The FCA has published its finalised guidance on financial crime systems and controls, including insider dealing and market manipulation (FG18/5). This follows a consultation in March 2018 on an update to its Financial Crime Guide, where the FCA proposed a new Chapter in relation to the requirement to detect, report, and counter the risk of insider dealing and market manipulation. The FCA has also published a summary of feedback received, to address some of the points raised by the 8 respondents to the consultation, which led the FCA to amend and clarify its guidance.
Some respondents expressed concern that the new guidance implied firms have an absolute duty to prevent financial crime, and highlighted that that the inclusion of a requirement to prevent financial crime differs from the obligations to implement controls to prevent the risk of being used to further financial crime (as per SYSC 6.1.1R of the FCA Handbook). The FCA has taken this point on board, and removed the suggestion that firms have an obligation to prevent financial crime.
Key points to highlight are that:
- Firms should refuse to execute a trade where they have information which suggests that a client is seeking to trade either manipulatively or based on inside information. It is recognised that this risk may be lower for Direct Electronic Access (DEA) providers.
- Firms should have a procedure in place to address the risks that arise in scenarios whereby their client is not the decision maker, with orders and trades being instructed by an underlying client. If a relationship is assessed as higher risk from an insider dealing or market manipulation perspective, or the monitoring of transactions identifies potentially unusual or suspicious transactions, firms should consider the steps to gain further information, or an understanding, of the client, underlying client and/or activity (e.g. engaging with its client to obtain further information about the trading in question and/or the nature of the underlying clients).
- Firms should not enter into or maintain a client relationship if they are unable to effectively manage the financial crime risk associated with maintaining that relationship. This does not mean that firms are required to off-board clients immediately after identifying a single suspicious trade; rather, they should have systems and controls in place to identify, assess and mitigate the risk in a consistent and appropriate manner.
- Firms suspecting insider dealing or market manipulation should consider their anti-money laundering obligations should the relevant client seek to transfer or use the proceeds of that suspicious activity. This includes, where appropriate, submitting a Suspicious Activity Report (SAR) and seeking consent from the National Crime Agency.
- Firms should consider the interaction between the Money Laundering Reporting Officer (MLRO) and the individual/team responsible for trading surveillance.
The FCA agrees that suspicion does not constitute proof of criminal activity. However, firms are obliged to manage the risk that they are being used to facilitate financial crime, and this may on occasion involve taking measures over and above submission of a Suspicious Trade and Order Report (STOR). The concern that clients could move their business to less compliant service providers should not be a factor that firms consider when dealing with their obligation to counter the risk of being used to further financial crime.
Some respondents raised concerns that firms would risk tipping off a client or an employee if they were to restrict a client’s access, or terminate a client or employee relationship. Although there is no tipping off offence defined as such, market abuse legislation requires firms to have procedures to ensure that the subject of a STOR is not informed of the report. The FCA’s expectation is that firms will exercise careful consideration when communicating with their clients or employees, and that they will consider the risks of tipping them off under anti-money laundering legislation on a case by case basis, seeking legal advice if necessary.
The FCA guidance indicates that each firm is required to ensure that its risk framework, and policies and procedures are tailored and appropriate to the nature of its business. Examples of good and poor practice are provided to clarify how the guidance may apply to different types of firm, including in particular how it may apply in relation to employee trading.
The guidance, which came into effect immediately, remarks the expectation for senior management to take clear responsibility for managing financial crime risks, which includes understanding the risks of insider dealing or market manipulation that their firm is exposed to and establishing adequate policies and procedures to counter the risks, even if this conflicts with the focus on revenue generation. A firm’s senior management must be able to demonstrate that they are actively engaged in the firm’s approach to addressing the risks.