Views on improving the integrity of global capital markets
19 June 2015

Raising Bar on Finance Culture and Conduct: IOSCO Meeting and FEMR Offer Blueprint


The focus on business conduct and ethical behaviour within the financial services industry has received renewed impetus this week. Following the publication of the UK Fair and Effective Markets Review (FEMR) on 10 June — which focuses on the need for higher professional standards within the fixed income, currencies, and commodities (FICC) markets — the theme of changing culture and improving conduct took centre stage at the International Organization of Securities Commissions (IOSCO) Annual Conference.

Taking place in London on 17–18 June, a stellar panel of speakers examined the role of culture and business conduct in financial industry reform. The topic of the discussion reflected the limitations of regulatory tools and the ineffectiveness of simply escalating fines for financial firms as a means of dealing with poor conduct. Recognising that good behaviour cannot be regulated or legislated for, the onus for cultural change must lie with firms, starting with senior management accepting personal responsibility and exhibiting ethical leadership.

Conduct and Culture

Speaking on the panel, UBS Chief Executive Sergio Ermotti commented that the concept of culture relates to “how” a firm achieves its goals, and these parameters must flow through to the evaluation and remuneration of staff. In other words, culture is not simply about not doing bad things — it reflects the way in which a firm goes about its business and must permeate all aspects of performance measurement. This focus on culture in the context of performance is most welcome; a report by the Economist Intelligence Unit titled A Crisis of Culture, commissioned by CFA Institute in 2013, found that financial services professionals believed that strict adherence to ethical standards inhibited career progression.

Despite a number of steps already taken by firms to improve culture, a poll of conference delegates revealed that over half of the audience thought that firms were being slow to implement cultural change. A result that perhaps also reflects wider public perception.

The panel recognised that cultural change is a long-term process and does not simply occur by having staff attend a training course or read a compliance manual. Delivering cultural change will require a higher degree of collaboration and engagement among stakeholders to establish best practices and to develop meaningful, practical guidance that firms can embed in the conduct of business.

To this end, the creation in the UK of the FICC market standards board (a key element of the FEMR recommendations) is a positive development. The FICC Market Standards Board (FMSB) — to be led by Elizabeth Corley, chief executive of Allianz Global Investors and a participant on the IOSCO conference panel — provides a platform for the establishment of higher professionalism in wholesale markets. The FMSB will work to raise standards of conduct, underpinned by professional qualifications and ethical practices.


The FMSB will comprise senior market participants from a cross-section of firms. It will provide feedback to regulators on areas of emerging concern and on how qualifications and training should be maintained. CFA Society of the UK, together with CFA Institute, engaged with the FEMR team on the professionalism aspects of the review through the consultation period leading up to the publication of the final report (read CFA UK’s consultation response here). The focus on professional qualifications within FEMR is clearly welcome. However, it will be important to establish a significantly rigorous qualifications framework, comprising a set of acceptable minimum competencies, in order to underpin public and investor trust. The FEMR report proposes to benchmark qualifications against the UK Qualifications and Credit Framework (QCF) and to establish level 3 of the QCF as a baseline (the scale ranges from 1 to 8, with 8 being equivalent to a doctorate degree). With level 3 being equivalent to an A-level (i.e., taught in UK schools), such qualifications should be considered as a minimum, with higher-level qualifications being required of more senior roles.

Other aspects of FEMR include strengthened sanctioning powers for regulators to punish malpractice, and the extension of the Senior Managers and Certification Regimes, currently applied to banks, to a wider range of firms active in FICC markets, including asset managers. The senior managers regime includes regulatory pre-approval of senior managers and certification of individuals who can do “significant harm” to clients or the firm. Firms will also be required to provide “regulatory references” to each other for covered individuals, thereby reducing the ability of an individual to ignore sanctions for poor conduct by walking into another job elsewhere. All in all, this regime will strengthen personal accountability and ensure that conduct rules for individuals will be more enforceable. The pursuit of strengthened individual accountability in the UK has attracted attention in other jurisdictions; for example, SEC Chair Mary Jo White, another of the IOSCO conference panelists, commented that the US authorities will be monitoring how this regime plays out in the UK.

Ultimately, it is this international dimension — and particularly the global nature of the FICC markets — that poses one of the most significant challenges, for example via the potential for regulatory arbitrage. As Elizabeth Corley (a member of the CFA Institute Future of Finance Advisory Council) noted, markets may be global, but you have to start somewhere in the effort to raise standards and improve behaviour. Fortunately, the UK initiatives to strengthen wholesale market conduct will be complemented to some extent at the European level. For example, the introduction of MiFID II/MiFIR in 2017 will increase transparency across all asset classes including FICC markets, whilst the revised EU market abuse legislation will strengthen sanctioning powers for national authorities. The exemption of spot FX from the scope of market abuse legislation means that a global code of conduct for this market, as recommended in FEMR, will be critical to underpin higher standards of conduct. The LIBOR and FX benchmark manipulation scandals are an uncomfortable reminder of why.

Marking the publication of the UK FEMR, Bank of England Governor Mark Carney spoke of “ethical drift” within financial firms as a key factor in the financial crisis. Developments such as FEMR are an important response. It is time to accelerate cultural change and to raise the bar on ethics and professionalism to serve the interests of investors and society.

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About the Author(s)
Rhodri Preece, CFA

Rhodri Preece, CFA, is Senior Head of Industry Research for CFA Institute. He is responsible for building and maintaining the global research function at CFA Institute, including leading the planning, coordination, and creation of research content across CFA Institute research platforms, which include the Future of Finance, the CFA Institute Research Foundation, the Financial Analysts Journal, and the Enterprising Investor blog. Preece formerly served as head of capital markets policy EMEA at CFA Institute, where he was responsible for leading capital markets policy activities in the Europe, Middle East, and Africa region. Preece is a former member (2014-2018) of the Group of Economic Advisers of the European Securities and Markets Authority (ESMA) Committee on Economic and Markets Analysis. Prior to joining CFA Institute, Preece was a manager at PricewaterhouseCoopers LLP where he specialized in investment funds.

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