Speech delivered by Mark Yallop, FMSB Chair, on 28 February 2020 at the 2020 IOSCO Stakeholder Meeting
‘Behaving Fairly: Artificial Intelligence and Conduct in Wholesale Markets’ – Speech delivered by Mark Yallop
Speech delivered by Mark Yallop, FMSB Chair, on 2 December 2019 at the 2019 Toronto Refinitiv Summit, Canada
‘Behaving Fairly: Artificial Intelligence and Conduct in Wholesale Markets’ – Speech delivered by Mark Yallop
Speech delivered by Mark Yallop, FMSB Chair, on 28 November 2019 at the 3rd International Workshop on Behavioural Financial Regulation and Policy, Bank of Italy, Rome
“China and the Global Economy – Financial Reform and Unlocking Opportunities” – Speech delivered by Mark Yallop on 29 October 2019
Financial Reform and Unlocking Opportunities – Painters’ Hall, London, 29 October 2019.
“FMSB 2016-21” – Speech delivered by Mark Yallop on 14 May 2019 at the IOSCO Board Meeting in Sydney
IOSCO Board Sydney 14 May 2019
“Wholesale Market Manipulation” – Speech delivered by Mark Yallop at the Deloitte Capital Markets Seminar on 5 April 2019
Deloitte Capital Markets Seminar 5 April 2019
Evolve or Perish – The Global Forces changing the business of Banks Geopolitical Threats and Opportunities for Europe – speech given by Mark Yallop
Financial Regulatory Outlook Conference 2018 Evolve or Perish – The Global Forces changing the business of Banks Geopolitical Threats and Opportunities for Europe Palazzo Taverna, Rome, 28 November 2018 Speech given by Mark Yallop (Chair, FMSB) As I have told some of you before, I was staying in the Borghese gardens when I woke up two and a half years ago to the news that my country had voted for Brexit. Notwithstanding this alarming memory, it is a huge pleasure to be in Rome and I thank you for inviting me back here to be with you at this conference. When thinking about what I might say to you this evening I first thought I might discuss the macroeconomic challenges facing the eurozone; how the most productive EU economies benefit most from an undervalued Euro; how monetary union is creating an unintended but damaging divergence between the north and the south, with massive persistent surpluses in the former and deficits in the latter; and how domestic demand has been suppressed in the periphery to sustain the union. But then I thought that – as a Briton speaking in Rome – this might seem rather unattractive, if not downright undiplomatic. I also considered talking about the problems created by the shifting political landscape; the popular disenchantment with mainstream politics; the lack of respect for experts and great public institutions; the lack of informed public debate about the balance between the safety and soundness of the financial system and the need for economic growth; and the need for a clearer defence of open markets and capitalism. But then I realised that – as a Briton speaking in Rome – this too might seem rather presumptuous. So I thought I would speak briefly about two other challenges that I see for Europe, its economy and financial system and its regulators: trust and technology. In truth they are global challenges; but clearly also highly relevant for our own region here. Let me first address trust, and particularly the loss of trust in the financial system and financial markets that has occurred in the past decade. The crisis that broke over us 10 years ago inflicted extraordinary damage. On top of the staggering outright losses incurred by firms and individuals, the fines imposed for misconduct now total almost $400 billion, the cost of remediation for firms runs to between $5-10 billion, and a generation of bankers have been wiped out. To give you sense of scale, $400 billion, had it been retained as capital in the banking system, would have supported well over $5 trillion in bank lending – equivalent to about 40% of all bank lending today in the United States. However, the real harm done a decade ago was not financial, but rather reputational damage – to trust in the financial system, in financial services firms and in financial services regulators. And this reputational harm and loss of trust has had a real cost to us all in terms of higher costs of capital, lost opportunity and the erosion of the social licence to operate needed by the financial services industry. A decade on, countless surveys show that trust in financial services and banking in particular is still very low: both by the public in bankers and by employees in banks with respect to their own firms. I was in Australia three weeks ago when coincidentally the latest Trust Project survey findings revealed that just 18% of Australian citizens trust their banks; so you can work out quite easily how many don’t trust them. Of course regulators have been very busy in the past decade, repairing things that were broken and making individual firms and the system as a whole much safer. But – and this is the central message I want to convey this evening in connection with trust – regulation cannot fix the “trust deficit” that persists; however much we may want it to. Fundamentally, this is because the conduct and culture of people and firms in financial services are determined by factors well outside the scope of financial regulation; factors that are the province of psychology, social science, behavioural economics, philosophy and the law; that manifest themselves in complex ways; and in which a series of collective action and prisoners dilemma problems make embedded conflicts of interest very hard to address. It is also fair to point out that regulation can struggle with the rapid pace of innovation in the private sector; the asymmetric imbalance of knowledge and resources between public sector regulators and the private sector; and a global financial services industry that transcends national jurisdictional and regulatory boundaries. I must emphasise that I am not arguing that regulation is a