On 12 October 2020, the FCA published a speech by Julia Hoggett (FCA Director, Market Oversight) entitled Market abuse in a time of Coronavirus.
Key points in the speech include:
- The FCA has sought to place the market abuse risk assessment at the heart of how it encourages firms and venues to think about all the activities they need to undertake to surveil for market abuse.
- The FCA understands why it is often tempting for firms to look purely to the behaviours described in the recitals to the Market Abuse Regulation or to utilise ‘out of the box’ alerts from certain technology providers. However, whilst that may provide assurance that the firm has followed a process, it may not provide assurance that it has effective controls in place to mitigate the risks that the firm actually faces.
- It is essential in these changing times that firms identify the risks associated with the new environment in which they are operating.
- The need for firms to ensure that they have appropriate controls over inside information and effective information barriers is even more critical during these times.
- Sometimes simple steps can make the greatest difference, such as regularly reviewing how many people are permanent insiders in a firm and whether they are necessary – including in the firm’s technology division.
- The FCA highlighted at the start of the pandemic the importance of lending firms managing conflicts if they were seeking capital raising mandates, but equally, with the increase in M&A transactions, an increased volume of inside information will be generated and firms should ensure that they are alert to this, and identify when during a transaction, controls become necessary.
- Market participants should ensure that they have proper controls in place to recognise the point during transactional discussions with an issuer at which to restrict themselves from trading in relevant securities. This is especially true of firms which invest in distressed debt markets where inside information is not always as clearly demarcated as in equity markets, and there is the potential for misuse of that information to occur, particularly in relation to credit restructuring talks.
- What constitutes inside information may change radically during the pandemic. This requires firms and their advisors to be alert to what information is likely to drive their valuation and to bring a potentially wider range of issues to be discussed at their disclosure committees. Equally important is how listed companies consider the controls over this information.
- The FCA has spoken to many firms and trading venues to discuss maintaining appropriate trade surveillance throughout the pandemic.
- The job of managing alerts is made considerably harder by a rise in the volume of alerts driven by the volatility being experienced and hence appropriate calibration of any alerting protocol to take account of the market context is reasonable.
- Whilst the fundamentals of the market abuse offences are constant, the ways in which the risk may manifest are not. The manner of surveilling for them must, therefore, also change.
- Crucially, any changes to calibration need to be appropriately considered, documented and governed. Where new dynamics arise, firms may wish to consider some form of thematic analysis or retrospective review to ensure those dynamics are captured for future risk assessments.
- Firms should continue to escalate and report instances of potentially suspicious activity by considering whether the bar of ‘reasonable of suspicion’ has been met. While the FCA understands that the exceptional market conditions may have an impact on what is judged to constitute unusual, or anomalous, the process should be the same. Firms should assess the evidence, apply context and make informed decisions. In other words, the FCA does not expect firms to submit poor quality suspicious transaction and order reports, simply because they have had more alerts.
- The FCA expects firms to have updated their policies, refreshed their training and put in place rigorous oversight reflecting the new environment – particularly regarding the risk of use of privately owned devices. These policies should be demonstrable to the FCA and to the firm’s audit teams.
- Before the pandemic, the FCA had observed the risk of an uptick in what it defines as ‘single stock events’ – the potential that individuals within listed companies, or with access to information about listed companies – were inappropriately utilising that information to make a profit or avoid a loss in the relevant securities. The FCA remains exceptionally focused on this type of event.