Out-Law News 2 min. read

High-frequency trading to be caught by extension of accountability rules, FCA says


Algorithmic and high-frequency traders will be subject to new rules intended to make it easier for regulators to hold them personally accountable for failures, the Financial Conduct Authority (FCA) has announced.

Banks, building societies and designated investment firms performing wholesale banking activities must certify senior staff performing client dealing and algorithmic trading roles and train less senior staff in new conduct rules before they come into force on 7 September, according to an FCA policy statement. The announcement effectively extends the scope of the new senior managers' and certification regimes (SM&CR) for senior bank staff, which come into force next month.

FCA acting chief executive Tracey McDemitt said that the regulator was "determined to embed a culture of personal responsibility within the banking sector".

"Clear individual accountability should focus minds, drive up standards, and make firms easier to run and to supervise," she said. "And if things go wrong, it will allow senior managers to be held to account for misconduct that falls within their area of responsibility."

Financial regulation and enforcement expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement reflected "previous statements by the FCA regarding the purpose for improving individual accountability".

"While the FCA expects standards to improve, it has made it clear that these rules will improve the FCA's ability to hold senior individuals to account when things go wrong," he said.

"The latest announcement extends this regime to two new functions of client-dealing and algorithmic trading. When taken into account with the certification regime and conduct rules, which extend the requirement to comply with the new regime far beyond those who were previously captured under the approved persons regime, this is a clear indication of the FCA placing significant emphasis on the need for firms to have the appropriate systems and controls to implement the regime," he said.

The regulator announced its intention to extend the certification regime to all staff who could "pose a risk of significant harm to the firm or any of its customers" last July. The extension will capture a new 'client dealing' significant harm function, including staff who give investment advice or submit to benchmarks. Under the certification regime, these staff will no longer require regulatory pre-approval, but will instead have their fitness and propriety assessed and re-certified at least once a year.

The new rules will also capture individuals with certain responsibilities relating to algorithmic or high-frequency trading, including those responsible for approving changes to an algorithm. The FCA has amended its original proposal, which would have applied to those responsible for "material" changes, "given the complex nature of algorithms and the iterative nature of the development process".

"Iterative changes when considered in isolation may appear minor and unlikely to breach any materiality threshold; however when considering several iterations together the net impact on the algorithm could be substantive," the FCA said in its policy paper. "This means the distinction of a 'material' change is not meaningful in practice."

Those individuals making changes to an algorithm will not be captured by the certification regime. They will instead be subject to new conduct rules, which will apply to all staff within relevant firms except those carrying out purely ancillary functions. Individuals now subject to the certification regime will be subject to the conduct rules from 7 September 2016. They will apply to other staff from 7 March 2017.

In the same policy paper, the FCA announced a delay to new requirements for regulatory references which new employers would have to obtain from the previous employers of candidates applying for roles subject to the senior managers' or certification regimes. It will instead continue with the current referencing requirements under the approved persons regime for those in pre-approved roles, subject to "further deliberation" on "complex issues" raised during last year's consultation exercise.

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