A Call for Input reveals that the FCA is planning for a post-EU future and examining ethics with regard to MAR.

On 9 March 2020, the Financial Conduct Authority (FCA) issued a Call for Input on the way that wholesale market participants access and use data in the UK. A Call for Input is an opportunity for the FCA to raise whatever questions it likes without having to commit to a view, in order to enable it (at a later stage) to make policy proposals without surprising market participants. This paper largely covers matters already subject to review at the European level, and therefore indicates that the FCA is preparing to make its own policies after the end of the current transitional period.

The Call for Input addresses some important, and detailed, questions for wholesale market participants, such as:

• Is a Consolidated Tape Provider likely to evolve as part of the EU’s review of the workings of MiFID II — and if not, might the UK want to create one?
• Are the requirements that data be provided by venues on a reasonable commercial basis being met?
• Are trading venues able to discriminate when providing trading data, and might this be combatted by requiring them to publish an explanation of, for example, the logic behind any volume-based tiering fee?
• Are the costs of switching between benchmark providers too high?
• Are benchmark providers exploiting complexity and a lack of clarity in contractual terms? (an unusual question for a regulator to ask in what is generally considered a highly sophisticated, non-retail market)
• Are market data vendors creating economic inefficiencies by bundling services that benefit from network effects (such as instant messaging services that enable OTC trading to occur) with data services?
• Could machine learning create collusion or lead to unintended biases towards incumbents when it is used to direct market flow?

Doubtless, a significant amount of ink will be spilt by the participants who answer these questions. However, the Call for Input raises two broader issues, neither of which is spelled out particularly clearly (if at all) in the paper.

The UK is already planning for a post-EU future

In almost all of the areas covered by the Call for Input, the rules are currently set at the European level. The UK is still required to comply with those laws until (at least) 1 January 2021. Between them, European directives such as MiFID, the Benchmarks Regulation, the Market Abuse Regulation (MAR), and the General Data Protection Regulation already set out the EU’s approach to the questions being posed by the FCA, and (at the moment) provide standardised answers. By opening this consultation just under a year from the date when the FCA may start to get freedom of action in these areas, the FCA is making clear (presumably with a degree of consent from the government) that the UK is considering writing new policies for itself in these areas. For instance, the FCA was seen as a key driver behind the unbundling of the costs of the provision of research from the costs of transaction execution. Might it take a similar approach in relation to the provision of bundled services by market data vendors? If so, would that put the UK at a disadvantage (because more restrictive rules would apply) or, in the long term, at an advantage (because unbundling would be efficient over a period of time)? Similarly, might action to facilitate switching between benchmark providers make the UK a more efficient place to do business, or would it amount to a different sort of red tape being imposed on the industry?

These are the types of questions that, in a post-Brexit environment, the FCA is now able to grapple with. Notably, ongoing consultations at the European level are underway in relation to most of the directives mentioned above, either to amend them or refit them for market developments. The UK will have left the EU by the time that any of these ongoing EU consultations turn into firm proposals. Therefore, it is instructive from a policy point of view that the FCA is already opening significant consultations of its own — consultations that presumably may lead to a different destination.

Beyond MAR

The FCA seems prepared to start a debate about the role of ethics in determining whether or not information is public for the purposes of MAR. This initiative may eventually be dropped, or it may be taken forward outside the context of MAR. Indeed, considering the type of offences which MAR creates, it seems from a legal-certainty point of view undesirable that ethics should be a consideration in deciding whether MAR has been breached. Presumably, the FCA’s general principles will capture whether or not firms are acting in a way that manages conflicts of interest or provides fair treatment for their customers.

If, for instance, the FCA wanted to address further the point that some data may not be widely available because “firms cannot secure sufficient financing to purchase these data”, then the FCA would need to explain what was “sufficient” for these purposes. Most investors should be able to afford the Financial Times. A good many of them are able to afford access to data vendor providers. At what point does data become too expensive for the information provided to be considered public?

Similarly, it makes some sense to say that information that has been sourced “in ways which do not comply with the General Data Protection Regulation” cannot be considered public because it has (in effect) been obtained unlawfully. But that is very different from saying that information could be treated in the same way if it has been sourced lawfully, but not ethically. The FCA does not say that this is its current determination, but surely ethical treatment, focused on client consent or knowledge about the way in which information might be used, would be better addressed by the FCA’s General Principles for Businesses (for which everyone accepts that a degree of flexibility and interpretation is required) rather than using MAR as a hook upon which to hang such policy developments. If the FCA takes the approach of focusing on ethical considerations as part of its MAR analysis, it will become even harder for firms and advisers to know where the line is drawn in an area that requires clarity.