bad idea or doomed to fail – rather that it is a necessary, but not sufficient, condition for fair and effective financial services. Something else beyond regulation has to be addressed if trust in financial services is to be rebuilt. If you need proof of this thesis then I refer you to work that has been done by the FMSB recently which shows that over 235 years since the dawn of modern capital markets, across hundreds of cases of misconduct in finance in 25 jurisdictions worldwide, just 14 types of behaviour repeat again and again across time, markets and jurisdictions and together explain effectively all market misconduct that has been prosecuted. Every time a major problem occurs, the same cycle ensues: an investigation is conducted, an authoritative report is written, new laws are passed and regulation created. Then a few years later, in another part of the world or another market – or even in the same part of the world and the same market – precisely the same misconduct repeats itself. The law in the UK that was used to prosecute LIBOR manipulators in 2014 was the very same law that was created in 1814 to prosecute the first manipulators on the UK government bond market at the end of the Napoleonic Wars. I believe that the biggest missing pre-requisite for trust to be rebuilt is a comprehensive and sustained effort by the private sector, undertaken willingly and not at the end of the regulators gun barrel, to define the standards by which business will be done and how the private sector will measure itself against these standards verifiably, and in public. Only with such public, voluntary and measurable scrutiny can trustworthiness be established and the first steps taken to rebuilding trust itself. There is already good work being done in this area, not only by my organisation FMSB, by the UK Banking Standards Board and other parallel organisations; but there is quite a steep hill still to climb before this work is complete. Let me now turn to my second topic: technology. I believe that massive technological advances in computer processing power, data harvesting and storage, machine learning, open access, cloud computing and the distributed ledger, as well as changes to come – for example in quantum computing – all will mean very significant changes over the next 15-20 years in financial services and, necessarily therefore also, for regulation. Many of these changes will result in huge benefits, for example in the area of financial inclusion where they could enable the 1.5 billion people globally who have no access to banking to receive financial services, or in combating financial crime where new technology, data science and artificial intelligence should materially help fight the criminal and terrorist exploitation of financial services intermediaries. Without in any way underplaying these benefits I want to focus this evening on the challenges that will also be encountered, as they must be addressed but haven’t yet received much attention. The biggest change that new technology will bring is the disaggregation of what have hitherto been highly integrated bank business models – in which essentially all activities, risk, infrastructure and governance have been located inside a single legal entity or group of closely related legal entities. This corporate structure has in turn driven the approach to bank regulation, which has everywhere in the world developed policies and supervision tailored to the legal entity structure of the industry. In future it is most likely that material banking risks, and the accountability for those risks, will not sit so neatly inside simple, easily-supervisable, legal entities. It is highly probable that bank business models will change materially to reflect the opportunities offered by advanced data science and AI. It seems logical that “data rewards” available to those firms with advanced data harvesting and analysis capabilities will confer greater advantages than simple algorithmic prowess. In this case, it seems likely that firms with the best data scientists are likely to have a systematic competitive advantage over their peers; and in all likelihood will be able to grow at a structurally higher rate. If this is the case it is likely that such firms will outstrip medium and smaller sized firms to create a new tier of “globally significant” financial services providers enabled by data science – potentially a very different group of firms from today’s GSIBs. Different skills will be needed by banks to compete in a highly technology enabled, data rich world. Where previously asset gathering and balance sheet management were critical, in future data gathering and analysis will be crucial. Where scale and the techniques of mass production have been critical to compete on cost, in future tailoring services to specific customer profile will be key. Where personal relationship management was a critical differentiator, in a digitised world optimising the “best fit” for your customer using data science will be essential. Where firms have hitherto retained customers by raising barriers to exit, they will in future have to work harder to create sticky retention-ties based on the quality, excitement and convenience of their data-enabled services. Where human judgement has been a differentiating advantage, in future competition will be driven by data-fuelled artificial intelligence. Faced with these challenges some firms will likely opt to become “dumb pipes” to other product providers while other firms will choose to become “supermarkets” offering a wide range of banking, and non-banking, services under one roof. Probably, some of these supermarkets will have their ancestry in technology and e-commerce rather than in banking. Not-for-profit industry utilities and infrastructure providers are likely to be attracted by the opportunities presented by data harvesting and analysis, just as much