The UK’s Financial Conduct Authority (FCA) is increasing its focus on market abuse at buy-side firms with new publications, activities and potential enforcement actions, according to panellists at an ACA Compliance Group (Europe) briefing held in London in mid-November. Firms need to make sure their approach to market abuse will stand up to this enhanced supervisory scrutiny or risk potential reputational damage and, in extremis, financial penalties.
There are a number of trends that are contributing to this heightened regulatory intensity. First, although the EU’s Market Abuse Regulation (MAR) took effect in July 2016, it is now operating in tandem with the Markets in Financial Instruments Directive (MiFID II). In addition to the increased scope of instruments caught under MAR, MiFID II also required in scope firms to submit far more detailed transaction reports than previously, giving the regulators a significantly expanded set of data with which to identify potentially suspicious transactions.
Secondly, the FCA would like the UK – especially in a post-Brexit environment – to be seen as a clean jurisdiction to do business in. The regulator wants firms to participate in this agenda around making markets clean and safe.
Thirdly, historically it’s proven difficult to prosecute individuals for insider dealing in the UK, using criminal law. The regulator may feel that focusing on firms’ systems and controls is a more effective way of reducing the risk of market abuse taking place.
Specific market abuse activities the FCA is undertaking include:
- Launching an industry survey – Some 400 investment management industry firms received a survey focused on their market abuse risk management and prevention efforts during the summer of 2018. Responses to this survey are likely to be instructive in shaping the FCA’s approach to tackling market abuse issues on the buy-side going forward.
- Publishing a thematic review – The FCA has disclosed that it will be publishing its findings from the review of insider dealing and market abuse practices, policies and procedures at buy-side firms within the current fiscal year.
- Staffing the supervision team – Within the FCA, several high-profile individuals who served within the enforcement division have transferred into the supervision team in recent years. It’s said that their enforcement experiences – seeing first-hand how market abuse comes to take place at a firm – has shaped the front-foot approach being taken by the regulator.
- Discussing issues in Market Watch – The FCA’s Market Watch newsletter frequently highlights specific practices and trends that firms should be sure to remediate. Recent topics include calibration of technology systems, the independence of surveillance teams, and the filing of suspicious transaction and order reports (STORs).
- Ramping up enforcement – The FCA has a record number of market abuse investigations open at the moment, and the enforcement actions are coming through. Examples of such action on the sell side have seen firms fined for a range of issues: from the absence of a marketing abuse monitoring framework – further to a misplaced reliance on counterparty systems; to the failure to provide appropriate input into the calibration and review of intra-group systems. Expect buy-side firms to start encountering a similar level of scrutiny, including from the outcome of the thematic review and follow-up work conducted.
Buy-side firms should act now to ensure their market abuse systems and controls meet regulatory expectations. Suggested actions firms can take include:
- Implementing surveillance across all security types – An ongoing concern of the FCA is the lack of rigour in non-equity market abuse surveillance, with the fixed income market repeatedly cited as an example. MAR extended the range of in scope financial instruments to include those traded on MTFs and OTFs as well as Regulated Markets.
- Reviewing trade surveillance solution calibration – Firms cannot just use a trade surveillance system out-of-the-box. It must be calibrated to a firm’s risk profile and should be back-tested with a good degree of historic data to be sure the settings are right.
- Training staff on STORs – It’s important that employees understand the conditions under which they should submit a STOR, and how to do so, especially as the FCA is concerned about the low overall level of STORs being filed.
- Ensuring Portfolio Managers (PMs) keep adequate records – It can be difficult for an individual PM to reconstruct in his or her mind the decision-making process around a trade months after the event if there is an inquiry from the regulator. Staff should be encouraged to keep adequate records concerning their decision making and trade rationale.
- Considering how a trade “looks” – A trade may not fall foul of any rule but if it is likely to spark a market abuse inquiry by either the firm or the regulator, it may be a good idea for investment managers to reconsider. Investigations can take up months, and a prosecution can take years!
How ACA Can Help
ACA offers market abuse controls reviews that encompass an examination of relevant policies and procedures, evaluation of the robustness of your firms’ monitoring, an assessment of your surveillance techniques and interviews with non-compliance staff members designed to assess the effectiveness of the internal market conduct controls and the overall culture of the firm.
ACA's Decryptex® trade surveillance technology solution can also help in this area. Decryptex provides automated in-depth trade surveillance to help identify items of interest and non-compliant trading and investment activity. The system offers a case management tool that can track and store emails, reports, and research related to each investigation.
For More Information
To discuss recent trends in market abuse systems and controls exams and enforcement, or to explore improving a specific aspect of a firm’s framework, please firstname.lastname@example.org or contact your regular ACA consultant.
- FCA Warns Firms Over Market Abuse Surveillance (11 October 2018)
- FCA Questionnaire on Market Abuse Controls Signals Their Priorities For Investment Managers (21 August 2018)