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FCA and PRA enforcement trends: market abuse

The UK Financial Conduct Authority (FCA) is taking a multi-pronged approach to improving market conduct. Whilst FCA outcomes for substantive market abuse remain modest, 19% of FCA fines imposed on firms in 2022 related to weaknesses in market abuse surveillance. This is a significant up-tick on previous years. 

General enforcement trends

The number of open FCA enforcement investigations relating to substantive market abuse offences such as insider dealing, market manipulation and unlawful disclosure, continues to decline, having fallen by 35% since 2018/19. Outcomes remain low too, with none announced in 2021/22 and only one in 2022. However, the FCA has published three decision notices against individuals in relation to market manipulation, all of which have been referred to the Upper Tribunal, and it appears to have a pipeline of cases nearing completion. 

There has been a noticeable uptick in enforcements relating to market abuse systems and controls, with three significant enforcements announced in 2022. In one of these cases, decision notices were also issued against three of the firm’s former directors, two of whom have been prohibited. 

Looking a little further back, the number of open FCA enforcement investigations where the primary issue being investigated is the making of misleading statements has shot up by 154% in the last six years and the FCA is building a successful track record for those cases.

Criminal prosecutions

Market abuse accounts for roughly a third of the FCA’s criminal and dual-track investigations, but the number of convictions secured by the FCA in relation to market abuse remains low. In 2022, the FCA secured the second of two convictions against former executives of an AIM listed company for making misleading statements, contrary to the section 89 of the Financial Services Act 2012, as well as various accounting fraud offences. 

The conviction rate on FCA prosecutions relating to market abuse is currently sitting at 40% but this is based on a very small pool of cases. Again, the FCA appears to have a pipeline of cases. It kicked-off 2023 with the announcement of five prosecutions for conspiracy to commit insider dealing (and money laundering offences) and it seems likely that more activity will be announced later in the year.  

Individual accountability 

One notable case in 2022 involved a listed issuer that was censured by the FCA for recklessly publishing announcements that were misleading and did not accurately disclose the true performance of the company. The FCA also issued decisions against three former directors of that company for being knowingly concerned in the company’s breach under section 131AD of the Financial Services and Markets Act 2000 (FSMA). 

All three individuals have referred the FCA decisions made against them to the Upper Tribunal on a number of different grounds, including the relevant test for an individual being “knowingly concerned” in a company’s breach, in the context of market abuse. The individuals in these cases argue that the FCA must demonstrate that they actually knew the announcements were false, whereas the FCA considers that it is enough to demonstrate that the individuals knew of the information contained in the announcements and should have known that the announcements were misleading. 

The FCA’s position is that the test should not favour directors who turn a blind eye or fail to engage meaningfully with their responsibilities. 

Systems and controls 

The headline decline in the number of substantive market abuse cases is interesting but it would be a mistake to infer from these numbers that the FCA’s focus on tackling market abuse is declining. It is clear, for example, from the FCA’s Strategy for 2022-25 that tackling market abuse remains a key strategic priority for the FCA. 

Market abuse surveillance is probably the area of the FCA that is most forward-looking with regard to its use of data and technology. The FCA has dedicated specialist supervision teams in its Market Oversight division focused specifically on market abuse and this still constitutes a significant organisational investment. 

The FCA’s own market surveillance is partly dependent on the data that it receives from firms, including suspicious transaction and order reports (STORs). The FCA had been concerned about under reporting of STORs during the COVID-19 pandemic. The number of STORs filed is increasing, by 15% in 2021, but is not yet back to pre-pandemic levels. Despite the FCA warning that it expects to see more STORs filed in relation to non-equities asset classes, the vast majority of reports (93%) filed in 2021 related to suspected insider dealing in equities. 

The FCA has issued multiple warnings about the importance of firms’ market abuse surveillance controls and these are now being translated into enforcement action. Areas of weakness the FCA has identified include: relying on inadequate or out-of-date market abuse risk assessments; using automated monitoring systems that have not been configured to the firm’s market abuse risk assessments; and failing to accurately or promptly file STORs. The availability of FCA warnings and guidance is often cited as an aggravating factor when it comes to calculating penalties, so now would be a good time to review the available guidance and ensure adequate systems and controls are in place, and are working as they should. 

This post is based on an article “FCA and PRA Enforcement Action: Trends and Predictions” which first appeared in the January/February edition of PLC Magazine. A copy of the full article is available here and on the PLC Magazine website