as traditional profit-maximisers. The human resources, talent management and governance structures of firms will likely be severely tested by these changes, and firm cultures will be tried in ways that they have not previously. In all probability we will face a war for data science talent similar or greater in intensity to that experienced by banking in the heady days of the late twentieth century. All these developments will create challenges for the regulators. The shape of the regulatory perimeter will need to be revisited. And where risk sits inside the perimeter will change. For macro-prudential regulators, the shape and structure of the financial services system will change. But it may also become less diverse – due to the accelerated growth opportunities for data leaders, or because of the arrival in financial services of new, concentrated technology firms. The financial system is likely to be more interconnected, a particular hazard already identified by the G20 in 2009 and which regulators have been trying to mitigate for the past decade. The types of risk that are systemic – potentially a hazard to the entire financial system – will be different. And the viability of firms that are today traditional, major players in banking may be threatened if their business models are “salami-sliced” by new firms gouging profitable tranches of the integrated banking industry. Micro-prudential regulators face a digital world with analogue tools. The traditional micro-prudential tools – of supervision, capital and liquidity – may be inadequate safeguards of safety and soundness. Risk distributed across multiple technology providers will be much more difficult to assess than in the current integrated bank with bilateral or central counterparty risk profiles. Individual accountability regimes will be sorely tested, or even undermined, by artificial intelligence-driven decision making: who is making the decision in an algorithm that has “taught itself” based on past observations that are not visible to human management? Regulators will also find it useful, or even essential, to standardise or harmonise their rule books to automate and make them AI-interpretable; and will have to rethink how they gather and interpret regulatory data from firms they supervise. For conduct regulators interesting challenges will arise from the changes in the way that consumers interact with financial services providers in a data-enabled, high technology market. Less experienced consumers may be able to access sophisticated products and services rather more easily than would be ideal. The way in which consumer protection is provided may need to change markedly. And judging the effectiveness, or otherwise, of competition will need new skills. While sophisticated AI and strong data analysis may make conduct problems less frequent, the interconnectedness of the financial system may well make them larger, more contagious and more serious when they do occur. Regulator challenges will not end there, either. Banking and financial services regulators will need to think through, in the light of the probable changes I have described above, quite a few fundamental issues. Should financial services regulators try to address a much changed, technology-driven market by expanding their own responsibilities and purview; or by finding friends among data regulators? And if the latter, how should regulatory collaboration be ensured to deliver effective policy and oversight? In particular, how should disparate and under-developed personal data standards be developed to protect financial services customers and providers? An important related question is how technology and AI may impact the legal framework and decision making that underpins the financial services industry and regulatory structures that oversee it? How do we want ethical dilemmas that might have been decided using human judgement in the traditional legal system to be resolved in a world when, increasingly, artificial intelligence may be being used to cut the cost and increase the efficiency of legal dispute resolution? There is also an uncomfortable tension between global technology business models and the (necessarily) local focus of legal structures to safeguard consumers of technology services. Underpinning all of the above is of course a bigger existential question: namely what degree of delegation society will accept in terms of financial services data ownership, management and analysis. This is particularly pertinent in view of the damage inflicted on trust in financial services in the past decade. There are those who argue that consumers will take a different attitude to privacy for personal financial data to that they have for social media data, and that this will limit the scale of the challenge to financial services providers, but this remains to be tested. With all these questions unanswered – even unanswerable – today it would be easy to become discouraged. But I am an optimist and I look forward to the technology- enabled, data-rich future. In particular I am encouraged by the idea that there are obvious links between the trust “challenge” and the opportunities created by new technology. Greater transparency about how business gets done and decisions get made is key to rebuilding trustworthiness. And the techniques of data harvesting and analysis can create this transparency. So, while addressing the many questions posed by data science and new technology, we need also to be asking ourselves how these powerful new tools can be used to tackle the deficit of public and market user trust that has, very unfortunately come to bedevil financial services. By answering this question I believe we can do much to create the stronger and more highly regarded financial services industry and markets that we need to support economic growth for our children. Ladies and gentlemen, thank you for your attention.
