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The FCA Throws A Spotlight On Personal Account Dealing

The UK regulator's latest Market Watch newsletter sheds much-needed light on the subject of PAD. Here's what the FCA has to say about it and how StarCompliance can help

From a regulatory perspective, personal account dealing, or PAD, doesn't get the kind of attention that professional trading does. It's rogue traders blowing billion dollar holes in their investment banks' bottom lines that get the most attention. But market abuse is market abuse, and employees trading inappropriately on their own are not only in violation of the law but can also cause firms serious reputational damage. Here's what the FCA has to say about PAD.

The FCA recently carried out a study of PAD activity at some wholesale broker firms, in order to try and assess the extent to which firms have incorporated recent changes in the market abuse regime. These changes can be found in the FCA's Conduct Of Business Sourcebook, sections 11.17and 11.17A. Both were updated in March 2018, but in general lay out the regulator's overall rules regarding PAD for employees and tied agents, or "relevant persons." Together, these two Conduct Of Business Sourcebook sections are meant to help firms construct a "control framework" to help minimize the risk that personal trading might:

  • Conflict with the interests of firm clients.
  • Result in market abuse, including front running client orders.
  • Create a conflict between employees’ personal interests and their regulatory obligations to report suspicious transactions or orders.

What the study found, however, was not what the FCA was hoping for, and quite the opposite of the neat and tidy control framework as laid out above: "The way in which firms control and monitor PAD varied substantially in terms of practice and standard." Further: "While many firms require employees to sign regular attestations confirming compliance with PAD rules ... this [was] not always accompanied by proper arrangements ... to monitor and control PAD."

And finally: "We are generally concerned that firms in this sector have not identified or managed the PAD risks or conflicts of interest specific to their business model adequately. This may stem from a culture which has not sufficiently identified the potential for harm to clients or market integrity caused by inappropriate PAD practices. The absence of pre-approval for PAD trades, the low number of identified breaches, and the absence of STOR submissions within the sample of firms may indicate a lack of effective monitoring and management of risks."

"To achieve effective compliance," offers the regulator, "firms need to understand the PAD risks posed by their business models, design clear policies and processes around those risks, and develop a culture where adherence to their rules is the norm. When breaches of PAD policies do occur, firms need to investigate them and, where appropriate, take disciplinary action." Any arrangements made by the firm to effect the above directives must be designed to ensure that:

  • Each relevant person covered is aware of firm restrictions on personal transactions.
  • The firm is promptly informed of any personal transaction entered into by a relevant person, either by notification of that transaction or by other procedures enabling the firm to identify such transactions.
  • In the case of outsourcing arrangements, the service provider to which the activity is outsourced maintains a record of personal transactions entered into by any relevant person and provides that information to the firm promptly upon request.
  • Regardless of whether the notification procedure is handled internally or externally, a record is kept of the personal transaction notified to the firm or identified by it, including any authorization or prohibition in connection with such a transaction.

As an instrument for ensuring that "each relevant person covered is aware of firm restrictions on personal transactions," STAR Personal Trading offers workflows that lets compliance see certifications through from start to finish. And centralized, electronic storage means never having to rifle through a filing cabinet in search of a cert when it's audit or investigation time.

But it's pre-clearance that really gets at what the FCA seems to be asking for. With the STAR Platform, employees have an easy-to-access, easy-to-use application in which to enter their desired trade requests and—in most cases—get a fast yes or no answer as to whether or not they can proceed; this is possible because the STAR Platform allows financial firms to preset precisely what kinds of investments their employees can and can't trade in, down to the ticker.

And not having to wait on an answer means employees are less likely to bypass pre-clearance out of frustration or the fear of losing out on a good share price. Thus, with STAR, as long as employees use the system the firm is without a doubt "promptly informed of any personal transaction entered into by a relevant person," as the FCA requires. In addition, STAR’s audit and storage capabilities preserve "a record … of the personal transaction notified to the firm or identified by it, including any authorization or prohibition in connection with [it]."

The STAR Mobile app, which lets employees pre-clear trades from their mobile devices, means an even greater likelihood—due to sheer convenience—that the information on employee trades the FCA is pressing for will make it into a secure location that's easy for compliance to monitor. PAD may have suddenly come under the intense glare of the FCA regulatory spotlight, but with STAR Personal Trading and its comprehensive employee conflicts of interest monitoring capabilities, you can at least know that there really is an app for that.  

With clients in more than 80 countries, StarCompliance is a global leader in financial compliance software. Our scalable, easy-to-use solutions provide a 360-degree view of employee and business activity to help firms monitor and reduce risk, meet regulatory obligations, gain efficiencies, and drive employee adoption. To see what Star can do for you, book a FREE demo now.



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