No let-up in the FCA’s scrutiny of firms’ market abuse controls

Many financial services firms operate globally and are faced with numerous regulators and regulations covering market abuse. Firms answer to a combination of the SEC and CFTC in the United States, HKMA, MAS, JFSA and ASIC in Asia Pacific, and the FCA, AMF, BaFin and other national regulators in Europe. These European regulators enforce the EU’s Market Abuse Regulation (MAR) alongside their own domestic laws stemming from the Market Abuse Directive (MAD).

The FCA takes the lead in regulating market abuse in UK financial services and has frequently highlighted market abuse as a priority in its business plan, with the latest 2019/20 plan being no exception. A number of thematic reviews (including TR15/1 and TR 15/13) on market abuse have also been undertaken in recent years. The FCA has indicated that it is stepping up its scrutiny of firms’ market abuse controls, with this being a priority within its supervision of wealth and investment management firms; moreover, a number of recent publications have highlighted failings the FCA has found across sectors.

This blog highlights some specific areas of increasing FCA scrutiny on investment banks and asset managers in the UK and suggests how firms may wish to respond.

The FCA’s recent scrutiny and its implications for firms  

Recent FCA Market Watch publications have drawn attention to specific areas of concern around firms’ market abuse controls and governance, including:

  • Access and control of insider lists;
  • Recording and retention of telephone calls;
  • Low volumes of Suspicious Transactions and Order Reports (STORs) raised on non-equity trading.

Market Watch 60 discussed firms’ insider lists and controls over who has access to inside information. The FCA found that many firms had:

  • large numbers of support staff able routinely to access documents with inside information;
  • failed to implement proper access controls over documents containing inside information or had stored these documents in folders without any specific access controls; and
  • poor systems for monitoring who had accessed inside information documents, often failing to provide a clear picture of who had accessed a document. However some firms were able to offer comprehensive audit trails.

This was followed in June by two further convictions for insider trading, relating to abusing access to insider lists.

The FCA expects firms to have a strong set of systems and controls to limit who can access insider information. They have also emphasised that support staff should not have routine access to insider information and that insider lists should be strictly controlled and limited only to those with an essential need for the information. Accordingly, firms should have a clearly defined policy for governing who has access to inside information, as well as a strong set of controls to ensure this is realised in practice. Firms will also need to be able to audit who has accessed, read and edited any documents containing inside information.

Alongside these concerns over insider lists, Market Watch 59 drew attention to firms’ recording and retention of telephone records, as set out under SYSC 10A in the rulebook. The FCA found that some firms are not properly recording conversations, despite having recording systems installed. Given the presence of explicit rules mandating firms to engage in routine recording of telephone conversations, the FCA is likely to take a dim view of firms who fail to meet this requirement, or who fail to undertake appropriate checks to ensure conversations are being properly recorded.

Firms will consequently want to ensure they record their staff’s phone calls, and should consider investing in analytical tools, which use this voice data to help them detect potential cases of market abuse. The rapid emergence of AI driven voice analytics is easing the practical challenge of automating surveillance and can help firms to meet the regulatory challenges they face in this area.

Previous Market Watch publications have also raised concerns that the number of STORs (Suspicious Trade and Order Reports) has been heavily biased towards equities. Unlike exchange-listed securities which have reliable real time price data, fixed income products are generally more difficult to monitor due to complex factors affecting their value and the more opaque nature of the non-exchange OTC markets through which they are often traded. Nonetheless, the FCA clearly expects firms to invest in improving their monitoring of non-equity related securities, and it appears likely that future FCA visits will explore these areas with firms.

Implications for wealth management and buy-side firms

The FCA has been stepping up its enforcement action over market abuse more generally. In 2016 it opened 120 market abuse enforcement cases, falling to 87 in 2017. However, in 2018 it opened 484 preliminary market abuse investigations, which to date has led to 91 enforcement investigations and 72 non-enforcement actions. The remaining cases continue to be investigated, and could lead to further enforcement investigations in time.

Furthermore, the FCA has also highlighted market abuse as a priority area in its supervision of wealth managers. It set out its views in a recent Dear CEO letter, which we have previously blogged on. The letter makes clear that the regulator will look to identify any firms which damage trust in the market or take advantage of their clients, and that it “will take appropriate action with these firms.”  

