FCA finalised guidance on financial crime systems and controls
01 April 2019
The FCA’s revised guidance on financial crime systems and controls came into force on 13 December 2018. It is aimed at enhancing firms’ understanding of the FCA’s expectations of their financial crime systems and controls and provides practical observations of good and poor market practice.
New chapter: Insider dealing and market manipulation
The most significant amendment concerns firms’ obligations under SYSC 6.1.1R (compliance relating to financial crime). A new chapter 8 clarifies that the FCA considers insider dealing and market manipulation (under the Criminal Justice Act 1993 and the Financial Services Act 2012) to fall within the term “financial crime”. The new chapter does not provide guidance for the equivalent civil offences under the Market Abuse Regulation (MAR), as the responsibility for providing such guidance rests, presently at least, with ESMA. However the FCA recognises that firms might not distinguish between the criminal and civil regimes when implementing their controls relating to insider trading and market manipulation and may find it simpler to consider its guidance as applicable to both the criminal and civil regimes.
The guidance – an overview
The chapter is split into four key themes with the FCA’s expectations, self-assessment questions for the firm, and examples of good and poor practice set out for each. Throughout the guidance the connection between money laundering risks and insider dealing and market manipulation is emphasised as such activities often lead to the generation and transfer of proceeds of criminal activities. The FCA highlights the importance of firms having frameworks for such offences that interact with each other in a clear and efficient manner, for example a self-assessment question for a firm is: “How does the firm’s MLRO interact with the individual/departments responsible for order and trade surveillance/monitoring?”
The FCA expects senior management to take responsibility for firms’ measures in relation to insider dealing and market manipulation, including being aware of and managing the potential conflict of interest between revenue generation and the risk the firm is exposed to in the furthering of financial crime. Senior management is expected to set the ‘tone from the top’ in dealing with insider dealing and market manipulation, and to ensure its employees have the appropriate training to identify such activities. Senior management should also interact regularly with the MLRO and should not consider the firm’s regulatory obligations to be fulfilled solely by the firm filing Suspicious Transaction and Order Reports (under MAR) and/or Suspicious Activity Reports (under the Proceeds of Crime Act 2002 (POCA)). Senior managers should ensure that the individuals responsible for overseeing a firm’s monitoring of potential insider dealing and market manipulation activity will share relevant information and regularly interact with the firm’s MLRO.
Firms should regularly assess and review the risk of facilitating insider dealing and market manipulation against all its client types and asset classes, including risks posed by the actions of their own employees. For example, firms should consider if employees are able to use discretionary accounts to commit offences. Firms should ensure persons of sufficient expertise and seniority carry out risk assessments, and that the insider dealing and market manipulation risk framework is aligned with the firm’s AML risk framework.
Policies and procedures
Firms’ policies and procedures should be designed to counter the risks identified in their risk assessments. These policies and procedures should cover the lifecycle of a transaction from countering the risks of insider dealing and market manipulation pre-trade, to mitigating future risk where suspicious trading, by a client or employee, has already occurred. Firms should ensure that front office staff are able to identify potentially suspicious trading. Where an order is identified as being potentially suspicious, a firm should refuse to execute the trade where possible. Respondents during the FCA’s consultation process raised the concern that refusal to execute trades or terminating a client relationship altogether could ‘tip off’ the client and expose the firm to other potential offences eg the offence of tipping off under s333A POCA. The FCA has clarified it does not consider refusing to execute potentially suspicious tradesto constitute ‘tipping off’ but firms may want to record the rationale, decision making and communications for any actions taken against clients to show clearly the intention of the firm is not to tip off the client.
The FCA suggests firms may be able to use the results of its order and transaction monitoring obligations under MAR for the purpose of countering insider dealing and market manipulation. These monitoring activities may include surveillance of a client’s usual trading behaviour via targeted monitoring of voice and electronic communications, and initial onboarding checks. Where a client is placing orders on behalf of its underlying clients, the firm may try to gain further information by engaging with the client to establish whether they maintain tradesto constitute ‘tipping off’ but firms may want to appropriate systems and controls for countering the risk of being used to further financial crime. However, firms should recognise the scope of the criminal regime is broader than that under MAR in terms of the markets and instruments to which it applies. As a result, firms should assess whether it would be appropriate for them to rely solely on such arrangements.
The new information set out in the Guide constitutes FCA guidance, not rules. However, the FCA will take into account whether firms have complied with the guidance when it is determining whether they have complied with the FCA’s rules, e.g. SYSC 6.1.1R and the FCA’s Principles for Businesses. As a result, it is important that firms are aware of this new guidance and assess their current systems and controls against it in order to identify any gaps.