In the Winston Churchill tradition of “never let a good crisis go to waste”, this report has proved useful in bringing about some positive change. A call for “Better functioning and more diverse banking markets” has been at least partially satisfied.

Accountability has improved and together with some new developments over the past decade in behavioural science and technology, the potential for further improvement is rising. In this article, the Financial Markets Standards Board (“FMSB”), summarises some key factors that were less evident in 2013 but are more advanced now. These could even give us a reason to be optimistic about better markets in the future.

The Parliamentary Report responded to a succession of financial crises from 2007 through to the scandal around the misuse of LIBOR, and retail bank mis-selling on a massive scale. It drew attention to individual responsibility, standards of governance, the desire for better functioning and more diverse banking markets, as well as the need to restore trust among the multitude of stakeholders.

Everyone has an important stake in wholesale markets operating, and being seen to operate, fairly and effectively; it is vital for the health of the global economy and economic growth. However, that doesn’t happen by magic. In a world full of vested interests, the Financial Markets Standards Board (“FMSB”) stands apart. Founded pursuant to a review commissioned by the Bank of England, FCA and HM Treasury in 2015, it exists to convene market practitioners to contribute directly to better-functioning global wholesale financial markets that in turn support sustainable economic growth for governments, corporations and investors.

MARKET COMPETITORS SET ASIDE THEIR DIFFERENCES

The financial community increasingly realised the necessity of pulling together towards the collective good. FMSB was specifically created to provide a forum where the community could safely and practically convene to explore and create standards which they could later attest to, joining up the spirit as much as the letter of the law.

The economic environment for business of all kinds, let alone wholesale banking, remains challenging. Further banking scandals, a global pandemic and quantitative easing has been followed by inflation, tightening monetary policy and continuing disruption to global supply chains and business models. And these developments have now been followed by Russia’s illegal invasion of Ukraine, an energy shock, rising geo-political tensions and surging technological advances.

Pausing for a moment, it is a heartening to reflect on the resolve with which wholesale market participants and their infrastructure providers transitioned to a work-from-home operating model in the space of a few days. This was primarily enabled by technology but also required flexibility in applying principled regulation so a degree of trust was evident.

Business model design and operating models evolved at pace and continue to do so. Adverse events, including crumbling crypto firms and US regional bank shocks, have become accelerated by the contagion of data and news flowing at ultra-high speed. But in the background we’ve seen the industry come to the table ready to cooperate to drive better conduct outcomes for consumers of wholesale markets. Here’s what’s happened:

Market practitioners from across the buy-side and sell-side, corporations and market infrastructure providers have worked with FMSB since 2016 to determine and publish nine sets of international Standards and ten Statements of Good Practice across fixed income, currencies and commodities markets on topics ranging across reference prices, new issue processes and trade execution, all of which improve the quality of markets.

Some specific examples include the Standard for the execution of Large Trades which considers the heightened conduct risks associated with the execution of such transactions and seeks to drive international convergence of standards. The current package of work on post-trade processes — which moved from the Bank of England’s Post-Trade Task Force to FMSB in 2022 — reflects a dive into the market plumbing and seeks to drive operational efficiencies and reduce associated costs and risks.

These initiatives demonstrate the industry’s improved ability to work collaboratively and quickly across a multitude of market improvements, some large, some small. Principle-led standards, applied widely and made available to all, ultimately create the trust needed for better functioning and more diverse wholesale markets — something the Fair and Effective Markets Review would recommend just two years after the Report of the Parliamentary Commission on Banking Standards.

INDIVIDUAL ACCOUNTABILITY IS IMPROVING

One of the most significant developments that directly followed from the 2013 Parliamentary Report was the introduction of the Senior Managers and Certification Regime. While not universally loved, it was seen by senior bank management as a catalyst for long overdue rationalisation of organisational and governance structures. The FCA implemented the regime in the UK in three steps starting in 2016:

a) the most senior managers with regulatory involvement were certified,

b) the layers below where firms undertook the responsibility to certify their staff, and

c) expansion of the regime to include other parts of the financial services industry.

