No one gets a free ride, and standards need to rise across the industry. That was the message from the FCA’s Jamie Bell as he delivered the keynote speech at the XLOD event in London recently.

The event was entitled The Future of Non-Financial Risk & Control Across the 3 Lines of Defence and Bell, the FCA”s Head of Secondary Markets Oversight, began by commenting on how significantly markets and the macroeconomic environment have changed. He referenced the sharp rise in interest rates, the volatility in bond markets, the recent failure of FTX in the crypto space, and the war in the Ukraine.

He then tackled the most noteworthy enforcements that the FCA has published in the market abuse space this year and referred to the Citigroup enforcement action in August, as well as the one against Sigma Brokers where two individuals received personal bans. He warned the audience of compliance, legal and audit personnel that there were more of these in the pipeline.

Agents for change

One of the most revealing comments he made was that the FCA feels that the gap between the good firms and the average firms is too wide. He qualified this by stating that surveillance capability is not keeping pace with new requirements and natural change. The fines that the regulator levies are always uncomfortable but they are powerful agents for change.

Risk surveillance must stay aligned with the risks inherent in the business. This forces everyone to make the right, albeit costly, investment decisions. He warned firms that the regulator wants every firm to be respectful of the required standards – no one gets a free ride. It is essential to keep markets clean.

Bell moved on from enforcement to more positive topics. He stressed that the FCA prefers to work with firms to improve standards. The regulator views its plans for risk surveillance as a shared goal across the industry. Market abuse risk assessment (MARA) is at the heart of this. FCA does not specify how to conduct a MARA but it will challenge one if it is not clear in its approach, lacks granularity and is not comprehensive. It must also be updated periodically. The regulator appreciates this is an expensive process.

He warned firms that the regulator wants every firm to be respectful of the required standards – no one gets a free ride. It is essential to keep markets clean.

The front office moves fast. The regulator feels that in some cases communication between the front office and surveillance is not at the level that it expects. Where this is the case, critical gaps are the unwanted result.

Bell called out the emergence of web-based platforms and new business lines as potential common gaps. Outsourced systems can be problematic where firms rely too much on ‘out of the box’ versions that encourage a ‘plug and play’ mentality. He said that the FCA is currently onboarding a new risk surveillance system and its effectiveness is only going to be enabled by identifying the risks targeted, the data (and its cleanliness) input to the system, and the subsequent risk analysis actively undertaken.

There is always a trade-off between cost and risk. Only the firm can manage that, and it depends on the risk appetite of the firm. FCA has an axiom which is that a regulated firm can outsource a capability but not the risk. He warned firms to avoid a ‘boiling the frog moment’ where the environment they are in changes around them almost imperceptibly. Without  knowing it, the temperature has risen to a lethal level. This is comparable to market stress.

Deviation above the mean

The FCA has conducted analytics of intra-day price movements across a diverse set of asset classes and this reveals a more than two standard deviation above the mean for the first time in 20 years. This intra-day volatility has had the biggest impact on the last 10-year quantum in the most recent two and a half years. Seven events have taken place in the last year where the indicative prices have exceeded 15 standard deviations. This has a huge correlation to existing systems that have not been refined or calibrated to these extraordinarily different market conditions. Imagine a system last set five years ago? A lack of attention to this is going to be very challenging to justify to the FCA.

There is so much good practice that firms must draw upon. Application of analytics, regular reviews and proportionate investment represent this practice, to ensure that systems are resilient and adaptable to risk. 

Please note that this is a reproduction and interpretation of what was said at this conference by the reporter and is not a complete transcription and has not been approved by the speaker