According to recent reports, hedge funds in the City of London have been told to prepare for wide-ranging checks on financial crime controls this Spring, as the Financial Conduct Authority (FCA) looks to crack down on fraudulent activity. In a letter to senior hedge fund executives, the FCA outlined its plan to conduct half-day assessments to identify potential breaches in anti-money laundering (AML) capabilities and financial sanctions rules.
In recent months, the FCA has indicated that it will be increasing its scrutiny of UK market participants around other key regulations relating to financial crime, insider trading and market manipulation. In February, for example, Julia Hoggett, Director of Market Oversight at the Financial Conduct Authority, noted that firms needed to increase their market surveillance capabilities around market manipulation to comply with the provisions of the EU Market Abuse Regulation (MAR).
The spot checks by the FCA are therefore a good opportunity for hedge funds to ensure they are meeting their compliance obligations across all areas including AML, Know Your Customer, insider trading and market manipulation. After all, there is a good likelihood that the FCA will take the opportunity to review hedge funds’ wider compliance efforts while they are assessing their AML and sanctions controls.
As part of these efforts, hedge funds will need to ensure they have in place systems and controls capable of analyzing trade and market data at volume to identify and flag suspect activity. For practical reasons, this capability should be automated and fully customizable in order to focus on specific risk areas or instruments that are relevant to the type of business transacted by an individual firm.
As hedge funds ready themselves for the FCA’s visits, speed will be critical. If a firm is lacking any key compliance capability, they will need to get this in place rapidly. This is where RegTech services come into play. Rather than building compliance capabilities in-house, a process that takes time and can be prohibitively expensive, RegTech services can be integrated into a hedge fund’s systems rapidly and at much lower cost points. Such an approach will allow firms to prepare for greater regulatory oversight faster and much more effectively.
Regulatory oversight is set to get more intense for London’s hedge funds. Firms should act now, and act fast, to ensure they are ready.
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