Realising Justice: the Role of Written Standards

Abstract

Behaviour in financial markets ultimately turns not on written rules but on how market relationships are lived and felt. Yet one of the most common ways in which humans seek to regulate behaviour is to create written standards and enforce them: laws, regulations, contracts, codes of conduct and so on. Recognition of a social licence for financial markets goes beyond written standards to the desires and beliefs that animate relationships. Nonetheless, it connects with them in various ways. This chapter considers how it does that, drawing a distinction between behavioural norms, written standards that are designed to establish structures within which behaviour takes place, and written standards that directly regulate behaviour, in the case of the last, distinguishing between those that are prescriptive and those that are aspirational.

This chapter builds on David Rouch, ‘The Social Licence for Financial Markets, Written Standards and Aspiration’, in Edward Elgar Handbook on Law and Ethics in Banking and Finance, eds. Costanza Russo, Rosa M. Lastra and William Blair (Edward Elgar 2019).

Appendix

1.1 The Written Standards Map

Standards that apply to individuals rather than firms are shown in italics.

1. Category of written standard	2. Application to UK market participants	3. Extent to which reliant upon public or private legal enforcement mechanisms	4. Aspirational rating	5. Hardness rating
International
United Nations: various standards relevant to finance sector including Sustainable Development Goals, Paris Climate Agreement, Declaration of Human Rights Numerous initiatives to encourage business to align their activities with these standards such as the Principles of the UN Global Compact, United Nations Guiding Principles on Business and Human Rights and the United Nations Environment Programme Finance Initiative	Not legally binding, except to the extent enshrined in national law, but businesses can voluntarily adhere to or seek to align their business with all or some standards. Otherwise, operate as a framework for national and international legislative initiatives (e.g. the European Union sustainable finance initiative which is intended to orientate EU finance law and policy behind the Paris Agreement and Sustainable Development Goals) and may be referenced in international investment treaties Initiatives such as the Global Compact and UNEPFI generate good practice standards which companies can adhere to, and as a way for society to monitor companies’ sustainability and human rights impact	Public: not enforceable except where enshrined in national law (see further below) or investment treaties Private: no private law enforcement (unless incorporated in some way by the parties into their relationship). However, the Guiding Principles are sufficiently specific to facilitate monitoring (e.g. by NGOs) so encouraging compliance	A1	H3
International standards for regulators set by bodies such as the Financial Stability Board, Basel Committee on Banking Supervision, the OECD, the International Organisation of Securities Commissions, International Association of Insurance Supervisors and the Financial Action Task Force to coordinate legal and regulatory standards globally	Not directly applicable to market participants, but assumed to be relevant to: • The way other directly applicable regulatory standards may be interpreted or applied • The future shape of the regulatory regime Hence, larger firms pay attention to emerging policy and statements at this level	Public: not enforced against market participants since they generally define standards for regulators, but may influence practice through a belief that they could influence the enforcement of rules identified below that are directly applicable Private: no private law enforcement (unless incorporated in some way by the parties into their relationship)	A2	H3
International private law coordination: in particular the Hague Convention, UNIDROIT and UNCITRAL—principally focused on harmonisation of standards relating to property, contract and insolvency rights and the elimination of legal uncertainty	Only applicable to the extent incorporated in national law or contractually adopted by the parties	Public: no direct enforcement against market participants Private: no private law enforcement (unless incorporated in some way by the parties into their relationship)	A3	H2
Other international standard setting bodies: these are a mixture of (a) public-private bodies (such as the Task Force on Climate Related Financial Disclosure, established by the FSB but with industry members), (b) private bodies (such as Transparency International, the Global Reporting Initiative and the International Organization for Standardization) and (c) industry associations (such as ICMA and ISDA). As to the last, see further below	Only applicable to the extent incorporated in national law or voluntarily adopted by the parties. Strong UK regulatory encouragement to adhere to TCFD and moves to incorporate into some areas of regulation84	Public: no direct enforcement against market participants. However, compliance with the TCFD in particular is likely to be relevant to regulatory assessments of compliance with UK regulation, where relevant Private: limited, but could be referenced as a guide to good practice in private law actions, and enforceable between parties if incorporated in some way by the parties into their relationship	A2–3	H3
