Defining ‘conduct supervision’

The consistent themes defining conduct supervision in all jurisdictions are the fair treatment of customers and the stability of financial markets. These underpin the purpose of the conduct supervisor and unify the outcomes that each seeks to deliver.

In Ireland, the organisational structure of the CBI comprises two key pillars, Prudential Regulation and Financial Conduct, with the latter comprising four distinct Directorates: Consumer Protection, Securities and Markets Supervision, Policy and Risk and Enforcement and AML.

Similarly, the French Monetary and Financial Code charges the AMF with responsibility for overseeing the protection of savings invested in financial instruments, the information to investors and the proper functioning of financial markets.

The Dutch regulator is “problem-oriented”. Dutch law expresses conduct supervision in terms of outcomes, describing it as something aimed at securing orderly and transparent financial market processes, integrity in relations between market parties and due care in the provision of services to clients.

In Germany, the concept is articulated as an obligation imposed upon investment firms to act honestly, fairly and professionally in accordance with the best interests of their clients and to provide a fair, orderly and transparent financial market when providing investment services to clients.

Proportionality and harm

Regulators in all jurisdictions apply a proportionality principle to decisions about where and how to focus their supervisory efforts. Whilst tending to base this on the ECB significance criteria, proportionality is not precisely defined and will differ between regulators.

The Netherlands are applying their risk-based and problemoriented approach by continuously analysing problems marketwide that may pose the greatest risks, and focusing on the most harmful behaviour rather than only non-compliant behaviour.

For the purposes of proportionality the German regulator focuses on a firm’s characteristics (including size, complexity and risk profile) and its interconnectedness with other firms. Besides that the German regulator also monitors and analyses market-wide problems.

In general, there is if anything a gradual movement away from a firm-specific analysis towards a market-wide problemoriented approach, following the UK FCA’s preference for thematic reviews and market studies. The Irish regulator is a good example: whilst it still conducts firm-specific assessments, it has started to develop a wholesale financial market risk-based supervisory framework.

Co-operation with the regulator

In all jurisdictions, firms must co-operate with regulators in satisfying requests for information made under their supervisory powers.

Beyond this, there is a general but undocumented expectation that firms should engage with their regulators in a transparent, open and co-operative way. The extent to which this is a formal regulatory requirement, however, varies depending on whether the regulator adopts a rules-based or principles- and outcomes-based approach to regulation.

None of the jurisdictions surveyed have an equivalent to FCA Principle 11. Indeed the broad regulatory expectations encapsulated in all of the FCA’s Principles for Business are, at present, a uniquely British concept.

Culture and governance

The regulators’ approach in this space is substantially influenced by whether they take a rules- or principles-based approach.

A rules-based approach to supervision addresses culture and governance as a symptom or by-product of regulatory concerns and specific rule breaches (more typical of the French and German regulators), whilst a principles-based regulatory approach identifies culture and governance as itself the root cause of failure to meet regulatory standards (as in the Netherlands, and increasingly in Ireland (although the CBI states that it applies a “risk-based” approach to supervision)).

These differences play out in the regulators’ approaches to personal non-regulatory related misconduct. The German regulator does not supervise in this area, unless the misconduct gives rise to regulatory concerns regarding the firm (e.g. the integrity of the firm’s management). Ireland currently addresses the issue as part of its fitness and probity assessments, though this may change with the introduction of the SEAR (its individual accountability regime).

Hot topics

AML: In all four jurisdictions, AML is as a key regulatory priority. In Germany, there is currently a focus on customer due diligence, the position and powers of MLROs and risks associated with correspondent banking relationships. The CBI takes a risk-based approach like that employed by the FCA, ensuring that firms with a higher level of risk of exposure to AML and CTF activity are supervised more closely.

Market misconduct: Unsurprisingly, the four conduct supervisors agree that this is another area of focus. Market misconduct is highlighted in the CBI’s Strategic Plan 2019-2021 and the BaFin is also reported to be active here, consulting on an update of the issuer guidelines regarding market misconduct under MAR and proposing to raise the threshold for directors’ dealings to €20,000.

MiFID II: The implementation of MiFID II is another common priority. Led largely by ESMA, national supervisors are assessing their markets for specific areas of MiFID II whose implementation requires improvement. The AMF recently reported on its first “mystery” campaigns, conducted within French major retail banks providing investment advice. BaFin has also asked auditing firms to put a special focus on MiFID II implementation in their upcoming audits.

Sustainability: Finally, sustainability is an increasingly important feature of conduct supervision, with the German, French and Dutch regulators.