True Finance – Ten years after the financial crisis Speech given by Mark Carney Governor of the Bank of England Chair of the Financial Stability Board Economic Club of New York 19 October 2018 Read the speech here: https://www.bankofengland.co.uk/speech/2018/mark-carney-economic-club-of-new-york?utm_source=Bank+of+England+updates&utm_campaign=3a5090062e-EMAIL_CAMPAIGN_2018_10_19_04_00&utm_medium=email&utm_term=0_556dbefcdc-3a5090062e-111026421
Addressing Misconduct in Capital Markets, Keynote Speech at 2018 Refinitiv Pan Asian Regulatory Summit
Ms Julia Leung Deputy Chief Executive Officer and Executive Director, Intermediaries 9 October 2018 Good morning. It’s an honour to be invited to the 2018 Refinitiv Pan Asian Regulatory Summit to deliver this keynote speech. We live in a time of great promise and great peril. New technologies are having a profound impact on the sciences as well as businesses and economies. The rapid development of artificial intelligence and machine learning has changed the way financial firms provide customer advice, how trading orders are executed and how regulators conduct surveillance. This is not a gradual evolution — it’s a revolution. In the midst of rapid technological and financial innovation, it’s easy to forget that economic development is predicated on fair and efficient capital markets. So I thought this would be an opportune time to reflect on the basic yet essential role that market regulators play in tackling misconduct in capital markets and how that ties in with our current regulatory approach at the Securities and Futures Commission (SFC). Importance of regulating capital markets A decade on from the Global Financial Crisis (GFC), it is worthwhile to reflect on how a combination of misconduct and excessive risk taking can destroy trust and prevent markets from functioning properly. The sub-prime mortgage crisis in the US had its roots in lax underwriting standards and risky lending which fuelled a housing bubble. Banks repackaged poor quality loans via the securitisation process. Flawed credit ratings were assigned to complex products and they were mis-sold to investors as high-credit-quality securities. When the US housing bubble finally burst, global financial institutions suffered crippling losses on their balance sheets. Confidence deteriorated and interbank lending seized up. The evaporation of public trust led to bank collapses and rescues in the UK and the US. More recently, failures of peer-to-peer lending platforms in mainland China were triggered by a series of high-profile scams coupled with tightening credit, liquidity and regulatory conditions as authorities reined in excessive lending after years of explosive growth. These are stark reminders of the need for regulators to tackle fraud, excessive risk-taking and misconduct in capital markets. As a regulator in an international financial centre, the SFC is charged with maintaining and promoting the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures markets. But as both a conduct regulator and a prudential regulator, our objectives are not limited to safeguarding the interests of investors and minimising fraud and market misconduct. Our role also extends to maintaining Hong Kong’s financial stability and mitigating systemic risk. I’ll now talk about the characteristics of capital markets that give rise to misconduct and how the SFC addresses it. Characteristics of capital markets that give rise to misconduct Recently, the FICC (1) Markets Standards Board (FMSB) published a fascinating study of “Misconduct Patterns in Financial Markets.” The study examined 390 cases from 26 jurisdictions, spanning 225 years, to identify the causes of misconduct. It found that misconduct has been similar across time, asset classes and jurisdictions. In other words, there is a core set of underlying behaviours which recur over time. These patterns also have a tendency to adapt to both new technologies and market structures. Twenty-five specific patterns of misconduct were identified and these can be classified into seven broad behavioural categories: price manipulation, wash trading, improper handling of client orders, misleading customers, manipulating reference prices (such as benchmarks), trading on inside information and collusion. The FMSB report cited a case in US in 1929 when the president of a listed company used dummy accounts he and his associates controlled to conduct wash trades. What is the modern day version like? In Hong Kong, China AU Group Holdings Limited issued convertible bonds in 2009 to finance an acquisition of Mainland property. Its then-CEO and her two associates opened 14 securities trading accounts in various names. The SFC alleged that the former CEO funded these accounts to trade China AU shares to create a false and misleading impression of active trading so