I recently attended a roundtable to discuss the forthcoming UK Money Markets Code (which ironically will not cover MMFs). The opening sentence uttered by a banker who was co-hosting the meeting was “this is not regulation by the back door”. I listened, argued, tried to believe it, but don’t.
If bankers want to impose ‘soft regulation’’ on themselves that is fine (and arguably laudable) but my real concern is that old saw of ‘unintended consequences’... Basically any corporate who is “regularly active” in placing money on deposit, investing in repos or borrowing and lending securities will be caught by the Code. “Regularly active” is yet to be defined but I’m led to believe that if you have more than one choice of bank with which to place your excess funds on deposit, you’re probably caught.
For decades now, the ACT has supported the old Non-Investment Products (NIPs) code, which sets out best practice in the market for otherwise unregulated financial products. The NIPs code was truly voluntary and didn’t require statements of adherence. But unfortunately the old NIPs code didn’t stop bankers from manipulating the financial markets and so there are two new Codes of Conduct currently under development: the Global FX Code (being led by the Bank for International Settlements – BIS) and the UK Money Markets Code (UK Code) being led by the Bank of England.
Is the UK Code a good idea? I believe it is. A code of conduct outlining how everyone should behave if they wish to participate in that market can only be a good thing. Both bankers and corporates should behave ethically, have a governance framework, a robust control environment etc.
However, I have two issues with the Code:
Firstly, Adherence: the UK Code has a number of best practices which were primarily written for financial institutions and aren’t really appropriate for the majority of corporates. Requiring voice recording equipment, not allowing the use of mobile phones to transact a deal are just some examples of these. The draft Code very helpfully states that adherence is proportional and that judgment can be used in assessing whether it is appropriate and practical to adopt all practices. However, and this is the issue I have, I believe the onus will be on the corporate to demonstrate their adherence was proportional and justify their judgement, if a dispute or litigious situation ever arose.
Secondly, Adoption: I have an issue with the potential application of the UK Code. Or to put it more bluntly: bankers embedding a statement of adherence to the UK Code into contractual terms and conditions (or any other documentation for that matter). The draft version of the UK Code states that it’s voluntary and that it will not impose legal obligation on UK Market Participants. But is it truly voluntary and without legal obligation when a bank references it in a legal contract (and that includes Terms of Business)? I think not. (oh, and if you’re a banker reading this, even the largest corporates would find it difficult to negotiate a regulatory point out of a contract). On top of this, even with a great marketing campaign I believe that there will be corporates who are not aware of the Code and its contents.
