Transcript of Question & Answer Session Remarks at a Workshop at King & Wood Mallesons

Guy made the point, at the beginning, that the lawyers were kept off deliberately. Stuart Fuller, let's bring you, bring you in. In terms of, what do you think is the likely legal effect of the certification process?

Question without notice, Mr Chairman. Oh, well, actually, can I turn it around, and ask the panel a question, if that's okay? Which is, I was very interested when Guy went through what the different regimes have done, just on this point of, starting out with, "It wasn't regulation. It was an industry code." But then, particularly, and putting China to one side, I think that's a unique jurisdiction. In the UK, bringing it into the senior manager's regime, with all of the consequences that that brings, for executives in banks, doesn't that effectively bring it right into the regulatory framework? And then, from the lawyer's perspective, it then brings it into the realm of, everything that institutions look for, whether it's compliance, adherence, or whatever, from the legal perspective.

So I'm just wondering whether the way that it's been done in different jurisdictions, whether it starts out as an industry code, but actually ends up in something that's more legalistic than not, because of the regime that then looks to implement it?

Maybe, but I don't really think so, partly because it is principles-based. So, I suppose ultimately it's still open to some interpretation by the FCA or by the firm. But, at the very least it establishes some sort of benchmark as to …

Could you just fix your mic please? Sorry, we can't hear you in Melbourne.

All right, sorry.

Thank you.

Sorry. Otherwise we would have had dual mikes up there. I still think because it's principles- based it gives you some idea about what the expectation is of the regulator as to what constitutes good practice, which happens to be, in this case, aligned with the industry's view of that. I mentioned that a number of the people we had working with us had been through the remediation process with the FCA. So they had a pretty decent idea, and they'd had to rewrite their own internal staff codes and procedures manuals and so they had a pretty decent idea as to what was acceptable or not to the FCA and that was distilled into this. Yeah, it's got a regulatory element in the UK because of that, but it still is principles-based and so is suppose it provides a basis for the conversation you're going to have with the FCA.

So, one thing we haven't done here. So it is 55 principles, it's written in plain Australian. It is not a procedures manual. So, which effectively is another way of at least translating it into internal rules if you want to think about it that way. But, what we do say is that we would expect that your procedures manual should be consistent with this. The FCA can then go and have a look and say in their view, "Is it consistent with this?" I suppose it does certainly leave it open to different people potentially have different interpretations. Yeah, we can't guarantee that that won't be the case. But by and large I think it reflects a shared view as to what constitutes good practice and I have a reasonable expectation that most people are going to share that view, the same view, including the relevant regulators.

Just throw it back to that. Because I think it is the interaction between the regulatory regime and a code, which can add legitimacy to the code and the question of how you strike the balance of that becomes very important. If you take a slightly different example, AFMA in the past has provided guidance in relation to equity standings and how that might be conducted. And this was developed by discussion with the law firms of the major investment banks and participants in the market. And we spoke to ASIC about this and they understood what we were doing. And so, it factors if you like a standard ethics, which is this is how you might go about doing this.

In practice, the way that works is when ASIC has gone and has prepared a report subsequently on behaviour of the market, it looked to that to provide a guide as to what is considered by the industry to be acceptable practise. Now people may vary from that, and people can readily argue, "No, I don't do that, but I do something, which I think is better. Or in the context of my business will be more efficient."

But it is important to have that interaction. By the way, we are talking about wholesale markets here because that balance if you strike it right gives you fantastic dynamic efficiencies. The people who prepare the code, or the standard, are the people working in the industry. They know where the issues are and they know the balances that need to be struck and when it comes to maintaining the code over time, well they are participants who were sitting and looking and talking to each other through industry forums about how well that's working or not. So, you have a ready mechanism through which you can update as required, but the dialogue with the regulator obviously is very important in that context. I don't feel concerned about the interaction, I think it's much more a question of ensuring that the interaction is set at the optimum level to achieve the most efficient outcomes for everyone involved, including the regulators.

Well, I think it's definitely the case if you think of regulatory guide 183 in terms of fragmentation. Basically, there is no fragmentation in relation to this because it was a buy side and the sell side, basically it's designed to be global. In terms of recognition of the issues, basically I think there was clear recognition within the wholesale market as to what those issues were. In terms of the process of certification, whether it be Citigroup or whether it be Westpac and other institutions moving forward, basically I think there is clear recognition that this is useful. I take Guy's point that you're not regulators, but there is an element of basically having the capacity to facilitate a dialogue. I think it is the case equally that there is really something really transformative, potentially really transformative, about this FX code, which could send a positive signal back into domestic markets. Anna Bligh from the ABA is here. What do you make of the FX code?

