Last summer the FCA published Market Watch 48 in which it set out certain observations from its suspicious transaction reporting (STR) supervisory visits that took place in 2013 and 2014. The FCA continued its programme of STR visits during 2015 and the latest issue of Market Watch sets out further observations which include the following:
- offshore surveillance teams. The FCA reports that it is increasingly seeing firms move parts of their surveillance teams offshore or ‘near shore’ to centres in other parts of the UK, EU or other countries. The FCA has seen some examples of effective offshoring of parts of the surveillance process with firms having strong training and development programmes for offshored staff, assisting their integration into the onshore surveillance team and ensuring that, where necessary, they are able to effectively challenge the business and escalate issues of concern. The FCA also notes that some firms have service-level agreements in place with their offshored surveillance functions to ensure that work is carried out to a sufficient standard and within an appropriate timeframe;
- independence of market abuse surveillance functions. The FCA notes that firms are increasingly posing questions to it in relation to how market abuse surveillance functions should fit within the first (front office) and second (compliance) line of defence structure. The FCA has seen many effective examples where firms have positioned their surveillance functions within the second line of defence. However, where certain functions of surveillance is being moved from the second line to the first line of defence, the FCA has seen examples of firms inadequately considering the potential conflicts of interest in the positioning of this surveillance. In the FCA’s experience the most effective surveillance generally comes from an independent function with a reporting line to senior management that is, as far as possible, non-conflicted. Whilst it is important for the first line to be engaged in the surveillance being carried out, the FCA has found examples of its effectiveness being diminished where too much knowledge of the technical details is shared with this area of the business;
- defensive reporting of STRs. Whilst firms have expressed concerns to the FCA that they wish to avoid ‘defensive’ reporting of STRs the FCA has seen examples where firms have potentially set too high a bar for the ‘reasonable suspicion’ test. The FCA states that in its view it receives little to no defensive reporting from the industry and, as stated in Market Watch 48, it believes that there is general under-reporting across most asset classes; and
- suspicious transaction and order reports (STORs) under the new Market Abuse Regulation. The FCA states that it intends to supervise the STOR regime in much the same way as it currently supervises the STR regime, and urges firms to continue to consider the observations set out in this Market Watch and Market Watch 48.
The FCA also sets out a reminder to firms of their transaction reporting obligations under SUP 17 and the Transaction Reporting User Pack.
The Market Watch ends with a summary of the key messages from the Final Notice against W H Ireland Limited. The Final Notice makes clear that ‘Market abuse is serious and undermines confidence in the integrity of the UK financial services sector. The first line of defence in the fight against market abuse is the systems and controls that firms have in place to protect against, detect and help prevent it, including comprehensive compliance oversight, robust governance and adequate training.’
View Market Watch 50, 27 April 2016