Quiet revolution occurring in wholesale conduct
Traditionally the FSA has relied on the ‘caveat emptor’ principle and focused its efforts on market abuse, transparency and disclosure.
The European Commission has recently published a raft of legislative proposals – a draft regulation on key information documents for packaged retail investment products, a revision of the insurance mediation directive, and a proposal amending the Ucits Directive. The EC’s reason for producing these proposals was summed up by European Union commissioner Michel Barnier, who said: “In the aftermath of the biggest financial crisis in recent memory, the financial sector must place consumers at its heart.”
However, while the spotlight is firmly on the retail conduct space, it is worth remembering that a quiet revolution is occurring in wholesale conduct. Let me explain.
Traditionally in the wholesale markets the FSA has sought to rely on the ‘caveat emptor’ principle and focused its efforts on market abuse and transparency and disclosure. The FSA’s focus was to ensure the integrity and resilience of these markets rather than to introduce concepts of detriment and redress that it uses in the retail market.
However in June 2011 the FSA published its first Financial Conduct Authority approach document that said it would place greater emphasis on wholesale conduct and the risks attached to the activities in the wholesale markets. The FCA would go beyond relying on caveat emptor and, where it saw potential damage to market integrity, intervene.
While the FCA would continue to ensure the integrity and resilience of the wholesale markets, the Clive Adamson, director of the FSA’s supervision division, mentioned in a speech at the beginning of this year that in the new regime supervisory emphasis would be placed on three particular areas. First, where wholesale products filter down or are distributed to retail customers. Second, where certain behaviours in wholesale markets can cause damage to market integrity and, third, where market structures can result in participants being disadvantaged or the market being inefficient.
Recently the issue of wholesale conduct was covered in Lord (Adair) Turner’s speech at the FSA annual public meeting. While his speech did not go into detail on how wholesale conduct regulation would change, he did give a glimpse of the FSA’s rationale for the changes. He said: “An insurance company or pension fund may be itself a large institution, but sitting behind the company or pension fund are retail investors. Any poor practice which unreasonably shifts income to the industry is at the expense of some end retail customer. There are no free lunches, and shoddy wholesale practice is not a victimless act, even in those cases where it is not defined as a crime.”
All eyes will be on the latest FCA approach document which is due this autumn.
Simon Lovegrove is a lawyer for the financial services group of Norton Rose LLP