BY Fraser Tennant
Financial institutions must improve how they identify and manage their benchmark activities and associated risks, according to a new Financial Conduct Authority (FCA) review of oversight and control of financial benchmarks.
The FCA’s review discovered that although there had been some progress made in terms of improving the oversight and controls around benchmarks, the application of the lessons learned from the LIBOR, Forex and Gold cases to other benchmarks had been uneven across the industry and "often lacked the urgency" required given the extent of the failings.
"We have seen widespread historic misconduct in relation to benchmarks,” said Tracey McDermott, director of supervision – investment, wholesale and specialists at the FCA. “It is now critical that firms act to restore trust and confidence in the system. Firms should have in place systems to manage the risks posed by benchmark activities and to address the weaknesses that have previously been identified.”
Additionally, the FCA found that firms were failing to identify a wide enough scope of benchmark activities by interpreting the International Organization of Securities Commissions (IOSCO) definition too narrowly.
Ms McDermott continued: “We recognise that this is a significant task and firms had 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."
Key FCA recommendations found in the review include the need for firms to: (i) continue to strengthen governance and oversight of benchmark activity; (ii) continue to identify and manage conflicts of interest; (iii) fully identify their benchmark activities across all business areas; (iv) establish oversight and controls for any in-house benchmarks where they have not done so; and (v) implement appropriate training programmes.
Responding to the FCA’s thematic review, PwC's UK banking and capital markets leader Simon Hunt said: “The identification of a complete population of benchmarks subject to the IOSCO definition is a significant challenge that firms have been grappling with.
“Firms 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.”
As a follow-up, the FCA has confirmed that it will write to all of the firms involved in the review to offer individual feedback as part of its regular supervision program.