12 December 2013

FCA/Wheatley: Looking ahead to 2014

Wheatley said 2014 was likely to be an important period of consolidation. Less 'exciting' maybe than previous years – but also a platform to bed in regulatory change and move things forward.

A key issue here is the fact that much of the reform process is now behind us. In the EU and the US, the majority of the rules breathing life into the G20 principles have already been scripted and delivered. In the UK, an entirely new regulatory structure took flight in April – governed by new principles and strengthened by new powers.

So to a large extent the financial world moved on significantly in 2013 – meaning the next 12 months are unlikely to involve long discussion about whether something should be done, but should be increasingly focused on transitioning towards next steps: The delivery of standards that will allow us to begin to turn the page on a very difficult chapter in financial history.

There are two key challenges for us to consider today within this context. First, the overwhelming importance of achieving cultural transition in 2014: Publicly demonstrating that there is clear blue water between the past and future. Moving away from the Gordon Gekko-era, if you like, of financiers hurling adding machines across offices and ripping their own shirts off their backs, to a more mature age where investor interests are front and centre of firm business models in the global markets.

Second, the perhaps drier, but equally important issue of technical transition: Making sure we get the nuts and bolts of international regulatory reform right – MiFID, EMIR and the like – so markets remain deep and liquid.  

As we move forward, the FCA will be working with industry to find solutions to key asset management issues, including evidence of poor transparency. Evidence of a lack of accountability in spending commissions charged to customers. As well as question marks over conflicts of interest and firms pushing the definition of research. By and large, these problems are cultural and our solutions need to reflect this fact, which is why the FCA approach has been to launch an open conversation with the sector to find viable, long-term answers that don’t affect the competitiveness of the UK market.

At the other end of the regulatory spectrum in terms of moving things forward is the linked priority of achieving technical transition: Tightening up legal requirements and rules, as is happening across Europe and the US at the moment. Most notable here, the increasing number of European conduct dossiers emerging (like the Insurance Mediation Directive, Packaged Retail Investment Products, the Mortgage Credit Directive and so on) as well as the market dossiers with conduct elements (MiFID and EMIR). To support progress, it will be crucial for firms and organisations like ICI to engage positively with ESMA to help get MiFID into the right place.

The revised legislation will place a cap on the total amount of certain types of dark equity trading in the EU. Clearly, investors need to have confidence in the price formation process on EU financial markets, and we recognise the concerns that have led various jurisdictions to introduce restrictions on dark trading.

It is clear ESMA will need to track carefully what happens when the cap takes effect – and be willing to provide robust advice to the Commission and Parliament if it damages Europe’s equity markets. The revised MiFID will also contain new provisions explicitly regulating automated trading. As such, automated trading will continue to be a significant focus for regulators, in relation to both firms and venue operators, as we look to make sure the financial system remains strong.

There are some urgent points that still need to be worked through, including detail relating to trading venues – particularly trading venues in the EU and US – used by firms in both territories as major conduits for transatlantic derivatives trading. The FCA, along with the EU, is pushing hard for this approach to be based on mutual recognition.

Less attention has been paid to the inputs to the consolidated tape but a key issue here in relation to data is that there is insufficient clarity about who reports – and there are too few checks on the quality of the data being reported. The revised legislation offers the opportunity to make improvements on this by rolling out the approved publication arrangements regime across the EU, and reducing the instances of double reporting.

G20 and EMIR

A different set of challenges in so far as they’re already rapidly moving towards full implementation, are the EMIR requirements. ESMA have already authorised the first trade repositories under EMIR and, as of the 12 February, all derivatives trades (both exchange traded and over the counter) falling under the jurisdiction of EMIR will have to be reported to one of ESMA’s recognised trade repositories. We have started to review firms’ compliance with EMIR in terms of the business conduct regulations already in place, and will also be checking firms’ preparations for the February start date in the coming weeks.

It bears repeating that firms should be making sure the relevant data is available internally, as well as arranging direct access to a trade repository or delegated reporting facilities. I’d also encourage firms to get a legal entity identifier as soon as possible. As I understand it, this is a relatively quick and straightforward process. But vital to the overall success of reporting to trade repositories.

Full speech

© FCA - Financial Conduct Authority