The Fixed Income, Currencies and Commodities Market Standards Board (FMSB) might be difficult to say, but its stated goal is simple: to improve the behaviour and awareness of individuals in FICC markets, by developing clear standards and guidelines.
While both the granular operational rules and high-level principles provided by regulators are necessary, they can occasionally leave a vacuum in between. The FMSB was established following the Fair and Effective Markets Review in 2015, in response to a number of high-profile cases of misconduct in UK financial services.
In the 18 months since it was born, the FMSB has published a number of these guidelines already. But there is plenty more work to be done, as FMSB chairman and member of the Bank of England’s Prudential Regulation Committee Mark Yallop explains in this exclusive interview with IFLR.
Why did you become involved with the FMSB?
For me this is the culmination of 35 years of experience – generally fantastic experience – in financial markets. I started trading swaps in 1983, so only two years after the first swap was ever done by the World Bank, and markets were in a very different state then. Since then I’ve seen innumerable crises; the stock market crash of 1987, then mini-crises throughout the 90s and 00s and of course, the problems we faced in 2008. And during that period I have seen a progressive trend towards the deregulation of markets, a loosening of control, and an evolution of how people think about their sense of responsibility to the users of markets – which, frankly, once ranked much higher up in their priorities than it does today.
So I’m now in a position to see if we can develop a really practical and effective solution to this slide in behaviours, conduct and practice which is perceived to have happened. In fact, I don’t think that some of the more extreme characterisations of the City and global financial markets are fair at all. But as we know, a perception of wrongdoing is as bad in many ways as the wrongdoing itself. And so if there are flaws in the way people perceive the banking industry, then those flawed perceptions need to be corrected as well.
"People in the City still now, 10 years on, seriously underestimate the depth of public anger about the crisis"
But having watched regulation for the past 30 years, I do not believe that regulation can fix the problems that were revealed during the most recent crisis. And I think that regulators on an international level agree with that sentiment. For a long time, they have wrestled to try and figure this out.
I think it was an incredibly brave suggestion in the Fair and Effective Markets Review for the authorities to publicly say that actually the way to solve this is not more regulation, but for the industry to take responsibility for its own actions and to develop a market-based solution, which we now call the FMSB. I wasn’t in the room when that decision was made and was as surprised as anyone else when this notion was floated. I can imagine there was a degree of trepidation as to whether or not it was a good idea, but we have done enough in the last 18 months to prove all the critics and naysayers wrong.
It’s easy for others to be suspicious about the FMSB. Actually, I think there are good reasons why what we’re doing in the standards space is different from other standard-setting bodies. I passionately believe this is a crucial task, and that this collective, private-sector approach is the way to fix it, not with more regulation. And in a funny way, my combination of 30 years of experience in the wholesale FICC markets, and the perspective I have on regulation through my work at the Bank of England, have been ideal training to get this thing up and running.
You have said in the past that the standards the UK Financial Conduct Authority (FCA) sets are so high level that they can’t tell those in markets how to act in ambiguous circumstances. Does the same not apply to the FMSB’s standards?
I hope not. To be clear, when it comes to guidance from the FCA, we have a few different problems: one is that not all markets are regulated. Regulation covers a subset of markets; equities are heavily regulated, fixed income is much less so. So there is a significant area of trading activity going on in the FICC markets which is not regulated at all. That means the FCA has no role in these markets, other than in relation to its general conduct principles.
But where markets are regulated, we have a different problem. On the one hand, regulators set out high level principles which firms must adhere to, such as: ‘treat your customers fairly’, ‘act with integrity’ and ‘be open with your regulator’. On the other hand, they publish very detailed and prescriptive, but largely operational, rule books. And that is all fine, but neither the high-level principles nor the operational rules tell traders, salespeople or originators how to handle ambiguous situations with clients that they encounter every day.
Another problem is the sheer volume of the detailed rules. If you print out the FCA’s rulebook it stands at two metres. The average trader or salesman will struggle to read and remember two metres worth of paper. Somewhere between those high-level integrity principles and that two-metre-tall rulebook there is a lot of space where ordinary people are sitting at their trading desks and wondering what to do. And you can see how in the absence of clear guidance, every firm developed its own practices and among these, sometimes unethical practices were able to grow.
By the way, this is not in any way unique to the UK.
So we do have a tricky task in creating guidelines that are short and written in plain language, as well as granular enough to be useful in a practical situation, and principles-based enough that your typical trader can apply the general principle to one specific situation on a Monday and to another on a Tuesday.
But if we don’t succeed, then more formal and detailed regulation will follow, I’m sure.
What do you think about extending the Senior Managers and Certification Regime (SMCR) to asset managers, and their rebuttal that they don’t pose the same level of systemic risk as the banks?
