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20 November 2012

FSA/Wheatley: Improving trust - Client assets and markets regulation in the FCA

Mr Wheatley said that the FCA will also be the UK's securities markets regulator, overseeing billions of pounds of equity and debt funding raised by companies every year through primary markets and the subsequent trading of securities.

The Government will – subject to Parliament – give the FCA a single, overarching objective of making sure that markets work well. Three operational objectives will underpin this – namely protecting consumers, promoting competition, and protecting and enhancing the integrity of the UK financial system. What we are talking about today – the successful regulation of securities markets, wholesale conduct and the protection of client assets – covers all of these objectives. In these three areas, much of what the FCA will do will be a continuation of current regulation. This is because what the FSA currently does here is recognised by many to be working well, and we do not believe in making change where it is not needed.

But the new FCA objectives – and some new powers – will bring an evolution in areas of our approach that I will go on to explain. And added to this, the FCA’s responsibilities in a number of areas will expand.  Oversight of the £600 trillion over-the-counter derivatives markets and a sharper focus on wholesale conduct are just two examples.

While all of the FCA objectives are of equal importance, when it comes to securities markets regulation, a principal focus will clearly be on maintaining the integrity of the financial system.

And I believe ‘integrity’ was a wise choice of words when the FCA’s objectives were first drafted. This is what the FCA is going to be about. We will only foster confidence in our markets if participants believe that the people that they are dealing with are acting with integrity. This is the cultural change we wish to see, and the idea of integrity lines up well with the FCA’s interests in ensuring markets are resilient, clean and transparent. It also complements the need to make sure trading and other ‘wholesale’ business transactions are conducted in an orderly fashion.

Previously, we would be concerned about preventing market manipulation and ensuring the stability of market infrastructure. Now, in addition to that, we will put more emphasis on the fair treatment of counterparties and ensuring a level playing field for market participants. For example, the integrity of the UK’s primary markets is of fundamental importance to capital raising by firms operating in the real economy, which underpins UK growth and, ultimately, financial stability. It is for that reason that we are increasing the intensity of our supervision of sponsors – who facilitate listing on regulated markets – and are proposing new rules to ensure that the growth of innovative corporate governance structures can’t undermine trust in the high quality of the UK listing regime.

And although much in relation to the FCA has been about how it will protect ‘consumers’, it is important to note that ‘consumer’ is very widely defined in the Bill that sets the FCA’s remit. The definition means that ‘consumer’ can – as most people would expect – be people like you and me opening a bank account. But it can also be another regulated firm, even an exchange operator like the London Stock Exchange offering trading services.

But this broad definition does not mean that we will treat all of these consumers the same. We will continue to segment consumers and one way to view this approach is by looking at them in three broad groups, reflecting their respective expertise and sophistication.

First is the retail consumer of financial services – the ordinary person who can rightly expect the highest level of protection from us.

Next we have professionals. These may include non-financial services firms who use financial services for commercial purposes by, for example, managing their risk by smoothing the cost of raw materials using derivatives. But it also includes financial services firms dealing with one another who may have elected to ensure that a certain level of protection applies to their relationships with other firms.

And finally, we have the largest and most sophisticated financial services firms. They are not subject to many of the detailed conduct of business rules, but are still required to apply high-level standards – for example, by managing their conflicts of interest in dealing with others.

The FCA will recognise these differences in expertise and the level of protection that should reasonably be applied as a result, based on existing rules. We are committed to this. 

But in order to enhance trust and confidence in the integrity of financial markets we will be willing to intervene in a greater range of client relationships and will no longer accept that there are some categories of relationship in which we have no interest. To do this, our staff will have to display a new FCA way of doing things – a new culture, if you like. They will ask questions and gather data in specialist areas to try and identify the root cause of poor conduct, and will intervene earlier where they find it. 

Whenever we intervene earlier, we run the risk that there is something we do not yet know. That is the nature of the more judgement-based regulation that we want to move to. But if we are to achieve our objectives, we will often need to act early and decisively. We will demonstrate courage in our convictions, but be flexible enough to adapt our views if we learn something new. In short, you can expect the FCA to be a robust regulator of securities markets. 

What this new approach means is that firms should expect to deal with the FCA in areas that regulators have not historically looked at. This may be in parts of securities markets where participants have traditionally believed the regulator will let them get on with it – either because they believe we are not interested, or because they believe they are big enough and sophisticated enough to look after themselves. 

In securities markets, creating a level playing field is already part of the regulatory regime set by MiFID. But the FCA will focus on this more than before, both through our participation in the work to revise MiFID, and our application of the current provisions.

On listings, the previously separate objectives of the UKLA will form part of the overall goals of the FCA. We will continue to apply these proportionately so we can balance the UK’s internationally competitive position with having well-functioning markets.

And the FCA will gain new powers in relation to recognised investment exchanges, sponsors and primary information providers. Broadly speaking, these changes expand the current FSA powers for supervising and sanctioning investment firms to a wider set of market participants.

For recognised investment exchanges in particular we will seek to act more quickly. The legislation allows simplified procedures for directing or removing recognition, powers to require the appointment of skilled persons and the ability for the FCA to levy financial penalties and issue public censures. 

Full speech

See also speech by FSA/Sutcliffe: The Client Assets Unit: why we were formed, what we do and how?

© FSA - Financial Services Authority

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