Look, I would agree Justin, whether it's this code or another in another part of the financial sector. There is something for all parts of the sector to learn and particularly if it does achieve the goal of transcending symbolism, if it can demonstrably have an effect on behaviour and on reputation then others in the sector will be looking, to not only the components of the code that achieve that, but listening to Guy I think some of the points he made was the process of getting there was as powerful as what ended up being written on the page. And I think one of the challenges of the codes is in 15 years' time, probably none of the people who were part of getting there will still be in positions of seniority and influence in the sector. So, how do you write into that, that repeating of the process?

I mean, I'll talk a little bit later about this, but I think in the banking industry, the code that we are now rewriting is a good example of one that had a lot of powerful things happen when it was first put in place in 1993. And, while it was tweaked in between, a comprehensive root and branch, let's all get back around the table and really examine the context that we are now working in in the very vastly changed world of payments and financial transactions since 1993, how do we make sure that we keep that on the agenda going forward?

I think one thing, we have got some chance of pulling that off, which is as I said we have got this global FX body. What we've said is each year, partly reflecting the experience people have in the industry, we may make small tweaks to it. Every three years, there's going to be a more wholesale review. To your point about by the time we're all retired and everyone's forgotten about this, what happens then? So that body will keep on, the membership will keep on turning over. There will always be a decent chunk of people who are head of FICC at global … at the large global banks. They will be on that group, there will always be someone, and there will be a different person in five years' time that it is today who will be running FX at a large asset manager. So we've got some chance of keeping that going by having at least established this timetable of regular review.

The FX market has changed, is changing, considerably and so, for no other reason than we can't write something, which is going to be constant through time. I mean some of the stuff is reasonably timeless, but some of it isn't. As I said, we have a decently large chunk on electronic trading. You wouldn't have had that 10 years ago, or 15 years ago. But it now constitutes a reasonably large chunk. I think, as I said, some part of it is timeless in the sense that no matter how you go about execution in the market, the actual mechanism can vary that a bit, but the general principle of what you are trying to achieve and what you are trying to do for your customer is reasonably time invariant. But as I said, we have given ourselves some sort of chance for maintaining the constancy in the market by the structure we've put in place to keep this thing current going forward.

And while it's not a requirement for regulatory agencies to take on board the code, they can.

Yep, and I think that's the other point, partly coming at Stuart's point. Given regulators can take this further to different degrees if they want. So, if the FCA wants to go further on Last Look, say, it may happen. Then they can. What I don't want to say is we've established a minimum standard, because that doesn't sound that good, and I think it isn't what we've done. But at the very least, I would have a strong expectation that however the regulator wants to take it into more detail, it will be consistent with what we've got. So I did say that it would be more about providing more detailed guidance if they felt so inclined. But whatever it is, the expectation would be it's going to be consistent with the principles we've got here.

I think the other thing, which is very interesting about it in terms of how you define market participants, that it's basically across the buy and the sell side at institutional and at personal level, right? And so, we've got Chris Whitehead from Finsia here, representing one of the biggest financial services organisations representing individuals. What's your view on the FX code, Chris?

I'd come back to the point that was made that I think this has to sit alongside trading and accreditation. So, particularly from the perspective of the individual, I think it is the reinforcing effect of the participants, the market code of conduct, but ultimately that support and we spoke about the importance of principles and values, ultimately that's supported by the behaviour of individuals and what drives those individuals. So, you know, I think it is necessary to look at the institution or the market participants' perspective, but also to look very much at that individual perspective and to ensure that the code is being backed up by good accreditation processes, good training processes, to make it effective.

So, in relation to that, Anna's point … I think her comments are right on point because one of the outcomes of the fair effect of market review, or one of its key findings was that there weren't codes, or where they were there, they weren't understood or weren't applied. So I think the whole design of the structure, both there to the FICC Markets Standards, but also to the work of the Global Foreign Exchange Code is part of its DNA is to overcome those issues because they have been very specifically recognised and it does go … It's not a question of saying "Well here's the Code of Conduct and file it away somewhere". It's actually making it a living document with the kind of things Chris is speaking about and that's why it's relevance to the average person working in the industry is actually quite fundamental.

And that links back to the whole social licence to operate, which underpins the fair effect of the market's review and Mark Carney's conception of inclusive capitalism. But let's have a break now to keep on target. We'll break for coffee and an opportunity to network and we'll reconvene at 10.20 to look at the retail side with Anna Bligh. Thanks very much indeed.