Why WFH Is Making The FCA Nervous And What Firms Can Do About It

In Market Watch 63, the regulator's latest newsletter, the FCA outlines its concerns surrounding remote work and the increased potential for market abuse. We outline how Star software can help

"We recognize the uncertainty created by the coronavirus crisis and operational challenges arising from the public policy on social distancing. However, we expect all market participants, including issuers, advisors and anyone handling inside information, to continue to act in a manner that supports the integrity and orderly functioning of financial markets. This includes complying with all their obligations under relevant regulation, including the Market Abuse Regulation (MAR)." So says the FCA in Market Watch 63, the regulator's most recent newsletter. It's a not-so-gentle reminder that—despite ongoing public health concerns and the resulting lockdowns—market integrity is as important as ever.

And perhaps partially because the FCA had already made a series of pandemic-related enforcement concessions (covered here and here), it decided it was time to make sure things didn't get too loosey-goosey out there. Today we hit the highlights of what the FCA has to say in Market Watch 63, and offer up some Star software solutions to help keep you and your firm on the regulator's good side.

GENERAL OVERVIEW OF CURRENT FCA MESSAGING
The FCA anticipates many issuers will need to seek additional capital during this economic downturn, leading to an increase in primary market activity. This, coupled with alternative working-arrangements, make it important that the right controls surrounding market abuse, personal conduct, and managing conflicts of interest are firmly in place. As such, the FCA calls for a particular focus on ensuring that:

• Inside information continues to be appropriately identified and handled by all persons involved in the information chain, so that it's not misused for insider dealing or commercial advantage.
• Inside information is appropriately disclosed by issuers so that investors are not misled.
• Robust market surveillance is maintained: in the context of changes in market conditions and the current extensive use of alternative-working arrangements.
• Conflicts of interest that may arise around capital raising events are identified and managed.

MAR INSIDE-INFORMATION OBLIGATIONS & STRATEGIES

• The circumstances created by coronavirus will create new challenges for market participants managing risks around identifying, handling, and disclosing inside information.
• More issuers coming to the market to recapitalize will increase the interactions and flows of inside information between issuers, advisors, and other market participants.
• Remote working by market participants may also create new challenges around how any existing systems and controls are now applied for handling inside information.
• Consider reviewing the availability or application of controls for restricting access to inside information on secure IT systems and how staff access can be remotely supervised.
• Common industry controls such as a mandatory two-week holiday for front office staff may be appropriate at this time, and may also support the mitigation of other non-market abuse risks.
• Repeating or updating training to refresh staff on how employees should be handling inside information may also be a sensible consideration for some market participants.

SPECIFIC CONSIDERATIONS FOR ISSUERS & ADVISORS

• It's important to maintain adequate procedures, systems, and controls to comply with disclosure obligations under MAR. FCA views on this are set out in Market Watch 58.
• Issuers must carefully assess what constitutes inside information, as coronavirus and public policy responses may alter the nature of information that is material to a business’s prospects.
• Issuers should carefully judge what information a reasonable investor would now be likely to use as part of their investment decisions in the context of coronavirus.
• Issuers should monitor whether any new information is materially different from previous guidance they have announced publicly, and which might now be misleading to investors.

INSIDER LISTS: FCA GUIDANCE AND STAR SOLUTIONS

• In order to handle and control inside information, issuers must continue to meet their obligations to ensure all staff who have access to inside information are included on insider lists.
• Issuers remain responsible for insider-list obligations under MAR where they delegate maintaining the insider list to a third party.
• Given the risks that arise from WFH, issuers may want to reaffirm that persons on insider lists continue to be aware of when they have access to inside information, and their legal and regulatory duties in relation to insider dealing and the unlawful disclosure of that information.
• Issuers often use project/prohibited-dealing lists to record individuals who may have access to confidential information that has not been deemed inside information. Such lists can be an important tool at this time for identifying and monitoring new sources of inside information.