Accountability regimes are becoming a widespread practice beyond the UK. A key feature is the detailed itemisation of responsibilities for each senior manager. This proved highly effective and triggered internal clarifications that firms were pleased to codify. It is highly notable that the approach is nominally focused on individual responsibilities, but the impact is on the health of the organisation as a whole and the ability to govern it.

The importance of the individual, their personal branding, the behaviour they tolerate or not, the tone they set, and the working relationships they build with others was already on the industry’s agenda but accelerated in the more humanitarian atmosphere nurtured in response to the Covid-19 pandemic.

BEHAVIOURAL PSYCHOLOGY HAS EMERGED

Since 2013, risk in the financial services industry is more often seen as an outcome of the infinite variety of human behaviours than something measurable or determined by quantitative analysis. A flurry of new legislation, rules and policies, tighter wording, additional controls and refreshed training initiatives typically follow adverse events. However, attention has turned more recently to the development of the individual and the strengthening of skills needed to support “doing the right thing” when dealing with both massive and rapid transaction flows in global financial settings.

Consequently, behavioural psychology vaulted into view for Human Resource teams, training professionals, compliance and risk managers and has now gained currency in top management and board circles. Thought leadership in conduct and culture continues to be profoundly influenced by the expanded knowledge and practical expertise emerging from this area, meriting not just considered attention but more active engagement.

FMSB launched a significant study of its own on the back of this progress. Misbehaviour in financial trading has occurred in consistent patterns over the past two millennia. Looking at case law over the last few hundred years across multiple jurisdictions, FMSB observed the same behavioural patterns recurring time and time again. FMSB’s updated review2 of this phenomenon, published in 2022, summarised six categories that will appear all too familiar: price manipulation, circular trading, misuse of inside information, reference price influence, improper order handling and misleading customers and/or markets. Basic familiarity with these patterns serves well to raise alertness to potential cases unfolding on the job or elsewhere.

TECHNOLOGY HAS RACED AHEAD

Today the categories of misbehaviour noted above can be amplified and accelerated by advances in computing power that have transformed processing speed and operating business models. Smart order routers and algorithmic processing give rise to new ethical questions around data creation and usage and what is now referred to as the “conduct of the machine”. The miscreant behaviour patterns are more difficult to spot in some traded markets given the scale and processing speed at which trades now occur. And this is while humanity is having an unnerving first touch with advanced Large Language Models that underpin the artificial intelligence tool ChatGPT4 and similar innovations. Additionally, social media since 2013 has transformed default risk and materially accelerated bank runs.

THE REPORT COULD NOW BE BETTER

The 2013 Parliamentary Report touched on many symptoms of unsatisfactory conduct in financial services. It elevated personal and organisational accountability and sensibly encouraged regulators to focus more on outcomes than on narrow rule adherence. If it were to be reissued today, a similar report might do well to also:

• address root causes more thoroughly and promote the value of culture and conduct for addressing adverse outcomes;
• point to behavioural psychology and the importance of harnessing that knowledge;
• advocate for more scientific rigour in the implementation of policy and procedure within the firm;
• insist on more benchmarking and high ambitions for industry-wide action; and
• elevate personal development as a primary support for leadership, management and general staff performance.

The nexus of conduct and culture, advanced technology and behavioural psychology is fertile ground for innovation leading to safer and fairer financial markets. In a world of accelerating technical complexity and uncertainty, it has been shown that simple collaboration can play a vital role in making the markets function better in response to the 2013 report. FMSB offers proof that this collaborative approach works when market practitioners and subject matter experts in the financial industry allow themselves to be cooperative, collegial, open-minded and flexible in addressing problems and working toward consensus.

This essay originally appeared in Parliamentary Commission on Banking Standards: A Global 10- Year Look-Back. Please visit Starling Insights to read the full report.

TED MACDONALD is a Senior Technical Specialist at the Financial Markets Standards Board. He is also an accredited mediator and maintains active links with Ivey Business School and its Leader Character programme. As a financial services practitioner, he has held senior roles in business origination, risk management, board-level governance, and more recently, regulation.