FCA outlines supervision strategy for benchmark administrators
The UK Financial Conduct Authority (FCA) today published a “Dear CEO” letter, outlining its supervision strategy for benchmark administrators.
The FCA expects all benchmark administrators to promote transparency by reviewing their benchmark statements and methodologies to ensure they contain key disclosures and remain accurate. Where necessary, they should make improvements to disclosures, so that they are readily understandable to users and end investors assessing whether the use of the benchmark is appropriate for their investment strategy.
Poor design, description and naming of benchmarks, including ESG benchmarks, could create a trust deficit in the market for passively managed sustainable investment products. The FCA has observed that grouping ESG and non-ESG benchmarks in the same family can result in a poor level of disclosure.
It is important that benchmark administrators ensure good quality of disclosure for ESG benchmarks through benchmark statements and methodologies. This ensures that intermediaries and investors can assess both the underlying economic reality or market which is being measured and the sustainability claims of the benchmark. Benchmark administrators must ensure that their benchmark names fairly reflect the methodology and contents of the benchmark so that users’ reasonable expectations are met.
Where the methodology for the ESG benchmark uses ESG ratings provided by a third party (e.g. an ESG ratings provider) to determine its constituents, benchmark administrators should ensure that the underlying rating methodology is clearly presented and explained to users.
Due to the increased risks relating to use of credit sensitive rates (CSRs), the FCA expects UK- regulated benchmark administrators to continue to notify it in advance if they intend to administer CSRs and make them available for use in the UK.
The FCA plans to collect further information from administrators in 2022 Q4 or 2023 Q1 to conduct a baseline assessment of operational resilience, including the risk and plans around cyber- attacks. The regulator will analyse the results to identify outliers and weaknesses and provide relevant feedback to firms, where appropriate.
The regulator will also consider how effectively firms meet their obligations under Principle 11 and disclose material incidents to it in a timely manner.
Further, the FCA says it will proactively engage with benchmark administrators where it has evidence of poor oversight and governance practices. The regulator will consider employing formal supervisory tools in those instances where firms fail to meet our requirements, fail to consider its feedback or are making insufficient progress.
The FCA reminds benchmark administrators that all FCA-authorised firms must at all times comply with FCA Principle 11 (Relations with regulators): “A firm must deal with its regulators in an open and cooperative way, and must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice”.