FCA issues Market Watch 69

May 23, 2022 12:00:00 AM

What has happened?

In its Market Watch 69, issued in May 2022, the FCA discusses firms’ arrangements for market abuse surveillance, drawing on its observations from engaging in this area with small and medium-sized firms. It also discusses some observations about obligations involving policies and procedures to counter the risk that a firm is used to further financial crime, specifically criminal market abuse, investigations into potential market abuse by firms’ employees, and when firms should submit a Suspicious Transaction and Order Report (STOR).

What are the key points of this Market Watch?

In its previous Market Watch issues 48, 50, and 56, the FCA had discussed its observations from its ongoing programme of STR/STOR supervisory visits to firms. As well as visits, this supervisory work involves other types of engagement, one of which is the periodic sending of a STOR questionnaire, which the FCA has done several times since 2014. It is now discussing some of the recurrent themes and observations from the responses to the questionnaires and its subsequent follow-up work.

Market abuse risk assessments

While the FCA continues to see good examples of work in this area, it has observed some firms that are less effective at identifying the market abuse risks to which they are exposed. Where firms do not consider different types of market abuse, the different areas of business in which they operate, how that business is undertaken, and the different asset classes and instruments traded, they may not be able to adequately identify market abuse risks and align their monitoring programme to them to ensure effective surveillance. This may also be the case where firms do not review and update their systems as necessary to ensure they remain effective in the context of risks arising from changes in their business.

Order and trade surveillance

FCA interactions with firms indicate that surveillance arrangements are improving across the industry; however, there continue to be variances. While the FCA has seen examples of comprehensive, tailored systems, accurately aligned to risk assessments, it has also seen instances of little or no monitoring taking place. Additionally, where monitoring is undertaken, there are elements of it that may hinder effectiveness.

Experience indicates that third-party system functionality in areas such as tailored calibration has progressed in recent years. However, sometimes firms are unaware of these developments and so may not be making the best use of the technology. More generally, where firms use vendor-supplied systems, they should ensure they understand how alert scenarios work, otherwise they may fail to identify gaps or weaknesses in their surveillance.

Policies and procedures

The FCA has observed instances where policies and procedures are vague or have limited detail, such as directing analysts reviewing surveillance alerts to look for signs of market abuse but providing no guidance on what these signs might be or what materials/information to use or consider.

Outsourcing

The FCA has observed that some firms, notably where they are part of a larger group with operations overseas, outsource aspects of their surveillance to another part of their organisation, or to a separate organisation. In some cases, there is a limited understanding and/or oversight of the surveillance taking place. This includes inadequate knowledge of alert logic and calibration, weak or no quality assurance work on triaging alerts, and insufficient management information.

Front office

The FCA observed that some firms place a reliance on front office staff to identify potential market abuse, sometimes giving them sole responsibility for monitoring. In other instances, firms cited the front office’s role as mitigation for a limited or non-existent surveillance by financial crime compliance. In those cases, this leads to several risks; that all potentially suspicious activity is not consistently identified and escalated, that staff know when trading activity might be escalated and might share that knowledge with clients and that staff whose remuneration is linked to client business might be conflicted in considering whether to escalate.

Countering the risk of market abuse-related financial crime

The FCA has found that firms which have created a formal framework to manage relevant risks are generally able to take appropriate decisions in managing those risks in a consistent manner. However, those firms yet to create a framework sometimes struggle to demonstrate that their approach is consistent or effective.

How can we help you?

If you’d like to know more about how we can help you with your market abuse surveillance arrangements or any other financial crime compliance issues, our specialist team is here to help.

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