Dear CEO | Release Date: 8th September 2022
To read a longer summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Short Summary
The FCA has issued a guidance letter to CEOs overseeing benchmark administrators, underscoring the critical role these entities play in financial markets through their activities related to designing, calculating, administering, and publishing benchmarks. This supervision aligns with the UK Benchmark Regulations (UK BMR) and other applicable FCA rules, including the Senior Managers Regime and Conduct Rules.
Key points from the letter include:
Disclosure: Benchmark administrators must provide transparent and comprehensive information to enable users to understand and evaluate benchmarks effectively. This includes detailed benchmark statements and methodologies, especially for ESG benchmarks and Credit Sensitive Rates (CSRs), where risks of poor disclosure are notably high.
Quality of Data and Controls: Administrators are expected to ensure the integrity of input data and transparent methodologies. This is crucial for the reliability of benchmarks, particularly with the growing reliance on third-party data providers. There is an emphasis on robust monitoring and validation of input data, including for cryptoasset benchmarks.
Operational Resilience: Benchmark administrators must maintain operational resilience to prevent disruptions that could impact benchmark reliability. This includes managing operational risks, having effective business continuity plans, and maintaining control over outsourced functions.
Oversight and Governance: Effective governance is vital to ensure benchmarks are administered in compliance with regulatory obligations. This involves managing conflicts of interest and maintaining clear documentation of key decisions.
The FCA highlights that while benchmark administration is not directly under the new Consumer Duty, administrators play a supportive role by providing necessary information and disclosures to firms that are. The letter also indicates that the FCA will actively monitor and intervene if necessary to ensure compliance and address any identified risks.
Key takeaways for CEOs include the necessity to review and enhance disclosure practices, ensure data integrity, bolster operational resilience, and uphold stringent governance standards. Firms should prepare for increased FCA scrutiny, particularly concerning their handling of ESG benchmarks and CSRs. The FCA encourages proactive engagement and transparency in interactions with regulators, and firms should be prepared to demonstrate compliance and readiness to address any issues the FCA identifies.