On 12 Oct Julia Hoggett (FCA director of Market Oversight) gave a speech at the City Financial Global event in which she highlighted the effects of the Coronavirus on market abuse.
The speech concentrated on six areas of note:
- risk assessments
- primary markets
- suspicious transactions and order reports (STORS)
- personal account dealing (PAD)
In this piece we have picked out points that she made which we believe clients should be aware of as an indication as to where the FCA may focus their attention during the rest of this year and into 2021.
Controlling inside information
Controlling information whilst many staff are working from home presents a different set of challenges to those where staff are located within the confines of the office environment. At home, inside information may need to be kept from partners or flatmates, which has always been the case, but where the separation between work and home life is less distinct it may be more difficult to conform. As the number of M&A transactions increase, a larger volume of inside information is generated so firms need to ensure they can identify when transaction controls become necessary. Different types of information constitute inside information to different companies and as such, a dynamic risk assessment is extremely important.
Suspicious Transaction and Order Reports (STORs) in volatile markets
The increase in trading activity and volatility during the crisis has led to an increase in alert volumes. Firms have dealt with this in a number of ways, but most commonly by transferring staff from other departments into the surveillance function and/or by recalibrating filters to their alert generation methodology to ensure output is meaningful. For example, benchmarking alerts against macro metrics like index volatility can help reduce alert volumes without missing potentially suspicious activity.
We agree with Ms Hoggett that calibration of any alerting protocol, to take account of the market context is reasonable but must be accompanied by appropriate documentation to show thoughtful decision making within the existing governance structure. Firms should consider some form of analysis or retrospective review to ensure new dynamics are captured for future risk assessments. The FCA does not expect firms to submit poor quality STORs, simply because they have had more alerts, but to assess the evidence, apply context and continue to make informed decisions.
It is appreciated that there is a significant backlog of STORs so the FCA asks that firms promptly advise the STOR Supervision team of the issue, its scale and anticipated timescales for clearance. If a STOR is submitted outside the normal timeframe, it is important that the cause of the delay at the time of the submission is made clear.
As firms work through their return to office plans, including hybrid ways of working with potentially long-term changes, there is a requirement for them to adjust the way in which they think of the range of surveillance tools available. The FCA’s expectation is that office and working from home arrangements should be equivalent and not be arbitraged.
Firms need to have updated their policies, refreshed appropriate training and have rigorous oversight in place to reflect the new environment. In particular the risk of using privately-owned devices should to be thoroughly thought through. Policies must prevent the use of privately-owned devices for relevant activities where recording is not possible. New communication mechanisms need controls in place and their use approved in the prescribed way. It is important to acknowledge that firms’ regulatory obligations have not changed.
Oversight and the provision of advice from the compliance teams is as important in the new environment of remote working as it was in the old. Compliance support needs to be appropriately structured and have access to the relevant materials and information.
Additionally, there is also a risk of less self-policing amongst front office staff. In normal pre-crisis circumstances, it would have been easier for front office employees to observe or overhear something questionable involving a colleague nearby such that the activity would be questioned or reported to Compliance. With staff working remotely that type of first line control may be diminished, or absent. It is therefore imperative that firms have a strong compliance culture where staff are in no doubt as to the standards expected of them. These apply whether they are in the regular office, a disaster recovery site or at a makeshift workstation at home.
It is important staff are aware of the role they play as the first line of defence.
Personal Account Dealing (PAD)
There has been much written and discussed regarding the risk of personal dealing whilst staff are working from home. Also, there has been a significant increase in the opening of new personal trading accounts over the course of the pandemic. The FCA notes that where firms facilitate the access of private individuals to regulated markets, they need to be aware of the risks this type of trading may pose in their monitoring.
The FCA is able to see activity down to the individual account level. Consequently, if individuals trade suspiciously, they may receive communication from the FCA asking for a justification for that trading. Where there is no such communication, it may be because the FCA have other plans to address the behaviour in other ways including, making contact with employers in order to understand whether there was access to inside information. Even where there was not, this may nevertheless give rise to the employer becoming aware that an individual has breached the firm’s Personal Account Dealing (PAD) Policy which could lead to termination of the employment.
Data enables the FCA to holistically assess the risks in the market and the effectiveness of its own vigilance. A growing suite of market cleanliness statistics are produced from the use of this data, including the new Potentially Anomalous Trading Ratio (PATR). The metric gives the ability to quantify the potentially anomalous trading in UK markets. The PATR data suggests that 0.8% of relevant trading in 2019 met the necessary prerequisites to justify further review by the PATR metric. Of that 0.8%, 6.7% was considered potentially anomalous and worthy of further enquiries. While it is very early to draw conclusions from this new metric the results indicate that discipline in UK markets is overall strong and effective.
The FCA remains supportive of tools used to fight market abuse and is working with the Government on potential changes to the criminal market abuse regime to ensure combatting market abuse works effectively in an evolving market.
If you would like to discuss any of the points raised in this summary of Ms Hoggett’s speech please do not hesitate to contact Dan, Simon, or one of the team at Objectivus.