that the fundraising exercise would appear more attractive to potential investors. In August, the Market Misconduct Tribunal found the former CEO and her two associates culpable of false trading. Understanding misconduct and the behavioural patterns behind it helps us design a more robust and effective control framework. It also reinforces the industry’s collective memory. New joiners who have no experience of prior failings are made aware of them. So what are the characteristics of capital markets that enable misconduct to occur in the first place? Well, we’ve actually touched on some of them already. First is the age-old problem of conflicts of interest. When discussing the GFC, I alluded to credit rating agencies which were incentivised to assign higher credit ratings to debt instruments to win more business. In capital markets, there are inherent conflicts of interest in the way firms operate. Whether as market makers or as sole proprietary traders, they may be trading as an agent for clients or as principal. Their interests in price movements may conflict with those of their clients, opening the way for possible misconduct. For example, when transacting for clients as agents in opaque markets, they may hide and retain any price differences behind obscure fees and charges. The SFC reprimanded Societe Generale in July 2012 for failing to disclose that it retained the difference between the actual transacted price and what it charged clients for over 3,000 secondary market transactions in over-the-counter (OTC) bonds, options and structured notes. As part of the resolution of this case(2), Societe Generale, without admitting liability, agreed to reimburse affected customers with interest. It has since taken steps to overhaul its systems and procedures to be fully compliant. The opacity of OTC trading makes it relatively easy to charge mark-ups or spreads to unsuspecting clients. This opacity and the complexity of some of the financial products traded over the counter impede effective market surveillance by regulators and make it more difficult to detect misconduct such as manipulation, mis-use of information, front running and collusion. Next, let’s mull over the lack of senior management accountability. No doubt we’ve all seen the prominent news coverage of firms being taken to task and fined for misconduct. But even when charges were brought against individuals, senior management deflected attention from their own failings during the GFC and laid the blame on rogue traders. Very few senior executives were prosecuted. It’s not difficult to see why the public and even the individuals concerned have the false impression that senior management or star employees are not personally liable for misconduct. Finally, as I alluded to earlier, financial innovation, particularly automation and algorithmic trading, heightens misconduct risk by magnifying existing concerns and introducing new ones. By enabling more transactions to be conducted even more quickly, automation makes it even more challenging for regulators to monitor and analyse the huge volume of trading data as well as to ensure that market integrity is maintained. Questions have been raised over the role of automation and algorithms in flash crashes such as the one in August 2015 when the S&P 500 fell 5% within minutes of opening. Some commentators argued that market volatility was exacerbated by high-frequency trading and market makers holding back liquidity because their computer models malfunctioned or shut down. The SFC’s regulatory approach But are we doomed to repeat the mistakes of the past? Are market misconduct, excessive risk taking and the cycles of boom and bust going to stay with us? Is the notion of stopping misconduct in capital markets a lost cause? Of course not. Alice in Wonderland has to keep running just to stay in the same spot in the race with the Red Queen. We regulators have to do better — to keep running a step ahead of the bad actors. We need to adapt to the times and arm ourselves with the appropriate technologies, data and methods to combat misconduct more effectively with the resources at our disposal. Throughout history bad actors have exhibited the same behaviours and recycled the same old tricks. So the SFC aims to drive and mould good conduct to achieve the desired regulatory outcomes. Rather than letting potential issues fester and morph into more serious problems later on and then using our enforcement and disciplinary powers to deal with the fallout, our tactic is to pre-empt them. This means adopting a front-loaded regulatory approach whereby we intervene at an earlier stage with targeted actions designed to achieve a quicker, more impactful outcome. Before I go into more detail, I want to clarify that enforcement still has an essential role as a regulatory tool for deterring bad behaviour. My