Financial Conduct Authority
Market conduct and transaction reporting issues – FCA publishes Market Watch No. 72 – 11 January 2023
The FCA has published issue 72 of Market Watch, its newsletter on market conduct and transaction reporting issues. The latest edition discusses the FCA’s findings on the quality of service provided by Approved Publication Arrangements (APAs) and Approved Reporting Mechanisms (ARMs), collectively known as Data Reporting Service Providers (DRSPs), to clients who use a DRSP to meet their regulatory reporting obligations under the Markets in Financial Instrument Directive (2014/65/EU) (MiFID II). It covers matters including the following:
- Connectivity: DRSPs are required to have robust systems and facilities to ensure the continuity and regularity of the services they provide. DRSPs should keep clients affected by connectivity issues appropriately informed throughout the identification and remediation process.
- Data quality: There is no complete list of factors that APAs should consider when identifying information that is likely to be erroneous. The FCA has found several instances of good practice where APAs have a number of checks for identifying and reporting content that is likely to be erroneous. In addition, ARMs are encouraged to implement other checks and validations beyond those set out in the FCA’s validation rules.
- Unregulated services: Where clients use unregulated services that are ancillary to the DRSP, these services are not covered by the systems and controls requirements under the DRSP regulatory framework. As such, DRSP clients are exposed to the regulatory risk of, and bear responsibility for, any errors or omissions and should carry out appropriate due diligence.
- Barriers to switching: To make switching DRSP more accessible, the FCA encourages DRSPs to review onboarding and offboarding procedures to ensure these procedures do not cause any unnecessary friction.
Market Watch No. 72
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Wholesale brokers – FCA publishes Portfolio Letter – 11 January 2023
The FCA has published a portfolio letter addressed to the CEOs of wholesale brokerage firms setting out its new supervision strategy for such firms.
The FCA notes that boards should consider the context of heightened systemic risk and episodes of market stress, as has been seen in the energy, metals and government bond markets in 2022, and reflect how their business models may expose them to risk and how such risk can be mitigated. With this in mind, the FCA has reflected on the changing context and drawn from recent supervisory work to identify the following four key areas of focus for wholesale broking firms:
- Financial resilience: To improve their financial resilience, firms should review the level of liquidity that they hold under the Investment Firms Prudential Regime (IFPR) and ensure that their assessment is commensurate with the risks they face. The FCA will carry out targeted work in this space and, where it identifies material weaknesses or firms underestimating their liquidity needs, take action. Further to this, the FCA notes that firms should seek to model stress events in more extreme, or reverse stress, scenarios.
- Remuneration structures: The FCA expects wholesale brokers’ boards and CEOs to ensure their remuneration structures comply with the IFPR remuneration requirements. In 2023, the FCA will focus on ensuring that firms are appropriately applying deferrals, malus and clawback when remunerating relevant staff.
- Governance and culture: Boards play an important role in instilling a healthy and purposeful culture at firms. In line with the requirements under the Senior Managers and Certification Regime (SMCR), firms can also help themselves to avoid conduct risk by properly taking into account regulatory references when hiring new certified staff and considering appropriate risk mitigations where adverse information in relation to individuals comes to light. This is an area where the FCA has identified weaknesses across a number of brokerage firms.
- Control functions: The FCA expects firms to comply with all relevant FCA rules, to consider relevant guidance and to resource their risk management and control functions adequately. The FCA notes that financial crime and market abuse mitigation are areas where brokerage firms commonly have weak systems and controls, and firms should develop safeguards to mitigate these risks.
The FCA notes that by the end of February 2023, the FCA expects all CEOs to have discussed this letter with their fellow directors and to have agreed actions and next steps.
FCA Portfolio Letter: Wholesale brokers 2023
