Flexible ethics?


Early in March the FCA made an announcement in the news section of its website about the Double Volume Cap – what’s that I asked myself and clicked on the link. I’m now a little wiser in understanding that it’s a tool the FCA can use to restrict the level of dark trading in equities – made me think of the dark web which sounds scary.

Dark trading takes place when the terms on which participants are willing to trade in equity instruments are not made publicly available before the trade is executed. The issue is that it may make it difficult for other market participants to make well informed decisions.

Anything that is not transparent runs the risk of causing or allowing abuse to occur – hence the tool exists as a result of Article 5(3B) of UK MiFIR. I was curious that the recent announcement from the FCA was that they won’t automatically apply it to any equities, having said in December that they wouldn’t use it for UK equities.

Earlier this year, in response to the dramatic post-Brexit move of trades in EU shares to European venues, the watchdog lowered the large-in-scale (LIS) thresholds for dark pool trading to €15,000, meaning that in the UK if a transaction is above €15,000, it can trade in a dark pool. In the EU, the minimum threshold for using a dark pool is €650,000, now significantly higher compared to the UK.

 If one of the values is transparency (and it often is) how does the trainer square the circle where there may be commercial reasons for not being too transparent?

Actively encouraging non-transparent trading seems counter-intuitive but the justification is that it accounts for some 30-40% of trades and enables shares to be traded in a way that doesn’t move the market in the way that large visible trades would.

So what does this have to do with training and competence? Well, the FCA talks a lot about culture and lots of other organisations in financial services (or their suppliers) are following their lead. At a virtual conference recently more than half of the speakers included references to culture in their presentations.

In terms of training staff on what culture means, one of the presenters suggested an interesting question: after asking a person to state one of the values of their business, the question could be asked can you show me a piece of work putting that value into practice? If one of the values is transparency (and it often is) how does the trainer square the circle where there may be commercial reasons for not being too transparent? Commercial confidentiality makes a lot of sense in a competitive environment.

A culture that enables people to ask tricky questions as the boundary between transparency and confidentiality is explored should be encouraged. Senior managers should expect and accept being challenged – training and competence professionals can help both sides to frame conversations in way that is collaborative rather than combative.

Another question suggested during that conference was in two parts: when was the last time someone challenged a decision and what happened next? This goes to the heart of the question of a firm’s culture: do people feel comfortable raising concerns, knowing that they will be listened to and that their careers won’t be threatened.

Many of the ethics case studies I have seen are too clear cut: I remember one where a senior manager instructed a junior member of staff to show an important customer a ‘good time’. Certainly, ones I have seen recently are more nuanced, where there are arguments for alternative outcomes. For example, where a newly appointed senior manager introduces a rule which has quite a wide scope and someone doesn’t follow it, but the impact is only minor (no client detriment). Should the stated punishment when the rule was introduced be imposed (disciplinary action) or would taking the individual to one side and reminding them be sufficient? Would the seniority or profitability of the individual breaching the rule make a difference? Does not taking visible action undermine the authority of the new manager or demonstrate that the firm is pragmatic?

Another area where there is potential for flexibility is in the requirement for investment firms to consider ESG in their selection process. Ethically many people would agree that considering the environmental, societal and governance impacts of potential investments is important. If an investment will potentially show greater financial returns than one that fits ESG criteria which is the ‘right’ one to choose?

As training and competence specialists we have a part to play in providing opportunities to consider these issues. One area of particular topicality is that of certification under SM&CR. How do we assess an individual’s ethics as part of the fit and proper assessment which feeds into whether a certificate can be issued? Without one that person is potentially out of work. Preparing early so that issues can be addressed may be a part of the approach but as the deadline looms for each person will we be expected to be flexible with our ethics?

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Compliance Cubed Financial services is constantly changing - my passion is helping firms function effectively and in compliance with FCA regulation

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