European Union85
EU Regulations (Level I/Level II)	Apply directly to businesses. Must be enforced by relevant UK authorities and applied by English courts, subject ultimately to the Court of Justice of the European Union (CJEU)	Public: generally enforced at UK level using public enforcement tools. EU trend to stipulate minimum requirements Private: limited, but could be taken into account in private law actions. May rely upon market forces to secure desired result. Breach could affect attitudes of counterparties and clients and therefore firm’s commercial position	A2–3	H1.2
EU Directives (Level I/Level II)	Implemented by UK authorities in rules that apply to businesses. Enforced by relevant UK authorities and applied by English courts, subject ultimately to the CJEU	Public: generally enforced at UK level using public enforcement tools. EU trend to stipulate minimum requirements Private: limited, but could be taken into account in private law actions. May rely upon market forces to secure desired result. Breach could affect attitudes of counterparties and clients and therefore firm’s commercial position	A2–3	H1.2
Regulatory Technical Standards and Implementing Technical Standards	Detailed implementing rules made under Regulations or Directives. Enforced by relevant UK authorities and applied by English courts, subject ultimately to the CJEU	Public: as for framework legislation Private: limited, but could be taken into account in private law actions	A3	H1.2
EU Commission guidance	Relevant principally because it expresses the EU Commission’s view on the meaning and application of EU legislation	Public: no direct sanction, but may influence the enforcement of EU Regulations or rules implementing EU Directives Private: limited, but could be taken into account in private law actions	A2–3	H2
EBA/ESMA/EIOPA86 (ESAs) guidance and recommendations	To promote supervisory convergence, the ESAs have the power to issue guidelines that are addressed to individual member state regulatory authorities or, less frequently, to market participants. ESAs may also address an individual decision to a market participant where a member state authority has failed to act. Need not be specifically related to the application of Regulations and Directives, but often will be	Public: in most cases ESAs do not currently have direct enforcement rights, but should influence member state enforcement of EU rules or those implementing relevant EU legislation Private: limited, but could be taken into account in private law actions	A2–3	H2
EU Commission Q&A/EBA/ESMA/EIOPA Q&A	Provides the views of the EU Commission/ESAs on the meaning and application of EU legislation, but is not legally binding	Public: not directly enforceable against market participants, but could be used by member state courts and regulators in assisting in the interpretation and enforcement of EU legislation Private: limited, but could be taken into account in private law actions	A2–3	H2
Commission and ESA consultations, feedback documents and other commentary	No direct legal effect, but is sometimes referenced by industry participants in seeking to understand the purpose and effect of the resulting provisions in Regulations and Directives	Public: not directly enforceable against market participants, but could be taken into account in assisting in member state and judicial interpretation and enforcement of EU legislation Private: limited, but could be taken into account in private law actions	A3	H3
UK
Private law, especially contract law and fiduciary duties	Directly applicable, as a minimum, to those located and conducting activities in the UK. Contractual rights are a particularly important feature of the financial markets, especially under industry standard documentation such as the master documentation maintained by the International Capital Market Association or ICMA (bond market documentation and repurchase agreements), ISDA (derivatives), the International Securities Lending Association or ISLA (securities lending) and the Loan Market Association or LMA (lending)	Public: enforced by the courts using the full range of private law remedies and sanctions Private: may be used as a basis for enforcing written norms promulgated by private bodies	A1–2	H2
UK Statute/Statutory Instruments	Directly applicable to all persons within their jurisdictional reach—that is, very broadly, those carrying on activity with a UK connection. (Also implement EU regulatory standards—see above)	Public: will depend upon the relevant statute, but generally apply criminal sanctions for breach of the primary legislation. See regulatory regimes below for sanctions upon breach of rules made by regulators under the legislation Private: not generally applicable save to the extent the legislation makes use of private enforcement mechanisms or market forces	A2–3	H1.1–1.2
