Doing the 'Right thing'...

[fa icon="calendar"] 06-Jun-2018 15:16:43 / by David Woolcock

world environmental day

Eurobase has just given me a reusable coffee/tea mug in support of World Environment Day. This should arrest the use of plastic in the office and help our seas and oceans, albeit in a very small way, but every little helps! Cycling into work, I heard on the radio about the tremendous amount inspired teachers do to educate our children on environmental matters. I can personally attest to the “nag factor” our teenagers bring to correct the ways of their elders! Overall, it is about doing the “right thing”.

We can see the same trend in financial markets with a move towards more principle based regulation. The regulatory tsunami that the Global Financial Crisis unleashed led at least in part to the advent of 'principle-based regulation', which has in recent years seen some regulators move away from prescriptive rules and forced regulated financial services firms to think for themselves and make informed decisions based upon what they consider to be best and most appropriate practice.

It has also put the customer front and centre of the new thinking with banks being led to put customer outcomes top of the list with regard to how they approach markets. Principle Based Regulation therefore demands that firms adopt a more mature and evolved approach towards regulation. Instead of slavishly following one rule irrespective of the size of the firm, its risk profile, market sector or specific needs, each firm will have to consider the principle involved and determine what is appropriate and proportionate for their business. They also need to be able to justify their decision to the regulator should they be called on so to do. 

It is a pity that MiFID II was not more principle based but maybe the rumoured MiFID III will take some steps in that direction! The existing tome brings to mind the quote from James Madison, 4th President of the United States - “It will be of little avail to the people that the laws are made by men of their own choice if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood.”

However, we could see some change in thinking in Brussels and one example is the change from all reasonable steps to all sufficient steps for best execution. This highlights the need to think of best execution as a principle not only a regulation. What is defined in the legalisation does not cover exactly what you have to do. What you need to judge is can you consider what you have done to be ALL the sufficient steps needed? This requires an interpretation of what you put in your execution policy and makes us think of the customer outcome. More of this to follow in my next whitepaper.

We have also recently celebrated the one-year anniversary of the publication of the full FX Global Code. This is a principle-based code of conduct that requires us to think about our actions and judge them against the overarching principles. With its attendant emphasis on proportionality, this also calls for firms to what they consider to be best and most appropriate practice – spot the theme between principle base codes and principle based regulation!

In the film by Spike Lee “Doing the Right Thing” a series of unrelated (and at times very humorous) things lead ultimately to the violent conclusion of the film. As we move towards more principle based regulatory structures we need to harness technology to detect those trivial things before they lead to bad practice developing and being accepted. Otherwise, the finale can be measured by the huge cost of damaged reputations and will certainly have in attendance a large fine.

Topics: Banking, Blog, Regulation, Global Code, Compliance, MiFID II

David Woolcock

Written by David Woolcock

David Woolcock is an independent consultant and Director, Business Consulting at Eurobase. In addition, David is Chair of the Committee for Professionalism at ACI – The Financial Markets Association as well as Vice-Chairing the ACI FX Committee. He is also a member of the Market Practitioners Group for the Bank of International Settlement's FXWG that wrote the FX Global Code.