On 28 January 2020, the FCA published a Dear CEO letter (dated 24 January 2020) setting out the regulator’s view of the potential harm as well as the underlying drivers that benchmark administrators could pose to their customers and the markets in which they operate.

The FCA sees three main ways in which benchmark administrators could harm consumers or markets:

  • customers receiving sub-standard quality benchmarks;
  • disruption to the market from poorly managing the cessation or recalculation of benchmarks or a lack of operational resilience at firms; and
  • customers paying excessive fees and charges resulting from high costs of switching, complex licensing arrangements and a preference from customers to use established benchmarks.

The FCA notes that the harms set out above can arise from inherent characteristics such as conflicts of interest in business models, market structures or cultural factors at firms.

Over the next two years, the FCA will engage and work with benchmark administrators where necessary to continue to develop its understanding and continue to identify factors which can lead to harm, particularly focussing on the areas set out below:

  • sub-standard quality. The FCA expects firms to regularly review their governance and controls to ensure their robustness. The FCA will undertake its own review over the next two years, which will include on-site visits. It also expects firms to ensure that there are appropriate controls around the confidentiality, integrity and availability of data in their organisation, which are regularly reviewed and tested. The FCA states that it will engage with larger firms regarding their operational resilience and share its findings more widely if there are wider lessons to be learned;
  • excessive fees and charges. The FCA has found from its wholesale sector competition review and asset management market study that competition may not be working well in the provision of benchmarks. To understand the harm relating to the way data in wholesale markets is purchased and used, it is planning a call for input on access to data in wholesale markets. It will use this to better understand the issue and determine whether any remedial action is necessary;
  • extension of the senior managers and certification regime (SMCR) to benchmark administrators. In December 2020, the SMCR will be extended to benchmark administrators, with the aim of improving senior management accountability. The FCA states that this is an opportunity for all firms to reflect on their standards of governance and to implement any necessary improvements; and
  • end of LIBOR. Firms should prepare for the end of LIBOR after the end of 2021. If a firm administers benchmarks which reference LIBOR or LIBOR related products, or uses LIBOR in the operation of its business, it will need to make changes to transition to alternative rates and communicate with its users.