Prudential Regulatory Authority (‘PRA’)—prudential regulation of UK incorporated banks and insurers
PRA Fundamental Rules—technically PRA ‘General Rules’ (see below), but in the form of high-level principles rather than precise targeted requirements	Directly applicable to all PRA authorised firms. (Also implement EU regulatory standards—see above)	Public: full range of PRA sanctions applies if breached. Could also have other consequences such as increased capital requirements Private: limited, but could be taken into account in private law actions Breach could affect attitudes of counterparties and clients and therefore firm’s commercial position	A1	H1.2
PRA General Rules (under s137G of the Financial Services and Markets Act 2000 (‘FSMA’)), specialised rules and various other rules made under other powers	Directly applicable to all PRA authorised firms. (Also implement EU regulatory standards—see above)	Public: full range of PRA sanctions applies if breached. Could also have other consequences such as increased capital requirements Private: limited, but could be taken into account in private law actions May rely upon market forces to secure a given result. Breach could affect attitudes of counterparties and clients and therefore firm’s commercial position	A2–3	H1.2
PRA Evidential Rules (s138C FSMA)	Apply to all PRA authorised firms except inward business under an EU cross-border passport. However, indicative only. Compliance with these will tend to establish compliance with another specified rule and breach will tend to establish non-compliance	Public: no sanction for breach, but may be relevant to whether a binding rule breached—see above Private: limited, but could be taken into account in private law actions	A2–3	H2
PRA Guidance including guidance statements in the PRA Handbook PRA Supervisory Statements Other materials such as PRA letters87	Guidance on the operation of specified parts of FSMA and on the PRA rules and the PRA’s functions, therefore, relevant to authorised firms in complying with the above	Public: may be taken into account by the PRA in considering whether a standard has been breached Private: limited, but could be taken into account in private law actions	A2–3	H2
PRA Directions/Requirements given under various Acts (including s138A FSMA) and statutory instruments	Binding on the persons or categories of persons to whom they are addressed. Relevant to the way particular rules apply to those persons	Public: as for the rules to which the direction relates Private: as for the rules to which the direction relates	A3	H1.2
PRA Senior Managers Regime88	Requirement for PRA individual approval for those managing aspects of the firm’s affairs relevant to regulated activities which could involve a risk of serious consequences for the firm or business or other interests in the UK	Public: a range of PRA sanctions can be applied under the PRA Conduct Rules to an individual who fails to discharge responsibilities Private: limited, but could be taken into account in private law actions, including between an individual and their employer. Could also be taken into account in the context of membership of professional bodies and by future potential employers	A2	H1.2
PRA Conduct Rules	Apply to all PRA senior managers and PRA certified persons and others involved in the business of the firm	Public: a range of PRA sanctions can be applied to an individual who is in breach Private: limited, but could be taken into account in private law actions. Could also be taken into account in the context of membership of professional bodies and by future potential employers	A1	H1.2
FCA—conduct of business regulation for all firms in the UK market, prudential regulation of non-PRA UK firms, listing authority
FCA Principles for Businesses—technically FCA ‘General Rules’ (see below), but in the form of high-level principles rather than precise targeted requirements	Increasing use made of these. Directly applicable to all authorised firms except inward business under an EU cross-border passport. (Also implement EU regulatory standards—see above)	Public: full range of FCA sanctions applies if breached. Could also have other consequences such as increased capital requirements Private: limited, but could be taken into account in private law actions Breach could affect attitudes of counterparties and clients and therefore firm’s commercial position	A1	H1.2