colleague Tom Atkinson will speak here tomorrow on the role of enforcement. However, disciplinary action is not the panacea, and it takes time. The point is, no single regulatory function can address today’s complex misconduct risks. We need to pool our regulatory expertise and industry knowledge to home in on nascent issues and tackle misconduct in a coordinated, holistic manner. That’s why we’ve adopted the “One SFC approach”, so that we can put our heads together to unmask the masterminds, unravel ulterior motives and hidden agendas and expose linkages among the connected parties behind misconduct. Misconduct in the listed market Two years ago, we formed a multi-disciplinary project team called ICE after the first letters of our Intermediaries, Corporate Finance and Enforcement divisions. The team’s objective was to identify patterns of misconduct that aims to manipulate stock prices, rig shareholders’ votes or scam minority shareholders. Even though the so-called “con stock” activities involve a small number of listed companies, the reputation risk for Hong Kong is not small. The ICE team’s strategy has had tangible results. An early success was against price manipulation of GEM shares. There was a pattern: high concentrations of GEM shares were placed with a few shareholders, with 10% or less suspected to be distributed among a number of nominees. On the first day of listing, prices soared multiple times (3) only to fall flat later, suggesting a pump-and-dump scheme. In response, the SFC and Hong Kong Exchanges and Clearing Limited issued a joint statement (4) in January 2017 which detailed our regulatory concerns (5). The SFC concurrently issued a guideline (6) to sponsors, underwriters and placing agents involved in the listing and placing of GEM stocks. Following our intervention, the average first day price change of newly-listed GEM stocks immediately dropped to a more normal level of 20%, where it has since remained. ICE also took on the dubious market activities associated with shell companies. Our response was clear – better gatekeeping at both the front gate and the back gate. In cases where we suspected that listing applicants reported seriously inflated sales figures, the SFC exercised its power (7) to query the listing applications, which were subsequently withdrawn. In cases where vote rigging was suspected, we invoked our power to order suspension of trading in the shares (8). In 2017, around 40 cases involved the actual or potential use of these powers, compared to only two or three such cases in prior years. We also put sponsors in the spotlight. We identify sponsors with a history of having their sponsored listings rejected because of substandard work. These sponsors have a higher chance of being inspected by us. If our supervisory inspection identifies poor quality sponsor work (9), we open an enforcement investigation. Our recent inspections uncovered a worrying trend of intermediaries concocting convoluted arrangements to either conceal the identities of the beneficial owners of securities or cloak their true intentions, such as to engage in margin lending. Firms should not facilitate market misconduct by making “nominee” or “warehousing” arrangements for their clients. To protect investors and maintain the integrity of the markets, the SFC will not hesitate to take stiff enforcement action against the perpetrators as well as the firms and individuals who participate in such arrangements. Our intervention tools also include requiring immediate rectification of bad behaviour, imposing licensing conditions or issuing a restriction notice on the intermediary to limit or, in extreme cases, to prohibit some or all of their regulated activities to mitigate and control the risk. We’ve adopted similar approaches to manage the risks posed by persistently loss-making but thinly-capitalised brokers who struggle to meet their minimum liquid capital requirements. Misconduct in the wholesale market Let me now shift to the decentralised wholesale market. As discussed earlier, inherent conflicts of interest coupled with a lack of transparency is a recipe for misconduct. That’s why globally, this issue is most taxing to conduct regulators. The SFC Code of Conduct (10) requires intermediaries to disclose material interests or conflicts to the client. The client’s best interest is the overarching principle. While this seems like a simple rule to follow, firms sometimes conflate their principal roles and their agency roles. We have made this the theme of a joint inspection we conducted with the Hong Kong Monetary Authority (HKMA). The HKMA examined the wealth management unit of a bank that sourced in-house products as agent, and the SFC inspected the books of the securities unit in the same banking group that sold the products as principal. We are able to identify