The FCA’s recently published Market Watch 63 reminds firms that they must continue to comply with their obligations around market conduct and reporting during the COVID-19 crisis. It highlights some changes to market activities and alternative working arrangements which represent a higher risk. Below we highlight some key findings from the report, along with our recommendations on how financial services firms should respond to the regulator's concerns.
The FCA anticipates that the impact of the COVID-19 crisis will result in many issuers needing to seek additional capital. The corresponding increase in primary market activity will result in the flow of inside information within the financial service industry. As most investment firms now have employees working from home they are reminded of the importance of having strong controls in place to manage risks around market abuse, conduct and conflicts of interest.
The FCA acknowledges that the change in circumstances created by COVID-19 has created new issues in relation to identifying, handling and disclosing inside information. It is important to ensure that the systems and controls in place for home/alternative working are able to effectively manage the risk of unlawful disclosure in the same way as the usual office environment. Firms are advised to consider whether their controls continue to be sufficient, and also to determine whether training should be updated to refresh staff on the actions they should take if they are in receipt of inside information.
Under the Market Abuse Regulation (MAR), individuals holding inside information are prohibited from disclosing except where necessary. Details of inside information and individuals should be retained on an insider list, and it is good practice to remind employees of the restrictions around handling this information to reduce the risk of unlawful disclosure and misuse of information. Appropriate restrictions should be in place to ensure access to inside information is limited to only those individuals who require access for their role.
The MAR market soundings regime provides a framework for the control of inside information in a lawful manner. The FCA reminds market sounding recipients (MSRs) that the purpose of soundings is for issuers to gauge interest and views in a possible transaction. Any information received during a market sounding should only be communicated internally when necessary to provide an opinion to the issuer. In previous issues of Market Watch (see related stories below), the FCA has acknowledge the benefit that firms may find by having a gatekeeper appointed to act as the contact point for soundings, receipt of information and internal dissemination. ACA notes this role is often carried out by the compliance function.
Personal account dealing
The FCA has previously raised concerns around personal dealing and further concerns are raised due to higher risks where employees are working from home. Firms are advised to consider the controls in place on personal trading, including management of conflicts of interest and market abuse risks.
Earlier Market Watch newsletters have identified the importance of firms undertaking risk assessments to identify the specific risks that they may face and the controls to manage these risks. In order to ensure the controls continue to be appropriate, risk assessments could be reviewed and updated in light of the new working arrangements and market conditions. These risks may include unlawful disclosure and misuse of inside information and other manipulative behaviour. The FCA notes that surveillance systems should already be in place to be able to identify these risks but firms should consider whether to update to incorporate other new and emerging risks. It is important to note that firms should ensure their approach is tailored to their business and its risks. Where necessary a retrospective review of one or more specific area may be appropriate.
FCA market monitoring
Both primary and secondary market activities are monitored by the FCA to identify behaviours which could impact the integrity or orderly functioning of the market. It has access to a large range of data including transaction reports, order book reporting, inside information disclosures, price movement monitoring and short position reporting. The FCA will continue to request information from firms where it identifies potentially abusive behaviour and will use enforcement powers to take action against firms breaching the rules.
The FCA reminds firms that they should ensure they are able to continue to comply with the requirements of the Short Selling Regulations (SSR) which gives transparency to short selling activities and supports the orderly functioning of the market.
Restrictions on uncovered short sales in shares
Under the SSR firms are prevented from ‘naked’ short selling. This is done by ensuring the firms has
- Borrowed the shares,
- Has an agreement in place to borrow, or
- Has an arrangement in place where the shares are located.
Firms are reminded that any arrangements they have made to comply with these requirements should work in practice, and it may be appropriate to check these arrangements as well as ensuring evidence is in place to be able to demonstrate compliance.
Net short position reporting
Firms are required to report net short positions of 0.1% of issued share capital, and each time the position increases or decreases by 0.1%. Net positions in excess of 0.5% are publicly disclosed by the FCA.
Short selling monitoring
The FCA notes that it will continue to monitor short selling activities and will increase this where there are significant opportunities for abusive behaviour. It also refers to the potential actions that can be taken in relation to a failure to meet the obligations under SSR which can include fines.
Firms should consider the actions below:
- Review risk assessment to ensure it is up-to-date and reflects current and emerging financial crime risks
- Ensure controls around inside information are strong and access is restricted to only those individuals who need it for their role
- Review personal account dealing processes to ensure they remain appropriate for alternative working arrangements
- Ensure conflicts of interest records are up-to-date and accurate
- Ensure your trade surveillance solution can identify market abuse
- Make sure transaction reports are being submitted in a complete, accurate and timely fashion
- Check arrangements are in place to meet the requirements around short sales of shares
In addition, access the following ACA resources for further guidance.
- Download our white paper for further guidance: Best Practices for Implementing a Holistic Monitoring & Surveillance Programme
- Listen to our free training webcast, Core Disciplines in a Remote Working World, designed to help ensure that financial services staff, regardless of their role, do not forget their core compliance responsibilities during this period.
- Visit our COVID-19 resource page to access related guidance.
How We Help
ACA offers a range of market abuse solutions and trade and transaction reporting solutions for investment firms. To learn more, contact us here or call +1 (212) 951-1030 (U.S.) or +44 (0) 20 7042 0500 (UK).
For more best practices and insights on protecting your firm from insider trading, market abuse, and other misconduct, check out the following ACA resources:
- On Demand Webcast: Protect Your Firm Against Insider Trading and Other Misconduct Related to COVID-19
- Blog Post: Tips to Enhance Electronic Communications Surveillance
- Blog Post: Mitigating Employee Risks Related to the COVID-19 Pandemic
- Compliance Alert: Global Regulators Renew Commitment to Data and Analytics Innovation in 2020
- Compliance Alert: Market Watch 62: FCA has concerns about investment firms’ personal account dealing controls
- Compliance Alert: Market Watch 60: FCA Raises Further Concerns on Access to Inside Information
- Compliance Alert: Market Watch 59: Transaction Reporting: Six Common Failings
- Compliance Alert: Market Watch 58: FCA signals continued focus on Market Abuse with Market Watch 58
- Compliance Alert: Market Watch 56 & 57: FCA speech indicates continued focus on Market Abuse Regulation in the UK