FCA General Rules (under s137A-F, H, O-R and T FSMA), specialised rules (under s140-7 FSMA), listing rules under s73A and various other rules	Directly applicable to all authorised firms except inward business under an EU cross-border passport. (Also implement EU regulatory standards—see above)	Public: full range of public enforcement mechanisms used. FCA sanctions apply if breached. In some circumstances, can also lead to an action for damages from those who suffer loss as a result of the breach. Could also have other consequences such as increased capital requirements Interplay with Financial Ombudsman complaints process for firms dealing with private individuals Private: limited, but could be taken into account in private law actions May rely upon market forces to secure a given result. Breach could affect attitudes of counterparties and clients and therefore firm’s commercial position	A2–3	H1.2
FCA Evidential Rules (s138C FSMA)—applicable to firms	Apply to all authorised firms except inward business under an EU cross-border passport. However, indicative only. Compliance with these will tend to establish compliance with another specified rule and breach will tend to establish non-compliance	Public: no sanction for breach, but may be relevant to whether a binding rule breached—see above Private: limited, but could be taken into account in private law actions	A2–3	H2
FCA General Guidance (s139A FSMA) Generally set out in the FCA Handbook or in a separate ‘Regulatory Guide’ or, in an emergency, in a Guidance Note	Guidance on the operation of specified parts of FSMA and on the FCA rules and the FCA’s functions, therefore, relevant to authorised firms in complying with the above. Must generally be consulted upon in the same way as rules Not binding on the courts	Public: not binding and does not have evidential effect. Enforcement action would turn on breach of a binding rule to which the guidance relates However, FCA has indicated that where a person acts in accordance with general guidance, FCA will proceed as if the person has complied with the requirement to which the rule relates Private: limited, but could be taken into account in private law actions	A2–3	H2
Other FCA material: informal guidance/expressions of view—in consultation papers, feedback statements, discussion papers, speeches	Potentially relevant to all authorised firms except inward business under and EU cross-border passport to the UK	Public: not binding and does not have evidential effect, but taken by the industry as providing a further gloss on the way the FCA is likely to enforce particular Principles or Rules Private: limited, but could be taken into account in private law actions	A2–3	H2
FCA Senior Managers Regime89	Requirement for FCA individual approval for those managing aspects of the firm’s affairs relevant to regulated activities which could involve a risk of serious consequences for the firm or business or other interests in the UK	Public: a range of FCA sanctions can be applied under the FCA Code of Conduct to an individual who fails to discharge responsibilities Private: limited, but could be taken into account in private law actions, including between an individual and their employer. Could also be taken into account in the context of membership of professional bodies and by future potential employers	A2–3	H1.2
FCA Code of Conduct	Applies to all employees in a firm other than those performing a role not specific to the financial services business of the firm, such as drivers	Public: full range of FCA sanctions applies if breached. Could also have other consequences such as increased capital requirements Private: limited, but could be taken into account in private law actions including between an individual and their employer. Could also be taken into account in the context of membership of professional bodies and by future potential employers	A1	H1.2
Regulated markets
Membership rules, etc. of UK regulated markets (IPSX, London Metal Exchange, ICE Futures Europe, London Stock Exchange, Euronext London, NEX Exchange, Cboe Europe Equities)90	Apply to market participants that need membership of the relevant markets to carry on business, and may have an impact on the terms on which those participants can transact in the market. Concern the operation of and conduct within the relevant markets	Public: regulated markets are required to maintain these as condition of being permitted to operate. Breaches by market participants could affect the exercise of regulatory discretion or even involve a breach of regulatory rules Private: generally enforceable against members as a private law matter under the terms of membership; may also involve rights between members. Breach could affect market perception	A2–3	H2
Multilateral trading facilities/organised trading facilities
Effectively a form of investment market operated by financial firms or market operators.91 Access will generally depend upon entering into a user agreement and agreeing to comply with various operating standards setting out the terms on which the operator is willing to allow access, and also reflecting regulatory requirements	Apply to market participants that need access to the relevant platforms to carry on business, and may have an impact on the terms on which those participants can transact in the market	Public: operators are required to maintain these as a condition of being permitted to operate. Breaches of user terms and standards by market participants could affect the exercise of regulatory discretion or even involve a breach of regulatory rules. Private: user terms generally enforceable against users by operator as a private law matter under the terms of membership; may also involve rights between users	A3	H2
