How firms should focus their anti-market abuse work during the pandemic
What has happened?
A speech was given on 12 October by Julia Hoggett, the FCA Director of Market Oversight, which conveys the FCA’s view of how firms should focus their anti-market abuse work during the pandemic.
What do you need to do?
Some key points for firms to consider raised in Julia Hoggett’s speech are reproduced below.
Inside Information
New challenges, including controlling inside information moving within a firm and leaving a firm, may also manifest at times like these. Working from home, which many insiders will still be doing even as some trading floor staff have returned to the office, also changes the controls landscape. In initially instituting social distancing in the office, some firms were challenged in terms of supporting the appropriate physical distance to maintain information barriers. At home, this is equally important, where inside information may need to be kept from partners or flatmates.
What constitutes inside information may change radically during the pandemic: knowledge that an entire businesses’ operations would have to shut, or indeed could open again; knowledge of whether a company had utilised the furlough scheme or any of the pandemic lending schemes; information about the pace of cash flow burn – all issues that might either not have come up in the past, or not have been material, but which now are. This requires companies and their advisors to be alert to what information is likely to drive their valuation and to bring a potentially wider range of issues to be discussed at their disclosure committees. Equally important is how listed companies consider the controls over this information.
Surveillance alert triage and Suspicious Transaction and Order Reports (STORs) in volatile markets
The dramatic increase in trading activity and volatility is in most cases leading to a surge in alert volumes across the board.
Firms and venues have managed the increased output in a variety of ways – some have been able to deal with it with some flexibility, such as by transferring staff across from one compliance discipline to another to help handle sudden short-term increases in alert volume. This demonstrated the value of cross-training, and the value of flexible staff, and a nimble approach from managers. Other firms have recalibrated or applied additional filters to their alert generation – to ensure output is meaningful.
There is no doubt that the job of managing alerts is made considerably harder by a rise in the volume of alerts driven by the volatility we experienced and hence appropriate calibration of any alerting protocol to take account of the market context is reasonable. Whilst the fundamentals of the market abuse offences are constant, the ways in which the risk may manifest are not. The manner of surveilling for them must, therefore, also change.
Crucially, any changes to calibration need to be appropriately considered, documented and governed. Where new dynamics do appear to have arisen, firms may wish to consider some form of thematic analysis or retrospective review to ensure those dynamics are captured for future risk assessments.
Firms should continue to escalate and report instances of potentially suspicious activity by considering whether the bar of ‘reasonable of suspicion’ has been met. While we understand that the exceptional market conditions may have an impact on what is judged to constitute unusual, or anomalous, the process should be the same. Firms should assess the evidence, apply context and make informed decisions. In other words, we do not expect firms to submit poor quality STORs simply because they have had more alerts.
We do however recognise that backlogs were and can be created in these circumstances and that it is entirely possible they could be created again. If your firm has a significant backlog, please promptly advise our STOR Supervision team of the issue, its scale and anticipated timescales for clearance. In addition, while you should always aim to submit without delay, we recognise this might be difficult from time to time. If you submit a STOR and it is outside the normal timeframe, we would ask you to advise us of the cause of the delay at the time of the submission as that may obviate the need for us to contact you.
While scenarios emerged early in the pandemic where the usual levels of recording and surveillance were not possible, our experience suggests firms have now overcome these challenges. Our expectation is that going forward, office and working from home arrangements should be equivalent – this is not a market for information that we wish to see be arbitraged.
We expect firms to have updated their policies, refreshed their training and put in place rigorous oversight reflecting the new environment – particularly regarding the risk of use of privately owned devices. These policies should be demonstrable to us and to your audit teams. It should go without saying that policies should prevent the use of privately owned devices for relevant activities where recording is not possible. New communication mechanisms, before they are used, should have controls in place where required and their use be approved by firm management.
Another concern arising from remote working is the oversight and provision of advice from compliance advisory teams. Where firms are operating back in the office, it is important to consider whether the compliance support to those desks is appropriately structured and staff have access to the relevant materials and support.
There is also a risk of less self-policing amongst front office staff. As an example, consider a pre-crisis situation where a front office employee observes, or overhears, something questionable involving a colleague nearby. In normal – pre-crisis – circumstances, we would hope, and expect, that the activity would be questioned, or reported to Compliance. With people working remotely, especially when staff are working from home, that type of first-line control may be diminished, or absent.
There has been a great deal of public commentary regarding the risk of personal dealing whilst people are working from home. There has also been a significant increase, particularly amongst slightly younger generations, in the opening of new personal trading accounts over the course of the pandemic. It is essential that where firms facilitate the access of private individuals to regulated markets, they are alive to the risks this type of trading may pose in their monitoring as well.
How can we help you?
If you’d like to know more about how we can help you with your market abuse controls with any other aspect of FCA compliance, our expert team is here to help. Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.