To me the SMCR is not about helping to safeguard systemically important institutions, but about creating a more robust governance regime for firms generally. All sorts of firms were exposed to have some pretty woeful inadequacies in their governance arrangements during the crisis. Take Northern Rock – there is no way it would have been deemed a systemically important bank, and yet it had senior managers who thought it entirely appropriate to finance their entire lending book in the overnight money markets. You have to wonder how they came to that conclusion.
I view the SMCR as just about codifying what should be already existing standards of management and corporate governance. I’ve heard Andrew Bailey when he was at the PRA [Prudential Regulation Authority] say – and I completely agree with him on this – that the SMCR should have very little incremental impact on a well-run firm’s day-to-day operations. I have also been in rooms with senior executives, who argued vociferously against the SMCR before its introduction, who now say actually, Mark, this is quite a neat idea, because our senior executives are forced to tell us what they’re responsible for. My old profession – investment banking – was the worst of all in this respect, because it made a specialism of blurring lines of accountability.
One important reason why Martin Wheatley and regulators elsewhere in world have failed so far to bring individuals to account is that records of responsibility often didn’t exist, and where they did, they were unclear. Now that can’t happen. So I would be very happy if the SMCR was extended across all firms in wholesale financial markets – let’s get everybody on a level playing field.
I know it appears to be an onerous burden for a small firm that has not got lots of resources, but the regulator can be proportionate in its assessment, and I believe will be.
Do you think there will be criminal actions taken under the SMCR?
In answering this I feel a bit like [Labour leader] Jeremy Corbyn when asked about whether he would use nuclear weapons – this is a hypothetical situation. The test for a criminal action is a very high bar; and I certainly hope we don’t see institutions fail as a result of very poor decisions taken by senior managers in future. But I think the threat of criminal enforcement has to be there. Because if we have another RBS and £60 billion ($75 billion) worth of taxpayer money is thrown down the drain, who knows what regulators might feel is appropriate? And, people in the City still now, 10 years on, seriously underestimate the depth of public anger about the crisis.
I agree that how that power is interpreted has to depend on the circumstances and the severity of the problems, and any extenuating circumstances. You cannot condemn people in advance without knowing the facts.
The Banking Standards Board’s annual report, released in March, found that 13% of UK bankers feel they have to flex their ethical standards to get ahead in their career. Does that surprise you?
I think those numbers are tragic. I also would have hoped that 10 years on from the crisis, even five years on, that firms would have been able to do a lot more to demonstrate the appropriate course of action in these contentious situations.
It’s hard to interpret those figures without data from previous years, but they are obviously unacceptable statistics that have to be addressed. What it does illustrate is the importance of building culture from the bottom-up rather than just top-down. Yes, there has to be messaging from the board and CEO, and the actions of the CEO have to be consistent with that message, but if you’ve got 22 year olds starting out in finance straight out of university, they don’t arrive with a clear map of how to behave. They need to be given examples, and training needs to become more sophisticated and develop with career paths.
"I'm always happy to see very little whistleblowing going on"
The fact is that markets are not just huge firms colliding with each other. They are individual people making hundreds of thousands of individual decisions every day, across 25-30 major global trading centres across the world. And it’s the quality of those individual decisions that will make the difference. Sadly, those decisions are not going to be informed by the FCA saying ‘act with integrity’, nor by banks carving their values into the entrance lobby of their buildings.
The EU’s incoming Markets in Financial Instruments Directive (Mifid) II addresses a lot of the granular day-to-day issues; product governance and reporting, for example. Will it help at all?
Mifid II will help in some respects. But if you actually look at the detail, a fair amount is not FICC markets-related. And of those that are relevant, I’m afraid they fall into the same trap as the FCA’s guidance. Esma [European Securities and Markets Authority, responsible for drafting the technical rules] has a tendency, for quite understandable reasons, to formulate its rules at a rather generic high level, leaving a lot of the detail to individual firms.
Mifid II does address some areas we would have looked at, but the perimeter around it still leaves a lot of work to do – so it’s definitely not a fix-all.
The UK has new rules for whistleblowing as of last year. Do they help your cause?
Actually my cause is more like putting whistleblowers out of business. I think the whistleblowing process is an important safety procedure, and it should be robust and properly tested, with examples of it working with no negative consequences.
But if you have got to the point where whistleblowing is the only way for somebody to report problems, then things have already gone badly wrong. The business cannot have been run on an ethical or responsible place in the first place. I’m always very happy to see very little whistleblowing going on, but slightly cautious that that is because people are too worried to use the procedure. Nevertheless – I remain hopeful that they’re not using the procedure for good reasons because we are making progress on changing culture.