Infrastructure providers
Membership and operating rules of market infrastructure providers (e.g. payment systems such as CHAPS, central securities depositaries such as Euroclear UK & Ireland and central counterparties such as LCH Limited)92	Apply to market participants that need membership of the relevant organisations to carry on business (i.e. effect payments, clear transactions and hold UK securities), and may have an impact on the terms on which those participants can transact with third parties	Public: the relevant infrastructures are required to maintain these as a condition of being permitted to operate. Breaches by market participants could affect the exercise of regulatory discretion or even involve a breach of regulatory rules Private: generally enforceable against members as a private law matter under the terms of membership; may also involve rights between members	A3	H2
Other UK Codes with a legal footing
The Corporate Governance Code (FRC)	Sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders All companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to report in their annual report and accounts on how they have applied the Code. Tends to be regarded as relevant by other authorised firms because it is believed that the PRA and FCA refer to it in setting governance standards	Public: ‘comply or explain’ for UK-listed firms. Otherwise, no direct sanction Private: relevant to assessment of company by potential investors/clients. Could be taken into account in private law actions	A1–2	H2–3
The Stewardship Code (FRC)	A statement of good practice to which the FRC believes institutional investors should aspire. It also describes steps asset owners can take to protect and enhance the value that accrues to the ultimate beneficiary	Public: all UK-authorised Asset Managers are required under the FCA's Rules to produce a statement of commitment to the Stewardship Code or explain why it is not appropriate to their business model Private: ‘comply or explain’. Could be taken into account in private law actions and by potential clients	A1–2	H2–3
The Takeover Code (Takeover Panel)	Intended to reflect collective opinion of those professionally involved in takeovers as to appropriate business standards, fairness to offeree company shareholders and an orderly framework for takeovers. While the Takeover Panel was originally a private body, it has since been designated as the authority to carry out certain regulatory functions set out in Chapter 1 of Part 28 of the Companies Act 2006. As a result, the rules set out in the Code now have a statutory basis	Public: may issue a private or public censure, suspend or withdraw any exemption, approval or other special status which the Panel has granted May report conduct to a regulatory authority particularly the FCA to decide whether to take action (including fines), for example, where a firm fails to observe proper standards of market conduct May publish a Panel Statement indicating that the offender is someone who is not likely to comply with the Code. FCA rules and certain professional bodies oblige their members, in certain circumstances, not to act for the person in question in a Code transaction (cold shouldering) May issue directions (enforceable through the courts) and order the payment of compensation Certain breaches of bid documentation rules constitute a criminal offence Private: Panel grew from the private not public sector but now placed on a statutory footing Regime is intended to reduce scope for recourse to the courts in matters covered by the Code	A2	H1.2–3
The Joint Money Laundering Steering Group Guidance Notes	The JMLSG is comprised of the leading UK financial services trade associations. Its aim is to promulgate good practice in countering money laundering and to give practical assistance in interpreting the UK Money Laundering Regulations, principally by publishing guidance	Public: no sanction for not complying with the guidance, but potentially relevant to whether the primary money laundering prohibitions, the Money Laundering Regulations or other regulatory rules have been breached. Courts required to take account of behaviour in accordance with the guidance in certain circumstances. FCA has regard to whether conduct complied with the guidance in determining whether requirements breached93 Private: limited	A2–3	H2
Private UK codes ‘confirmed’ by the FCA94
