On 8th September 2022 the UK’s Financial Conduct Authority (“FCA”) published its latest “Portfolio Letter”, this time detailing its supervisory strategy for benchmark administrators. The letter provides insights into the FCA’s perception of areas of benchmark administrators’ activities that are at most risk of non-compliance with applicable regulatory obligations. The insights were gained from recent supervisory activity. The FCA is particularly keen to encourage benchmark administrators to consider how their output affects firms that will become subject to the Consumer Duty when it enters into force on 31st July 2022.
This note summarises key takeaways from the Portfolio Letter.
A summary of the FCA’s expectations and their relationship to perceived risks
|Accurate, accessible and transparent disclosure of a benchmark administrator’s:
so that they can be easily understood.
Investors should be able to verify the sustainability claims of ESG benchmarks. ESG benchmarks should be fairly labelled so users are not misled about their methodology and contents.
|Credit Sensitive Rates (“CSRs”) do not replace London Interbank Offered Rate (“LIBOR”).
Provide advance notice to FCA of an intention to administer and/or use CSRs in the UK context.
|Quality of data and data controls
|Benchmark administrators should ensure processes are in place to monitor:
These processes should be appropriate to the size, nature and scale of the benchmark.
A benchmark administrator should inform the FCA in the event of data quality incidents, considering:
The benchmark administrator should also provide details of the root cause analysis and remedial steps taken in their notification.
|Notify the FCA in advance of an intention to start administering cryptoasset benchmarks.
|Following the FCA’s rules in PS21/3, a benchmark administrator must be operationally resilient to significant disruption, for example a cyber-attack.
In keeping with wider regulation, a benchmark administrator remains responsible for any outsourced activities. Accordingly, a benchmark administrator must:
Pursuant to Principle 11, a benchmark administrator must notify the FCA promptly if an operational resilience event occurs.
|Poor operational resilience leads to:
FCA is unaware of situations that have occurred or are developing because a benchmark administrator has failed to promptly notify the FCA.
|Oversight and governance
|Benchmark administrators must have robust governance arrangements in place, including:
|Benchmark administrators are expected to engage with the FCA’s Wholesale Data market study. This is expected to commence in November 2022.
What could the FCA do if a benchmark administrator fails to meet its expectations?
In the portfolio letter, the FCA warns that it could employ one or more of the following tools if there is evidence that a benchmark administrator is not meeting its expectations:
- proactive engagement:
- monitoring the quality of disclosures;
- scrutinising the construction and labelling of ESG benchmarks;
- providing feedback from:
- a baseline assessment of benchmark administrators’ operational resilience, identifying outliers and weaknesses. This is schedule to take place in Q4 2022 or Q1 2023;
- “multi-firm work” (likely a thematic review) on data quality, citing weaknesses and outliners. The portfolio letter says this work is “planned”, but does not state when this will take place;
- use of “supervisory tools”, most likely by mandating a skill persons review (aka “Section 166 report”); and
- ultimately, enforcement action.
How C&G can help
C&G’s consultants have experience of managing the compliance obligations associated with administering and using benchmarks. Please contact us today to arrange a free one hour consultation to discuss your assurance requirements.
- Portfolio letter: Our supervisory strategy for benchmark administrators. Financial Conduct Authority. Available at: https://www.fca.org.uk/publication/correspondence/portfolio-letter-benchmarks-sep-2022.pdf (last accessed 26th September 2022).