The regulator’s actions and publications should be seen as a clear warning to buy-side firms, particularly those with less developed market abuse surveillance functions. All market participants are required to assess their own specific risks and apply appropriate controls and monitoring. While banks and brokers are typically exposed to the risk of direct manipulation in the market, wealth managers are likely to be concerned with a smaller subset of market abuse behaviour, and in particular insider dealing.

Many buy-side firms do not participate directly in markets and rely on order routing systems to communicate orders to brokers. However they are often party to insider information, including non-public information on equity placings, mergers, acquisitions and disposals, as well as debt issuance, restructuring and early redemption. Collaboration with other firms in fixing IPOs, managing fund rebalances and voting in mergers, acquisitions and disposals also present market abuse risks. Consequently, the management of such insider information, the use of information barriers and monitoring of insider trading across all asset classes are key control tasks.

To ensure effective control, both trading behaviour and communications need to be captured and monitored. However, voice recording and monitoring of emails, messaging and text messages are often relatively new areas for buy-side firms.

In summary, the regulators key area of focus in market abuse is on control of insider information and monitoring of trading. As such, it is essential firms give sufficient consideration to, and expedite their development of, effective controls around insider information misuse. An additional challenge for wealth and investment managers is finding an appropriate technology solution to provide monitoring that is aligned to their specific risks, which may often be relatively bespoke compared to baseline monitoring expectations.

How Deloitte can help

Deloitte has a range of teams with expertise on market abuse, across both the investment banking and asset management sectors. Based on our understanding of regulatory expectations, and working with our extensive network of clients, we have identified industry good practice in each of the key areas underlying the FCA’s market abuse concerns.

In a complex landscape of multiple regulators and regulations with the associated risk of escalating costs, Deloitte is able to help assess your firms’ current controls, perform risk assessments and advise on or support implementation of good practice monitoring.

Deloitte also has a range of Reg Tech solutions, including our Surveillance Grid and True Voice platforms, which allow firms to implement cost efficient automated trade, eComms and Voice surveillance. These solutions leverage Deloitte’s longstanding experience in both market abuse and forensics work as well as analytics expertise in AI and technology.

Adam Clarke

Adam Clarke - Director, Investment Management Risk Analytics

Adam is responsible for Trade Surveillance Analytics within Deloitte’s Financial Services Risk Analytics practice. Adam supports our largest banking clients in reviewing and improving the effectiveness of their surveillance functions.
He is also development lead of Deloitte.Vista, Deloitte’s own next generation surveillance application.

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Dimitri

Dimitri Tsopanakos - Director, FS Surveillance Analytics

Dimitri Tsopanakos is the Head of the Investment Management Data and Risk Analytics team in the UK, specialising in Risk, Data and IT. He has over 20 years’ experience, with a significant period of time spent working in Front office and later Operations and Risk Management functions. Dimitri has also worked for 2 of the largest international risk software vendors in the Financial Services space.

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Peter Goodman

Peter Goodman – Associate Director, Investment Management Risk Analytics

Peter is responsible for Risk Analytics within Deloitte’s Investment Management Risk Analytics practice. Peter supports investment management clients with regulatory compliance solutions including services and solutions for risk compliance monitoring and trade surveillance.

He is also product lead for Deloitte’s Surveillance Grid market abuse monitoring solution.

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EMEA Centre for Regulatory Strategy specialists

Andrew Bulley

Andrew Bulley - Partner, Centre for Regulatory Strategy

Andrew Bulley joined Deloitte in October 2016 from the Bank of England, where he was, most recently, the Director of Life Insurance Supervision. Between 2014 and 2016 he was a UK voting member of the Board of Supervisors of the European Insurance and Occupational Pensions Authority (“EIOPA”). In a career with the Bank of England and Financial Services Authority stretching over 27 years, Andrew has held senior roles in the supervision of life and general insurers, the London wholesale insurance underwriting and broking markets, retail and investment banks, asset managers, and IFAs.

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FB1

Felix Bungay, Senior Manager, Centre for Regulatory Strategy

Felix is a Senior Manager within the EMEA Centre for Regulatory Strategy, where he focuses on conduct regulation across a range of financial services sectors. Prior to joining Deloitte, Felix worked at the FCA where he helped produce a wide range of the organisation's House and Sector Views, including those on Retail Banking and Lending, Retail Investments and Wholesale Capital Markets.

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