Wholesale Conduct – Wholesale Review?

Traditionally, conduct supervision has focused on two issues - consumer protection and market integrity - with financial crime (relevant to both) sometimes identified separately. While market integrity is mainly a 'wholesale' issue, the consumer protection agenda has understandably been dominated by retail issues, not least because this is where the imbalance in information on, and understanding of, financial products is potentially greatest.

This, however, is now changing. When coupled with the generally more assertive and pre-emptive supervisory approach being shown to conduct issues in the UK, it has the potential to transform the approach to the supervision of wholesale market players here.

The Journey to the FCA: a new destination?

In its launch document issued in October, the FCA made clear that change was on the way. The new twin peaks regime provided the opportunity to "adjust our approach" to wholesale conduct. This appeared to reflect a variety of factors:

A lack of a clear divide between retail and wholesale markets. Such issues have arguably been surfaced by the ways in which interest rate hedging products were sold to relatively unsophisticated smaller businesses. A recognition that retail and wholesale markets are connected, with risks transmitted between them. A view that such links are important even if the linkage is indirect; e.g. structured products originated in investment banks and then packaged and sold in the retail market. A belief that trust in wider financial services can be undermined by incidents such as the LIBOR-setting saga, even if these have limited direct impact on retail relationships - in the FCA's words "misconduct in wholesale markets can have a much wider impact on the integrity of, and trust in, markets than a narrow interpretation of the principle of 'caveat emptor' may suggest". The paper stated that "Poor wholesale conduct is not a victimless act simply because it takes place between sophisticated market participants, and it is not limited to criminal behaviour such as fraud or market abuse. It also captures a wide range of activities that exploit differences in expertise or market power to undermine trust in the integrity of markets or cause harm to retail consumers".

So while the document said that the FCA would "continue to recognise the differing degrees of experience and expertise that different consumers may have" it would nevertheless "intervene more assertively to supervise existing rules...