We cover a speech by the FCA’s Director Of Market Oversight on insider trading challenges as relates to COVID-19, and tell you how Star software can optimize employee monitoring and reduce firm risk
“It is essential we maintain a focus on ensuring markets work well for consumers, ensuring they are orderly and clean, whatever the times and whatever the challenges. At a time where capital-raising activity is vital to fuel much needed economic activity, we must be clear that behaviors that risk disrupting that activity will not be tolerated.”
So offered Julia Hoggett, the Financial Conduct Authority’s Director Of Market Oversight, in a 12 October speech at the City Financial Global Event. The subject of the speech was market abuse, in particular how the coronavirus pandemic has changed the way market abuse risk can manifest, and how the manner of surveilling for it must therefore also change. Following are the primary highlights and takeaways from the speech, and how Star software can help you manage risk in this still-evolving market environment.
ON THE NEED TO SHIFT FIRM FOCUS AND EFFORT
- It’s essential in changing times like these that firms identify the risks associated with the new environment. The FCA undertakes regular risk assessments of the typologies of market abuse.
- What this work has proved is not that crises like this give rise to new market abuse risks, but that the prevalence of certain risks compared to a more normal scenario changes, as does the manner in which some of these risks may manifest, resulting in a need to shift focus and effort.
WHAT CONSTITUTES INSIDE INFORMATION CAN CHANGE
- In the first six months of 2020, the UK saw a greater volume of follow-on equity issuance than the next seven major European bourses combined. Such capital raising activity has the potential to give rise to a great deal of inside information which must be appropriately handled.
- Simple steps can go a long way, like regularly reviewing how many people are permanent insiders and whether they are necessary. And with potentially more M&A activity going forward, the importance of strong wall-crossing arrangements is greater than ever.
- Market participants should ensure they have proper controls in place during transactional discussions, to recognize when to restrict themselves from trading in relevant securities.
- What constitutes inside information can change, and may have changed radically during the pandemic. For example, knowledge that operations will shut, or when they may reopen. Anything that can drive valuation.
STAY FLEXIBLE AND READY TO RECALIBRATE FILTERS AND ALERTS
- The FCA has spoken to many firms on maintaining appropriate trade surveillance throughout this crisis. One common theme has been the dramatic increase in trading activity and volatility, particularly at the start of the crisis, leading to a surge in alert volumes across the board.
- Flexibility has been key to managing this increased output, such as transferring staff across from one compliance discipline to another to help handle sudden short-term increases in alert volume. This demonstrates the value of cross training and a nimble approach from managers.
- Some firms have recalibrated or applied additional filters to their alert generation, to ensure output is meaningful. One example is benchmarking against certain macro metrics like indices. This can help reduce alert volumes, but not at the cost of missing potentially suspicious activity.
STAY CALM AND ASSESS ON, NO MATTER WHAT THE BACKLOG
- Firms should continue to report instances of potentially suspicious activity by considering whether the bar of reasonable of suspicion has been met. While exceptional market conditions may have an impact on what constitutes unusual activity, the process should be the same.
- Firms should assess the evidence, apply context, and make informed decisions as always, i.e., the FCA doesn’t expect poor quality STORs to be submitted simply because there have been more alerts.
- If there is a STOR backlog, promptly advise the FCA of the issue, its scale, and timescale for clearance. While firms should always aim to submit without delay, if submitting a STOR outside the normal timeframe simply advise the FCA of the cause of the delay at the time of submission.
OFFICE AND WFH ARRANGEMENTS MUST BE EQUIVALENT
- Scenarios emerged early in the pandemic where the usual levels of recording and surveillance were not possible, but experience suggests firms have overcome these challenges. Moving forward, the expectation is that office and remote-work arrangements should be equivalent.
- Firms should update policies, refresh training, and put in place rigorous oversight reflecting the new environment, particularly regarding the risk of use of privately owned devices. These policies should be demonstrable to the FCA and to firm audit teams.
- There remains a risk of less self-policing. Consider a pre-crisis situation where a front office employee overhears something questionable involving a colleague nearby. In normal circumstances, the FCA would expect that activity to be questioned, or reported to compliance. With people working remotely, that type of first-line control may be diminished or absent.
GOOD FIRM CULTURE IS MORE IMPORTANT THAN EVER
- Staff should be in no doubt about the standards expected of them. And they should be in no doubt these standards apply whether they’re in the office, a disaster-recovery site, or at home. Culture always matters, but culture matters most when the risks are highest.