StarCompliance offers software products and services designed to let you monitor for and mitigate against insider trading:

Automated Trade Screening puts trades into the context of key market events, such as price movements and M&A. Once a suspicious trade is detected, the STAR Platform allows compliance officers to easily raise a case, with links to all relevant information and news articles. Interactive graphs make pinpointing where insider trading may have occurred simpler—showing relevant trades, market closing prices, and high-impact news items. And just by virtue of the fact you have such a robust, automated tracking and monitoring system in place, you'll demonstrate due diligence to regulators.Insider List Management lets you organize and centralize your most important insider list data. It records every firm employee involved in every project, including when they join, what information they're privy to, and when they leave. Insider List Management also allows you to easily manage and automate communications, so employees are informed as to when they’ve been added to or removed from an insider list. And because you have a record of every detail on every project at your fingertips, if and when regulators or issuers ever request an insider list you can easily produce one.

MARKET SOUNDINGS: FCA GUIDANCE AND STAR SOLUTIONS

• Wall-crossings play an important part in capital-raising transactions, but the inside information involved must be strictly controlled to prevent unlawful disclosure and insider dealing.
• The MAR market-soundings regime provides a framework for controlling inside information when market participants undertake wall crossings.
• Disclosing market participants should maintain appropriate records of their interactions, through recorded lines or written minutes, for example.
• Receiving participants should assess whether the disclosure includes inside information and be aware of their obligations around trading on that information and keeping it confidential.
• Receiving participants should be made aware that soundings are for issuers to discover their interest in and views on the terms of a possible transaction.
• This information should only be internally communicated where necessary to those persons that are fulfilling the specific duty to provide an opinion to the issuer.
• In Market Watch 58 and Market Watch 51, the FCA recognized the benefit of a "gatekeeper model" as a contact point for soundings that controlled their receipt and internal dissemination.

StarCompliance offers a product designed to act as a "gatekeeper" for market-sounding activity:

Compliance Control Room organizes your firm's deal information flows on a single platform, so you can more easily manage and monitor them. You get timely collaboration between deal owners, deal-team members, control-room teams, and compliance leadership. You get sophisticated conflicts-checking capabilities, that let you search for and manage inter-deal conflicts—as well as employee and third-party conflicts of interest—across all deals and related parties. You get centralized list management, which lets you associate entries with projects and associate each entry with the type of required restriction.

Compliance Control Room also lets you track, record, and monitor wall crossing requests and approvals as deal-team members initiate requests for employees to move from the public to the private side of a deal. An employee portal allows people anywhere in the company to report receipt of MNPI, whether it originates on the public or private side. Finally, you get easy integrations and detailed audit logs with Compliance Control Room.

PERSONAL ACCOUNT DEALING: FCA GUIDANCE AND STAR SOLUTIONS

• In Market Watch 62, the FCA shared its concerns about personal account dealing (PAD), where employees of an authorized firm trade for themselves rather than for clients.
• Given the potentially heightened risks of personal dealing for staff working from home, firms should consider and ensure that they have appropriate controls around PAD.

StarCompliance offers a suite of software products designed to help your firm monitor and mitigate employee conflicts of interest, including Personal Account Dealing:

Star's Personal Trading product makes detecting personal trading conflicts simpler and easier than ever—assessing trade requests against a fully configurable rules engine you define. Employees quickly and easily fill out pre-clearance request forms and receive automated approval or denial decisions within seconds. You can also implement escalation channels for trades that need further analysis and review by the employee’s manager and/or compliance team members. A highly configurable rules engine means your firm’s code and policies inform and automate the pre-clearance process.

Easy integrations mean you can leverage decision-making data from systems across your business, like HR and executed trade records. Strong case-management functionality allows for easy reviews, investigations, and audits. Strong reporting and analytics functionality provides you a 360-degree view of employee activity. And Star's Compliance Dashboards give an unprecedented view of many critical elements of employee activity almost as it happens: for proper, timely assessment by compliance officers and supervisors alike.