On 17 May 2022, the FCA published the latest edition of Market Watch, its newsletter on market conduct and transaction reporting issues.

In Market Watch 69 the FCA covers firms’ arrangements for market abuse surveillance, drawing on its observations from engaging with small and medium sized firms. The FCA states that whilst the topics covered apply to all firms subject to surveillance requirements under Article 16(2) of the UK Market Abuse Regulation (UK MAR), they may also be particularly relevant for firms with less complex business models. The FCA also discusses some of its observations about obligations involving policies and procedures to counter the risk a firm is used to further financial crime, specifically criminal market abuse, as per SYSC 6.1.1R. It also covers investigations into potential market abuse by firms’ employees and when firms should submit a suspicious transaction and order report (STOR).

Key points in Market Watch 69 include:

  • Market abuse risk assessments: The FCA observed that some firms are less effective than others at identifying their exposure to market abuse risks resulting from the methodologies they have utilised. Particularly, firms who do not consider different types of market abuse, the different areas of business in which they operate, how the business is undertaken, and the different asset clauses and instruments traded. This may also prove to be the case where firms do not review and update their systems in order to remain effective against new emerging risks.
  • Order and trade surveillance: In relation to order and trade surveillance the FCA observed cases where little or no monitoring is taking place, and where the effectiveness of current monitoring could be improved. Whilst there has been a progression within third party system functionality, firms who are not aware of these technological developments, in particular, vendor-supplied systems, should endeavour to understand and incorporate the technology, in order to improve the identification of gaps and weaknesses in their surveillance. Furthermore, proper consideration of the surveillance thresholds will ensure appropriate and proportionate surveillance. The FCA also observed instances where firms were not monitoring all orders and trades, resulting in a lapse in the identification of market manipulation. Additionally, weaknesses were found in the way some firms were reviewing their surveillance exception alerts. In some cases firms were only escalating and considering reporting where they had identified an obvious link between the client and the issuer or source of the inside information. The FCA reminds firms that the existence of such a link may be an aggravating factor in assessing whether reasonable suspicion of market abuse has been reached, its absence does not necessarily serve as sufficient mitigation to close alerts.
  • Policies and procedures: The FCA has witnessed that, where policies and procedures in relation to monitoring for market abuse are vague or have limited detail, information considered in alert review may be compromised. As such, alerts are being inappropriately closed. Likewise, it was shown in these circumstances that firms struggled to ensure a consistent approach. The FCA proposes that firms may consider creating policies and procedures that provide a level of guidance on how work should be undertaken.
  • Outsourcing: The FCA recognised that there may be organisational benefits for firms, particularly in large groups with overseas operations, to outsource aspects of their surveillance to another part of their organisation, or to a separate organisation. However, it also observed that in some cases there is limited understanding and/or oversight of the surveillance taking place. In a small number of cases, the FCA found that UK compliance teams had negligible understanding of the surveillance undertaken at group level and discovered the surveillance was ineffective for the UK business. The regulator reminds firms that UK MAR does not preclude such arrangements, but the responsibility for identifying and reporting potential instances of market abuse to the FCA rests with the UK entity subject to UK MAR obligations.
  • Front office: The FCA observed that where responsibilities for market abuse surveillance rests with both the front office and an independent compliance function, surveillance was more likely to be undertaken free from conflicts of interest, as opposed to relying solely on front office staff. The FCA observed that where a firm cited its front office’s role as mitigation for a limited or absence of surveillance in compliance several risks arose including that all potentially suspicious activity is not consistently identified and escalated.
  • Countering the risk of market abuse-related financial crime: The FCA refers to chapter 8 of its Financial Crime Guide which it published in December 2018 and which sets out guidance for firms in relation to market abuse-related financial crime. In its follow up work the FCA has found that firms which have created a formal framework to manage relevant risks are generally able to take appropriate decisions in managing those risks in a consistent manner. Firms that have not yet created a framework were found to struggle to demonstrate that their approach was consistent or effective. The FCA encourages firms to ensure that they have a formalised SYSC 6.1.1R framework in place.
  • Investigations into potential market abuse by firms’ employees: In relation to investigations into potential market abuse by firm’s employees, the FCA reminds firms subject to Article 16 UK MAR that they should also consider the requirement to submit a STOR without delay, once they have a reasonable suspicion that the relevant conduct could constitute market abuse. This may be before the full internal investigation is concluded. If appropriate / necessary, any information not available at the time of the submission can be communicated to the FCA at a later date.