- Having a culture that minimizes the risk of poor conduct occurring in the first place remains critical. It is important that staff are conscious of the role they play as the first line of defense.
EVERYONE MUST COMPLY WITH MAR AND CRIMINAL LAW
- There’s been a significant increase in the opening of new personal trading accounts over the course of the pandemic.
- The FCA has long observed the risk of an uptick in what it calls single stock events, i.e., the risk that individuals within listed companies, or with access to information about listed companies, could utilize that information to make a profit or avoid a loss in the relevant securities.
- The FCA remains exceptionally focused on this type of event. Market abuse not only applies to individuals working in financial services; everyone must comply with MAR and criminal law.
THE FCA IS WATCHING AT THE INDIVIDUAL ACCOUNT LEVEL
- If someone trades suspiciously and receives a letter from the FCA, it’s because the FCA is watching. If no letter is sent, it may be because there are other plans to address the behavior.
- If the individual in question works for a regulated firm, the FCA will most often contact the employer to ask whether the person had access to inside information. Regulator inquiries have led to an employer terminating an employee following disciplinary action, if nothing else.
- Misuse of inside information that anyone receives during the course of their work is a criminal offense. The companies these individuals work for should be equally concerned about the loss of integrity to the markets that such behavior represents. Everyone has a stake in clean markets.
FIRMS MUST CONDUCT INQUIRIES WITH PROPER DISCRETION
- The inappropriate handling of information requirements issued by the FCA can hinder, or even compromise, preliminary reviews of and investigations into suspected market abuse.
- In one case, the content of an FCA confidential information request was shared with a manager of the firm’s deal team, who then decided to question the individual who had accessed inside information. Upon being challenged, the person resigned from the firm and left the country.
ACCURATE TRANSACTION-REPORTING DATA IS A PUBLIC GOOD
- The FCA views accurate transaction-reporting data as a public good—enabling market surveillance and efficient follow-up, and in those ways minimizing the risk of future market abuse.
- Good data enables a more holistic assessment of market risks and more effective oversight. The growing suite of market cleanliness stats the FCA produces derive from the use of this data.
HOW STARCOMPLIANCE CAN HELP
There’s a lot to unpack here, and a lot Star software can help with. Beginning broadly, Director Hoggett’s emphasis near the end of her speech on the increasing importance of accurate data to FCA surveillance and clean markets is emblematic of the increasing importance of data and digital capacities in every field, including, of course, finance. Big Data is called Big Data for a reason. Money more and more moves around the globe and through economies electronically. Cryptocurrencies are even now becoming mainstream money options.
And as financial regulators become increasingly savvy with their use of technology and data, so must the firms they regulate. This means the hodgepodge of unintegrated, manual and semi-manual internal processes firms may now rely on to stay compliant must eventually give way to integrated, automated processes. Star offers a range of services and solutions that lets firms more easily and more accurately monitor and manage an ever-increasing amount of data—and staff—and stay on the right side of regulators. For a complete overview of Star’s technical approach—and perhaps some key insights into how it might dovetail with your own ever-evolving technical needs—check out our solutions page.
As regards market abuse in particular, Star offers an Insider Trading product that will keep compliance teams operating comfortably in the know. Use it to automatically screen for employee trades in relation to key market events. Use it to provide regulators with detailed audit records. Use it to track which employees have MNPI, with insider list management capabilities that organize and centralize all pertinent project data. In short, use it to easily evidence your compliance and your firm’s due diligence.
Finally, as regards personal account dealing—something the FCA remains “exceptionally focused on”—Star offers a Personal Account Dealing product that makes detecting these kinds of conflicts simple and easy. Trading pre-clearance gives employees fast, automated approval or denial decisions against a fully configurable rules engine. Blackout or restricted lists can be made to apply to all employees or specific individuals. And easy integrations with firm systems mean comprehensive surveys of employee records and employee trade activity, and the quick and automatic surfacing of transaction anomalies or patterns of behavior that may require further investigation.
Again, Director Hoggett: “As someone who joined the FCA in the midst of the LIBOR scandal and before the foreign exchange enforcement outcomes were made public, I am keenly aware that conduct crises can follow financial crises.” So far, so good this time around, it seems. StarCompliance can help keep it that way.