Fixed FX? Now for the rest of the front office.
14 October 2016
The forex fines were big headlines back in 2014. Since then, the FCA, and firms themselves, have done a huge amount to fix ineffective controls and ensure that FX traders couldn’t behave in a way that would damage the firms’ clients and the wider market.
But I’d argue that for many banks, Front Office conduct risk management remains patchy beyond FX. The FCA and the US Federal Reserve are now intervening beyond forex. That’s because similar conflicts of interest exist in the organisation. Most notably the FCA’s report ‘FX remediation programme: our next steps’ published in July asks firms to ensure the lessons learned from FX are applied right across the organisation.
Look for the conflict
In my opinion the key to applying lessons learned from FX is to understand the underlying conduct risks in FX and then determine whether these risks exist, perhaps in a different form, in your other businesses. I don’t think this should be confined to FICC - Equities and Banking businesses should be considered as well. Business practices that I see come up in nearly all Front Office conduct reviews include:
- Orders – while FX is the heaviest user of orders, they still feature in other businesses. One questions to consider is: what is the definition of an order?
- RFQs – while different from an order in some respects, the conduct risks can be similar particularly if the client request is directional
- Algo and e-trading - scrutiny has focussed on ‘last-look’. Understanding whether there is any code that acts against fair customer outcomes is the next step
- Auctions - inherent conduct risk is often built into existing processes
The good news is that, from what I’m seeing, banks can also rely heavily on the work they have started on FX – making possible significant ‘read across’ of core conduct controls.
- Front Office Supervision - regulators have been clear that the business must take ownership of dealing with Front Office conduct. Work of the past few years has been with unauthorised trading in mind; supervision specifically for conduct is still developing
- Surveillance and monitoring is evolving rapidly. Infrastructure on the communications side can be rolled out to other businesses. Trade surveillance is more comlicated: developing and codifying scenarios for different products can be really difficult and costly. As part of the FX push, many have invested in Front Office surveillance capability. I do see a risk of costly overlap, and as technologies develop establishing clear roles and responsibilities for first and second line surveillance will be a priority.
- Policies, procedures and guidance - are the foundation for conduct risk management. Conduct policies tend to be non-business specific - applicable across the firm. By contrast, procedures and guidance often require specific business content and will require the full ‘read across’ treatment.
- Training - while policy and procedure is key for setting out the bounds of acceptability, getting the application of those boundaries clear in peoples’ minds requires effective training. Approaches have evolved and I’m seeing the business more involved in the development and delivery of content. Getting this right can be one of the most cost-effective ways of embedding the conduct agenda.
The level of regulatory scrutiny has tended to result in a reactive, remediation-driven approach to FO conduct. Using that momentum, now is the time for banks to step back and focus strategically on customer outcomes across their businesses.