conflicts of interest by examining both ends of the same transaction. Thematic reviews allow us to deploy our limited regulatory resources to increase our touch points with intermediaries on specific risks identified from our intelligence gathering and monitoring activities. This helps focus our risk-based supervision on imminent, high-impact issues. In the past two years, we completed five thematic reviews on conduct issues in capital markets. (11) Innovation and technology can help the industry improve performance but it can also amplify the risks in capital markets. Quant funds have long employed algorithms to execute large orders to achieve particular statistical benchmarks, such as Value Weighted Average Price. Algorithmic programmes now use a vast number of hidden layers to process large, unstructured data sets to drive investment decisions. These programmes may be too complex and hard for humans to comprehend. I was once asked this question at a forum — as machines replace humans, what handle do we have over machines to control the risks? The answer is simple. If a computer algorithm goes awry and runs rampant, the SFC can’t exactly arrest the computer or bring it in for questioning, as fun as that may sound. Our regulatory handle is over the operator, and to hold senior management responsible for implementing a robust governance structure and appropriate policies and procedures with effective controls to ensure reliability, data protection and security. This brings us to the final issue of senior management responsibility, which is our response to one of the causes of misconduct discussed earlier. We introduced the Manager-In-Charge regime in 2016 to reinforce the message that senior management are responsible and accountable for fostering good conduct and behaviour. Let there be no doubt — we will vigorously pursue individuals culpable for misconduct. Before I conclude, I want to go back to what I said about the SFC leveraging technology to enrich our market surveillance and intelligence. To improve the effectiveness of our gatekeeping function, the SFC has embarked on a strategic effort to more closely track bad apples involved in misconduct and to keep bad actors out of the market altogether. New initiatives help us collect and analyse data as well as to more easily identify and visualise the relationships between firms, listed companies and individuals. To enhance our market surveillance, we also use big data processing techniques to analyse trading information. Those who exploit technology should be aware that the SFC is also leveraging technology to make sure that they have no place to hide. Conclusion Ladies and gentlemen, 10 years on, it’s more important than ever to remember the lessons from the GFC. While misconduct appears throughout the ages in various forms and guises, the behavioural patterns always remain the same. In this rapidly changing world, on the cusp of revolutionary breakthroughs in financial technology, it seems the adage “the more things change the more they stay the same”, still rings true today. But one thing that has not changed is the SFC’s steadfast determination to keep our capital markets clean. The bad actors are on our radar and we will do whatever it takes to prevent them from harming our markets. Hong Kong is open for business, but not at any cost. That’s why the SFC has shifted to a front-loaded regulatory approach. The examples I cited today demonstrate the positive impact that this new approach has had, as well as the SFC’s resolve to tackle misconduct. Thank you. Note: This is an expanded version of the speech Ms Leung delivered. 1 Fixed income, currencies and commodities. 2 Under section 201 of the Securities and Futures Ordinance. 3 The average first day price change of GEM listings was over seven times in 2015 and five times in 2016. 4 Joint statement regarding the price volatility of GEM stocks, 20 January 2017. 5 We were concerned that these market practices undermined the GEM Listing Rules and prevented an orderly, informed, fair and efficient market in GEM stocks to develop. 6 Guideline to sponsors, underwriters and placing agents involved in the listing and placing of GEM stocks, 20 January 2017. 7 Under Section 6 of the Securities and Futures (Stock Market Listing) Rules. 8 Section 8 of the SMLR gives the SFC the power to order suspension of trading in the shares of listed companies. 9 For example, not following up on obvious due diligence red flags or a lack of professional scepticism. 10 Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. 11 These reviews covered algorithmic trading, alternative liquidity pools, best execution, client facilitation, distribution of fixed-income and structured products. Reviews on prime broking and book building are continuing. SFC_Addressing Misconduct in Capital Markets Speech_20181009