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Freshfields Risk & Compliance

| 2 minutes read

FCA proceeds with plans to promote compliance with industry codes of conduct in unregulated markets/sectors

Co-authored by Emma Rachmaninov

The FCA has demonstrated in many of its highest profile enforcement actions its willingness to act when it considers there to be misconduct in unregulated markets.

The FCA considers that the SMCR Conduct Rule concerning market conduct (Individual Conduct Rule 5) applies to individuals in relation to unregulated as well as regulated markets.

Last year the FCA published a consultation paper (see our briefing and blog) in relation to proposals that it recognise industry codes of conduct in unregulated markets as a means of indicating what sort of conduct it would regard as being compliant with SMCR Individual Conduct Rule 5. The FCA also floated the idea that it might extend Principle 5 for regulated firms to unregulated markets, to address a perceived mismatch between the scope of that Principle and SMCR Individual Conduct Rule 5.

The FCA has now published its policy statement following that consultation exercise.

Firms are likely to welcome the FCA’s decision not to launch a formal consultation on an extension of Principle 5. The FCA appears to have listened to industry feedback that there is no obvious problem that would be cured by such an extension, and that it might require primary legislation.

However, the FCA has introduced a process for recognition of industry codes with immediate effect. Helpfully, the FCA has confirmed that it will, contrary to the original proposal, conduct a public consultation before formally recognising a code. The FCA intends that only a small number of codes will be recognised. It intends to target codes (or parts of codes) of conduct in unregulated financial services activities (such as FX trading and lending to businesses) and activities closely linked to financial markets (such as trading in physical commodities, which are linked to financial derivatives). It does not intend to focus on activities already covered by legislation or formal regulation. One significant concern raised in the consultation was that the FCA might recognise codes that were aspirational rather than reflective of reasonable standards of conduct. The FCA suggests it will favour codes with examples of current good practice but may also recognise an aspirational code that aims to improve existing market conduct, “where appropriate”. So there remains a risk that firms will be held to a higher standard than good market practice in the event that they face enforcement when the relevant standard of conduct comes into question.

Although the FCA takes pains to state that it is not mandatory to comply with the terms of an industry code that it has recognised and it is not the only way to comply with proper standards of market conduct for that activity, the FCA will view compliance with a recognised code as tending to show compliance with the proper market standards obligation (but has explicitly refused to be more definitive on what compliance with such codes will mean for a firm).

It will therefore be important for firms and senior managers to track which industry codes the FCA recognises, to consider whether the industry code will be followed in all respects or if proper standards of market conduct will be ensured by alternative means, and to record that decision as part of the firm’s governance arrangements, in addition to training and monitoring employees.


compliance, financial services, governance, conduct of business