On 18 October 2019, the FCA published the latest issue of Market Watch (no. 62), its newsletter on market conduct and transaction reporting issues.
In this issue of Market Watch, the FCA shares its concerns about personal account dealing (PAD), where employees of authorised firms trade for themselves rather than for clients. It also sets out the findings from the FCA’s study into PAD activity, policies, processes and systems and controls in a sample of wholesale broking firms.
The FCA requires firms to establish appropriate rules governing PAD undertaken by relevant persons (including employees and tied agents). These are set out in the Conduct of Business sourcebook (COBS) 11.7 and 11.7A. Failing to adequately assess the conduct risks that PAD may pose, or to have adequate systems and controls in place or to train staff to observe appropriate standards of market conduct may leave a firm or its staff exposed to raised risks of regulatory action.
The FCA is concerned with how often it sees apparent breaches of PAD policies and the issues which come to light as a result of its supervision of firms. These include:
- employees in the front office not appearing to understand their firm’s PAD policy despite having signed attestations that they have;
- employees deliberately not declaring external accounts to their employer or circumventing requirements; and
- employees trading in breach of their own firms policies i.e. placing spread bets on the firm’s own shares.
As a result of its findings, the FCA asks firms to consider the following matters when designing their PAD policy:
- where PAD creates conflict of interest or market abuse risk within its business model and how such risks can be adequately mitigated;
- what effective monitoring and control of PAD it could do;
- how it ensures that employees are aware of their obligations;
- the appropriate degree to which a firm should rely on employees acting with integrity and following internal procedures, and what level of post-trade monitoring of PAD activity is necessary to ensure employees comply with policies; and
- whether senior managers are leading by example when engaging in PAD and act as advocates of strict compliance with the firm’s PAD rules.
In terms of next steps for firms:
- firms should consider the points raised in this issue of Market Watch and the requirements set out in COBS 11.7 and COBS 11.7A;
- firms should also look at the FCA’s expectations of approved persons set out in the APER Statements of Principle and Code of Practice for Approved Persons and the new Code of Conduct Rules;
- firms should assess how they manage conflicts of interest and the risk of market abuse and the policies and processes that they have in place for managing PAD by employees; and
- firms should consider how they can monitor PAD by employees. Where they identify areas of concern, the FCA expects them to revise their arrangements. Firms need to work out how serious any breach was, assess the requirements of Principle II of the Principles of Businesses, and consider if they should inform the FCA.
Additionally, the FCA provides an update to Market Watch 59 which highlighted common errors observed in transaction reports. The FCA’s ongoing monitoring of transaction reports and engagement with firms has led it to identify further quality issues. These include issues relating to reporting transaction prices, inaccurate reporting of national identifiers, misreporting the contents of certain indicator fields, and the misuse of aggregate client account.