Earlier this month, the UK’s Upper Tribunal issued a written decision on a case involving the Financial Conduct Authority (FCA) and a trader & brokerage firm.
The FCA had fined the company for what it deemed to be an inadequate approach to its risk management systems with regards to the detection and reporting of potential instances of market abuse.
While the events in question occurred between 2013 and 2014 the FCA’s actions (which were upheld by the Tribunal) provide some interesting food for thought given that the Market Abuse Regulation (MAR) is now in full effect. So, what did we learn?
- Firms are responsible for their own market surveillance. If any doubt remained, it’s now quite clear that individual firms are responsible for their own market surveillance – firms cannot rely on underlying brokers to do this for them (something the firm in question had initially believed appropriate). While this has been the case for the sell-side for some time, MAR extends this obligation to buy-side firms.
- Fines for MAR non-compliance will be big. Under MAR, the FCA is entitled to impose unlimited fines, but as it states in its handbook these fines will be on an escalating scale: the more serious the breach, the stiffer the penalty. In the case under discussion, the firm was fined a whopping 10% (with some discounts) of its brokerage income for the entire period in question. For more serious breaches, the FCA is likely to fine as much as 20% of revenue.
- Market surveillance coverage must be total. Once the firm in question had installed an automated post-trade surveillance platform, there was a period where the firm needed to calibrate and test the system. During this time, alerts for spoofing and insider trading had to be switched off intermittently and there was no back-up system in place. The Regulator viewed this as a clear breach of the firms’ market abuse responsibilities. When putting in place a new market surveillance system, it’s therefore critical firms work with a vendor that’s able to pre-calibrate the platform so it’s ready for immediate use.
- No firm is safe. Cracking down on market abuse is a clear priority for the FCA, and as this case highlight, all firms will come under the regulatory microscope – regardless of size. The Tribunal’s decision also shows just how difficult it will be to find any legal wiggle room under MAR.
This case can be read as a warning to all financial sector firms: if you haven’t put in place a robust and comprehensive automated market surveillance system you must get your house in order now. Given the deleterious effect market abuse can have on the financial markets the regulator is coming down hard on the issue – it’s now up to firms to ensure they are fully compliant.
Contact us to receive more information about RegFocus℠ Market Surveillance, our award-winning solution which handles the many complex challenges of market surveillance, including MAR compliance.
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