant complexity for firms in meeting expectations and complying with this Principle. While an extension may ensure a level playing field between FCA-authorised firms that undertake regulated and/or unregulated activities, the extension risks giving rise to a potential competitive disadvantage. This would occur between FCA-authorised firms that engage in unregulated markets/activities and firms that are unauthorised by the FCA and that participate in unregulated activity, as they would not be bound by the obligation to observe proper standards of market conduct. Finally, we highlight that extending Principle 5 to unregulated markets/activities would place an increased resource burden on the FCA. 9