On 14 February 2024, the Financial Conduct Authority (FCA) published Market Watch 77. In this edition of Market Watch, the FCA shares its observations on trade by organised crime groups (OCGs) and how firms can mitigate the risks of being used to facilitate their trade.

Trading by organised crime groups

The FCA warns that suspicious trading by members of OCGs in products whose underlying securities are UK and internationally listed equities, forms a significant component of the overall volume of the suspicious trading that it observes in equity markets. Section 45(6) of the Serious Crime Act 2015 defines an OCG as a group that (1) has as its purpose, or as one of its purposes, the carrying on of criminal activities and (2) consists of 3 or more persons who act, or agree to act, together to further that purpose.

Insider dealing is a criminal offence under Part V Section 52 of the Criminal Justice Act 1993. The FCA views the following to be characteristic of OCGs in equity spread bets and contracts for differences (CFDs):

  • A pattern of trading before merger and acquisition (M&A) announcements, and before press speculation about M&A.
  • Pro-active recruitment of sources of inside information.
  • The use of intermediaries who broker inside information.
  • Using umbrella accounts at overseas broking firms, which do not display equivalent standards of safeguards to UK firms, and through which the identities of the account holders may be masked.
  • The use of facilitators, including employees of authorised firms, to open accounts with such overseas firms.
  • Feeding stories about M&A, both true and false, to major financial media outlets, to benefit from the ensuing price movements.
  • Links with other types of serious crime.

Significance of this issue

The FCA flags that any group which takes pre-meditated and deliberate steps to commit market abuse presents a significant risk to market integrity.

What firms should look out for

Executing firms are warned to be alert to the possibility of being used to facilitate insider dealing by members of OCGs, and to be familiar with their obligations to counter the risk of being used to further financial crime under SYSC 6.1.1R. The FCA highlights that suspicions that a firm might be executing trades on behalf of OCGs could be triggered by:

  • Clients regularly generating Suspicious Transaction and Order Reports (STORs). 
  • Clients frequently trading before announcements of M&A activity.
  • Clients opening positions shortly before, and closing those positions immediately after, publication of speculation about M&A in the media, without waiting until any relevant issuer has commented on the speculation. 
  • Several clients trading in the same security for the first time. 
  • Clients with any connection to other current or former clients about whom the firm has concerns, or whose trade has resulted in STORs. This might include trading in similar ways.

Advisory firms should be alert to members of their staff who have access to inside information being approached by members of OCGs with a view to disclosing inside information.

How firms can guard against OCGs

The FCA suggests some measures executing firms may want to consider to guard against being used to facilitate insider dealing by OCGs, including:

  • Communicating to all clients, both existing and prospective, that the firm has a zero-tolerance approach to market abuse, has an open relationship with its regulator, submits STORs to the FCA, terminates accounts based on very low thresholds of suspicion, and liaises with other law enforcement agencies as appropriate.
  • Requesting all overseas broking firms that are clients to submit documentary evidence of adequate surveillance arrangements and a zero-tolerance approach to market abuse.
  • Regarding trades placed before media reports of M&A as potentially suspicious, and submitting STORs where appropriate, even if no public confirmation of the matter described in the media reports is made.

The FCA also suggests some measures that advisory firms may want to consider in guarding against staff being recruited by OCGs as sources of inside information, which include: 

  • Advising staff who work in M&A advisory, whose names do not regularly appear in regulatory announcements, of the risks of including references to having access to inside information in their social media profiles. It is likely that OCGs’ recruitment of information sources is targeted at junior members of staff.
  • Considering whether it is appropriate to reference the names of staff engaged in M&A advisory in the firm’s own social media profiles, beyond its principal senior contacts.

The FCA’s enforcement powers

As well as considering these steps, the FCA says firms should be aware that in addition to enforcement investigations, it has a range of tools available to it to enforce compliance of firms’ obligations under the FCA Handbook. This includes FSMA s.166 reports, voluntary requirements and own-initiative variation of permissions. The FCA confirms that it will not hesitate to use these tools where it sees poor compliance with Handbook provisions that are designed to protect and enhance the integrity of UK markets.