Benchmarks regulation, PPI & the FCA on hard Brexit: This week in regulation


The speed read

  • FCA publishes document series on benchmarks regulation
  • FCA’s Brexit update: Where are we up to?
  • Progress report published as we move closer to PPI complaints deadline

FCA publishes document series on benchmarks regulation

The FCA has published a number of documents focused on benchmarks regulation, including research and analysis of benchmark effectiveness and the regulatory approach.


The effectiveness of the 4pm fix

The WM/R 4pm Closing Spot Rate, also known as the ‘4pm fix’ is the most important benchmark in FX markets. The FCA’s latest occasional paper examines market liquidity and trader behaviour as well as proposing new measures of benchmark quality.

A benchmark is effective if it meets the following criteria:

  • Representativeness: how closely it represents the rate throughout the day
  • Attainability: how closely market participants can replicate the fix rate in their own trading
  • Robustness: how resilient it is to manipulation.

To determine the effectiveness of the 4pm fix, the authors analysed trading volume and composition of participant type. The potential changes investigated within the paper highlight the trade-off that exists between attainability and robustness. Overall, benchmark quality improves if the fix window is increased to five minutes, but this also leads to a significant increase in tracking errors for users.


Research on the representativeness of the LBMA silver price 

In response to the threat of market manipulation, the methodology for calculating the LBMA silver price, the benchmark for silver, changed its methodology in 2014 and subsequently became regulated in April 2015.

Since these changes, market participants have observed unusual differences between the LMBA silver price and the silver spot market prices, bringing the representativeness of the LMBA price into question.

The FCA examined the benchmark between March-September 2017 to analyse the effects of temporary imbalances in bid and offer volumes during the benchmark-setting auction. Overall, the analysis suggests that the differences between the benchmark and the spot market prices didn’t compromise the representativeness of the LBMA silver price benchmark.


Evaluating the Benchmarks (Amendment) Instrument 2015

In April 2015 the FCA brought seven benchmarks into the regulatory regime, under the Benchmarks (Amendment) Instrument 2015, following cases of misconduct. It has now published an evaluation paper examining how effective the regulatory regime has been in meeting the objectives of enhancing the benchmarks’ integrity and restoring consumer trust.

The analysis shows:

  • Most stakeholders believe the regime makes benchmarks more robust and representative of the underlying markets and has improved user trust
  • Trading costs and liquidity have improved for already liquid markets
  • For less liquid markets, the changes may have increased the perception that there is greater regulatory risk, worsening liquidity and participation within the market.


FCA’s Brexit update: Where are we up to?

The FCA is on track with its preparations for a hard Brexit, with appropriate resources in place to avoid unnecessary disruption – that was the message of Andrew Bailey’s latest speech, delivered at the City Banquet, Mansion House.

As seen in the recent consultation papers, the FCA is preparing for a wide range of scenarios. Mr Bailey believes the regulator can handle it, but it requires cooperation from their international counterparts to establish robust Memorandums of Understanding (MoUs) and other practical arrangements.

He also welcomed the statement from Lloyd’s of London which stated that in the event of a hard Brexit without a transition or implementation period, underwriters will continue to honour their contractual obligations, including the payment of valid claims. This commitment is essential for ensuring customers continue to be treated fairly throughout the process of leaving the EU.

Although it is not the FCA’s responsibility to determine how the post-Brexit markets will function, the FCA will continue to abide by the guiding principle of maintaining open markets, supported by strong international standards of regulation and governance. As the UK market is so closely aligned with the EU, there are good reasons for staying close, so the regulator must find a way of ensuring the UK still has a voice and remains involved in shaping the international regulatory agenda.

Whatever the outcome, Andrew Bailey believes there are two tests any future regulatory arrangements should be able to pass. The first is that they can be tailored to particular market features and the second, that we retain the ability to amend and adapt the rules when they don’t work as intended.


Progress report published as we move closer to PPI complaints deadline

The FCA has published an update on the progress of its PPI complaints deadline communications campaign and supporting supervisory work.

Overall, the campaign has increase consumer awareness and understanding of PPI, how to check if they have it and the forthcoming deadline. In total:

  • Consumers made 8.4m checking enquiries, a 40% increase on pre-campaign levels
  • 7m complaints were filed, up 68% on the 10 months before the campaign
  • There has been an increase in consumers complaining to providers directly, rather than using claims management companies.
  • £3.7bn of redress has been paid since the campaign started.

The FCA’s supervisory work has focussed on monitoring and challenging firms to ensure they are handling complaints fairly and are making the process easy for consumers wishing to claim.

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