Financial Markets Reforms in the Near Future

When it comes to reforming financial markets, regulation has a role to play but can only ever be part of the answer and not a panacea. It is education, more than regulation, that will be key – Marshall Bailey CFA is President of ACI Financial Markets Association.

The current market evolution is part of a cycle that takes place every few decades, and there is no doubt that we are in the midst of change. In recent years, market participants have spent significant resources understanding, implementing and adapting to the new regulatory environment, and it appears the stream of regulation is steadying somewhat.

But it would be wrong to think that institutions and individuals can now rest on their laurels. Allegations of improper behaviour relating to Libor, the 4pm Fix and other instances highlight the need to shift the emphasis away from prescribed regulation to governing human behaviour. The allegations of improper behaviour in recent years remind us that in a world where financial markets are so fragmented and diverse, regulation can only ever be part of the answer and not a panacea.

Of course, stronger governance is required, but ultimately it comes down to the ethics and behaviour of individual market participants, and the ability of their supervisors to ensure this behaviour is appropriate through effective oversight and governance.

Last year, the deputy governor of the Bank of the England announced that a key area of the Fair and Effective Markets Review (FEMR) will focus on market standards, behaviour and governance, and how it should be reformed across FICC markets. This sensible approach sets the scene for finding a collaborative solution to the current conduct and behaviour issues, and reinforces the notion that the market will function best when everyone behaves according to a set of rules that are universal and apply globally.

A glimpse of the future

The events of recent years has tarnished the global financial services industry in the eyes of the public, and left us all in no doubt that we must strengthen the governance of the industry and its operations in order to regain the trust and credibility it once held. We have a duty to the global financial system and the public to ensure we repair where needed, but to truly reform financial markets globally and effectively, a set of standards that are universally applicable and implemented across all major financial institutions is urgently required.

In addition, we must focus on ensuring individuals are trained properly, their behaviour, ethics and conduct is held to a very high standard, and rules are backed up by appropriate legal systems where necessary that can deal with any malfeasance.

The Model Code of Conduct defines the principles and ethics that professionals should adhere to in order to uphold market standards globally, and has a system already in place to ensure any global adoption is universally implemented and carefully monitored. With sufficient backing and global enforcement, it can act as the logical bedrock for a formally adopted global standard governing behaviour and ethics across financial markets.

A global code of conduct would ensure participants operate on a level-playing field and play by the same rules, while regulators and institutions can better monitor and enforce market behaviour. Who would oppose such a move?