THE scandals buffeting the financial markets are not down to a “few bad apples” and authorities are ready to impose more regulation on the sector to regain public trust, a senior Bank of England official has said.
Minouche Shafik, the deputy governor for markets and banking, said the industry urgently needed to come forward with its own proposals to reform a system recently tarnished by allegations of the rigging of foreign exchange trading.
She was speaking to the Financial Times before delivering a blistering speech in which she attacked the past behaviour of some traders as “truly shocking” and warned that bad practices in markets may be re-emerging as memories of prior scandals fade.
Addressing an audience at the London School of Economics, she said much had been done to strengthen the financial system, but some of the benefits were “offset by a long tail of outrageous conduct cases. These are like salt rubbed into the wounds to public confidence in financial markets.”
Ms Shafik is overseeing the UK Fair and Effective Markets Review, launched by chancellor George Osborne over the summer after allegations that traders had rigged interest-rate and currency benchmarks. The scandals have damaged Britain’s reputation as a key global financial capital.
A consultation paper by the Bank, Treasury and Financial Conduct Authority, which was launched on Monday night, raises the prospect of tougher penalties on staff who breach internal guidelines, more intrusive electronic surveillance of trading floors and more established procedures for protecting whistleblowers.
But it also considers harsher regulation including imposing higher capital charges on firms that fall foul of rules. It also floats the idea of extending the UK’s bonus clawback rules from banks to non-banks such as asset managers and trading firms.
The review said regulators should have the power to police seven key financial benchmarks, including those governing oil, precious metals and foreign exchange.
In the paper, the review asked whether there was a need to strengthen criminal sanctions in fixed interest, currency and commodity (FICC) markets, as well as to introduce punishments such as temporarily suspending firms’ or individuals’ permissions to trade in certain markets.
Speaking at the Bank of England, Ms Shafik said: “We have already shown we are willing to regulate where necessary. The first act of the review was to identify seven additional benchmarks which need to come into the regulatory perimeter. So we will look at regulatory options if we have to.
“But a big part of the problem really can be solved through market-led and firm-led solutions and we are keen to work with the industry to find these.”
Ms Shafik said scandals such as Libor and allegations of forex manipulation could not be dismissed as one-off anomalies. “Early on one often heard the explanation ‘well it’s just a few bad apples’. I think what this review is saying is it is not just a few bad apples, it is actually the barrel in which they are operating, and we need to fix the barrel as well as track down the bad apples.”
The review is focusing on two key areas: structural problems and conduct issues. Ms Shafik asked whether there was a need for greater standardisation in the corporate bond market or lower barriers to the use of electronic trading platforms.
The consultation asks whether there are ways of reducing money managers’ reliance on benchmarks. It also examines the concentration of the industry – with the top six dealers accounting for over 60 per cent of the UK interdealer foreign exchange market – as well as conflicts of interest.
Ms Shafik said there were arguments over whether a “global consensus” was needed around a major code covering fixed income, commodities and currencies trading, although tailored to individual markets.
Alongside that, she raised ways of enforcing sound behaviour by traders, including through tougher appraisals or the introduction of new professional qualifications.
The final recommendations will come next June. They are in part an attempt to pre-empt EU-level initiatives including proposals for harsher regulation of benchmarks.
FT
