This week, the Financial Conduct Authority (FCA) warned that banks still have not applied the lessons learned from rate-rigging scandals, such as Libor and Forex.
Findings from the FCA’s 'Thematic Review of Oversight and Controls' report, which investigated 12 firms between August 2014 and June 2015 to access if they have learnt lessons from previous failures around benchmarks and taken appropriate action, showed that an even amount of progress has not been made across all of the industry.
The FCA said that although there has been some progress, lessons learned from Libor, Forex and gold cases compared to other benchmarks had been “uneven across the industry and often lacked the urgency required give the severity of recent findings.”
Director of supervision at the FCA, and Martin Wheatley’s replacement when he leaves in September this year, Tracey McDermott said: "We have seen widespread historic misconduct in relation to benchmarks. 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.”
The report also found that some firms were failing to identify benchmark activities and had not made sufficient effort to properly identify the conflicts of interest that could arise from their businesses and benchmark activities.
Following the review, the FCA suggests that firms should continue to strengthen governance and oversight of benchmark activity, identify conflicts of interest, establish controls over any in-house benchmarks that have been missed and implement training programmes.
Commenting on the news Matt Shaw, associate partner at financial services consultancy Crossbridge says, “Traders are tasked with speculating, hedging and arbitraging in the capital and money markets in order to make a profit for themselves, their firm and its customers. As various recent ‘rigging’ scandals have demonstrated Front Office incentives are such that ‘moral hazard' and conflicts of interest can arise – a trader may act in his own interests before the wider interests of the firm and its shareholders.”
Shaw also says that conflicts of interest often happen and banks should not be surprised when scandals occur. “Conflicts of interest can arise when there is asymmetry of information – but of course this is a key source of profit for banks. Traders use their access, proximity, and knowledge of markets and other participants to find and extract value. Since banks and their customers are aware and complicit in this enterprise, perhaps they shouldn’t be surprised when the occasional agent goes ‘rogue’.”