Libor Code of Conduct, Investment Association guidance on electronic instructions	The first was adopted by ICE Benchmark Administration Limited for benchmark submitters to ICE LIBOR. Intended to provide a framework within which contributing banks can operate and to assist users of LIBOR rates when deciding whether LIBOR is an appropriate rate to use in contracts	Public: the FCA will regard firms following the guidance as complying with the relevant FCA Handbook rule. But failure to comply with the guidance does not indicate failure to comply with the rule.95 (Knowingly or deliberately making false or misleading statements in relation to benchmark-setting is a criminal offence under the Financial Services Act 2012 and the FCA’s rules on benchmark submission are in Chapter 8 of its Market Conduct Sourcebook) Private: limited, but could be taken into account in private law actions and impact market perception	A2–3	H2
Other private UK/international industry codes for financial services firms
Codes produced with the active involvement of regulators, especially the Bank of England and other central banks: (a) the UK Money Markets Code (a voluntary code of good practice for the money and securities financing markets facilitated by the Money Markets Committee which is chaired by the Bank of England), (b) the FX Global Code (a voluntary code of good practice in the global FX markets developed by the FX Global Committee comprised of central banks and FX market participants) and (c) the London Bullion Markets Global Precious Metals Code (standards and best practice expected of participants in the global wholesale precious metals markets)	Voluntary, but regulators take a keen interest in adherence. Central banks (through the FX Working Group) have published a ‘blueprint’ on adherence to the FX Global Code.96 The Bank of England is involved in key oversight committees The FCA has formally ‘recognised’ the FX Global Code and the UK Money Markets Code. As a result, behaviour consistent with these codes will tend to indicate a person subject to the Senior Managers and Certification Regime is meeting their obligation to observe ‘proper standards of market conduct’ in relation to unregulated activities97	Public: not directly enforceable, but levels of compliance could influence the exercise of regulators’ supervisory powers and could be relevant to whether other rules have been complied with, whether by firms or individuals Private: limited, but could be taken into account in private law actions and impact market perception	A1–2	H2–3
Industry association conduct standards produced by, for example, the Alternative Investment Management Association, the Asset Backed Finance Association, the Association of British Insurers, the British Private Equity and Venture Capital Association, the International Capital Markets Association, the Investment Association, the International Forum of Sovereign Wealth Funds, the International Swaps and Derivatives Association, the Lending Standards Board, the Standards Board for Alternative Investments, the Wolfsburg Group	Generally voluntary in that firms usually have a decision as to whether or not to join the relevant body or on the extent to which they will adhere to the relevant written norms. Codes issued by industry bodies in areas of the financial markets that are heavily regulated generally concern matters of technical compliance with regulatory rules, whereas codes concerning conduct in more lightly regulated parts of the market are more likely to be in the form of over-arching conduct codes	Public: no direct sanction, but in some cases, these standards could be referenced by regulators in deciding whether standards under their rules have been met Private: in some cases, private bodies may rely to some degree upon Court-enforced contracts (such as membership agreements) to secure compliance. Otherwise, generally rely upon a mixture of private enforcement mechanisms. Could affect market perception if not followed	Lightly regulated market sectors: A1–2 More heavily regulated market sectors: A1–3	H3
Other private UK codes for individuals working in the financial services sector
Codes produced by the Chartered Banker Institute, the Chartered Financial Analysts Institute, the Chartered Institute for Securities & Investment, the Chartered Insurance Institute, The London Institute of Banking & Finance, The Worshipful Company of International Bankers	UK professional and other membership bodies. Codes voluntary, but could affect continued membership	Public: no direct sanction. Private: generally rely upon a mixture of private enforcement mechanisms. Breach could be relevant to whether employment contracts breached and employment decisions by employers and potential employers	A198	H3
Firms’ own codes of conduct
Firm-specific	Frequently apply group-wide within international financial services groups, including UK staff who are expected to comply as part of the terms of their employment	Public: no direct sanction, but the extent to which a firm has complied with its own standards could be relevant to the exercise of regulatory discretion Private: privately enforced within the firm, including under the terms of employment contracts, but also using career progression and remuneration decisions. Could be relevant to private law action, for example, in assessing the nature of a firm’s duties to third parties	A1–2	H2–3