Market abuse controls: The FCA really means business
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Suspicious Transaction Reports (STRs) once again dominated the latest issue of the UK Financial Conduct Authority’s (FCA) Market Watch Newsletter published the other week. Based on its review of 38 firms in 2015, the FCA continued to voice concerns that there is a general ‘under-reporting’ of suspected market abuse across most asset classes. The FCA also left readers in no doubt that it will take tough action against firms that are found to have poor market abuse controls.
In the past, firms have been harshly criticised for defensive reporting of STRs (i.e. where a firm is unsure whether the activity in question reasonably leads to a reasonable suspicion of market abuse, but adopts a cautious approach and submits an STR nonetheless). However, the FCA is now of the view that it receives ‘little or no defensive reporting from the industry’, even though it received over 1,800 STRs in 2015 (a 13% increase from 2014).
On the contrary, however, the FCA continues to worry that firms are ‘under-reporting’ STRs and setting their internal thresholds for submitting STRs at too high a level.
The test for submitting an STR – ‘reasonable grounds’
The test that firms are required to apply when deciding whether to submit an STR is set out in SUP 15.10.2R: ‘A firm which arranges or executes a transaction with or for a client and which has reasonable grounds to suspect that the transaction might constitute market abuse must notify the FCA without delay’.
During its supervisory visits, the FCA found that some firms were setting too high a bar for what constitutes ‘reasonable grounds’ (known as the ‘reasonable suspicion’ test) in this context. For example:
- Some firms have sought a level of evidence amounting to proof that market abuse has taken place, as opposed to reasonable suspicion that it may have done.
- Other firms were found to have focused their efforts on closing suspicious trading alerts, rather than undertaking an appropriate, balanced review as to whether there was a reasonable suspicion of market abuse. The FCA urged firms to ‘be cautious of seeking reasons not to submit’.
In some cases, deciding whether or not to submit an STR can be tricky. However, keeping in mind that the threshold is one of ‘reasonable suspicion’ in this context is important. Likewise, firms may want to review and take into account examples of when STRs have been submitted by them in the past, or any feedback the FCA has provided to them privately about their submission of STRs.
In the event that the FCA does receive STRs that do not meet the ‘reasonable suspicion’ threshold, the FCA usually provides feedback to firms on an individual basis. The bottom line? If the FCA thinks you are engaging in defensive reporting they will not hesitate to let you know about it.
The FCA will be tough on firms with weak market abuse controls
The FCA’s latest Market Watch Newsletter ended on quite a stern (and aggressive) note: ‘If we continue to find firms that fail to identify or mitigate risks associated with market abuse, or fail to report to the FCA instances where market abuse has occurred, then we will take stringent action against those firms’. The FCA also stated that it has an ‘increased focus’ on firms’ market abuse controls. This is an area where we can perhaps expect to see more FCA enforcement activity over the coming months.
These comments came off the back of the FCA’s recent enforcement action against WH Ireland, which was fined £1.2 million and banned from taking on new customers in one of its divisions for 72 days, due to weaknesses relating to its market abuse controls during 2013. Our summary of the some of the key points arising from the FCA’s action against WH Ireland relating to STRs can be found here.