UK: Financial Benchmarks: Last Chance For The Industry?

Last Updated: 6 August 2015
Article by Clifford Smout, Sarah Kim, Mark Cankett and Stephen Farrell

Most Read Contributor in UK, August 2017

The FCA issued a loud wake-up call to the market in its recent thematic review of firms' oversight and controls in relation to financial benchmarks.1  Although the FCA identified some positive changes, it found that none of the firms it had reviewed between August 2014 and June 2015 (12 in total) had "fully implemented changes across all benchmark activities" and that all firms still have work to do.

While the tone of the report is objective, there is little doubt that the FCA was disappointed by the lack of consistent and rapid progress that it found in its review, despite record fines and criminal investigations emerging after the scandals. Thematic reviews can be the precursor to increased supervision and intervention by the regulator if firms do not act promptly on the findings of the review.2  Firms need to act immediately to address the gap between what the FCA is expecting from benchmark remediation work and what firms are currently doing, or face the possibility of further supervisory action in the future.

The FCA's six key messages

The FCA set out six key messages on how financial services industry should be moving forward with their benchmark remediation programmes:

  1. Firms should adopt a broad interpretation of the IOSCO definition of benchmarks. They should then reconsider their business activity and ensure governance arrangements, oversight and controls are applied to all benchmarks across all asset classes.
  2. Senior management should ensure that lessons learnt from previous failures are applied to all business lines engaged in benchmark activity, with remediation programmes that have clear senior management focus.
  3. Firms need to strengthen their governance and oversight by creating an integrated approach to adequate management information (MI); creating surveillance and monitoring systems; and establishing defined roles and responsibilities for each of the three lines of defence.
  4. Firms should continuously review all the processes associated with benchmark activities to identify, raise awareness and manage conflicts of interest.
  5. Firms that exit benchmark activities need to give due consideration to the impact on their clients, stakeholders and the market, and ensure exits are completed in an orderly manner.
  6. Firms that use in-house benchmarks should apply the same robust controls and oversight that is expected of all benchmark activity.

The six messages by the FCA align closely with the recommendations in FEMR based on the assessment conducted by IOSCO on benchmark compliance. Due to the global nature of these markets, firms should look to apply these lessons globally.

Senior management accountability

In the review, the FCA placed significant emphasis on senior management's implementation of remediation programmes and their ongoing accountability. This is in line with the findings of the Fair and Effective Markets Review (FEMR) that place more emphasis on individual accountability to prevent firms from treating fines "as a cost of doing business". As a result, one of the recommendations from FEMR is to extend elements of the Senior Manager's Regime (SMR) beyond banks to firms "active in the FICC [fixed income, currency and commodities] markets", which will cover any firms using benchmarks that currently fall outside the SMR. In light of this, senior management - now more than ever - should be ensuring that they are improving standards throughout their business.


The report noted that although senior management were initiating cultural change, it was not evident that change was sufficiently embedded at desk level. Embedding good culture throughout the firm is a greater focus of the FCA, as it is conducting a wider thematic review on cultural change programmes in retail and wholesale banks. The FCA's expectation is that not only should the "tone at the top" be right but staff throughout the business should accept and exercise the right values. As a result, senior management should be implementing effective governance and controls to support the culture they want to embed in the firm.

The FCA strongly suggests firms should improve coordination of responsibilities between the three lines of defence, with an integrated approach to MI, effective challenge for benchmark processes and the creation of effective surveillance and monitoring systems. The first line of defence should take ownership of the risks around the submission and administration of benchmarks, while the second line should provide adequate challenge. Cultural change both requires and depends on good conduct, and senior management should be at the forefront of this initiative.

Broader definition of benchmarks

The FCA observed a lack of understanding by some firms of what constituted benchmark activity, while other firms were unable to identify that their business model depended on benchmarks. With half of the firms reviewed not realising that prices calculated and published by the firm (potentially used for valuation purposes) could be a benchmark, i.e. in-house benchmarks, the FCA advised firms to adopt "a broad interpretation of the IOSCO definition of benchmarks". The FCA warned that if firms apply a narrow definition, there is a risk that a firm's business strategy, controls and oversight will not be applied to all benchmark activities. As a result, this may increase the scope of benchmark activities for some firms and will require them to expand their remediation programmes.

What should firms be doing?

Firms should read the thematic review as a clear message from the FCA that they must increase the urgency of their remediation programmes and senior management should be taking a greater role to improve the quality of its oversight and controls.

Regulators are changing their views on using fines as the main enforcement tool. They are now placing more accountability on individual senior managers, e.g. through the extension of the banking SMR to FICC markets, and the creation of two Controlled Functions (CF40 and CF50). When developing and implementing their benchmark remediation programmes firms should keep SMR on their minds (although the implementation date is not yet clear), as it will be easier to embed this into their systems and culture now than to make further changes at a later date.

As Tracey McDermott noted in her recent speech on FEMR, "if the industry does not seize this opportunity it will not get another".


1 The review assessed all benchmarks apart from Libor and FX.

2 An example is the FCA ordering a number of Skilled Persons Reviews (section 166s) after publishing its "enhanced transfer value pension transfers" thematic review in July 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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