Ever since 2015, the Financial Conduct Authority (FCA) have been increasingly focussed on the minimisation of market abuse within the asset management industry.
The origin of the FCA’s most recent campaign against market abuse can be traced back to the findings of a thematic report published by the FCA in 2015. The report, entitled Thematic Report 15/1: Asset Management Firms and the Risk of Market Abuse (TR15/1), found that only ‘a small number of firms’ had enacted ‘comprehensive’ procedures to control market abuse, and that in the majority of firms, ‘further work is required to ensure these [procedures] operate effectively and cover all material risks’.
The report goes on to cite particular shortfalls in the management of insider information and the effectiveness of post-trade surveillance. The report claims that ‘only a minority of firms had appropriate controls for these matters’.
Within a year, the FCA had taken action. A regulatory framework designed to appropriately deal with the findings of TR 15/1 was implemented on 3 July 2016 in the form of the FCA’s Market Abuse Regulation (MAR). The aim of MAR was to ‘increase market integrity and investor protection’. To do this, it enforced ‘prohibitions of insider dealing, unlawful disclosure of inside information and market manipulation’, and outlined ‘provisions to prevent and detect these’.
While TR 15/1 was published over 3 years ago, and the consequent MAR was implemented over 2 years ago, 2018 has seen a new and rejuvenated push against market abuse within the world of asset management. This is in no small part due to the implementation of MiFID II this January. The increased volumes of data which the FCA is now privy to, and the increased transparency therein, means that asset management firms are even less able to hide inadequate responses to market abuse risks.
The impact of MiFID II on the FCA’s fight against market abuse was almost immediately felt. On 25 January, just weeks after MiFID II’s implementation, Interactive Brokers (UK) LTD were fined £1,049,412 for their failure to report and adequately respond to suspicious client transactions in the period from February 2014-February 2015.
Now, as we come towards the end of Q3, the FCA are only increasing their efforts. As Michelle Kirschner reports, supervisory visits from the FCA to asset management firms are currently taking place, and will continue to do so for the foreseeable future. These visits are intended to inspect potential market abuse infringements directly, and will likely serve as a deterrent to a number of asset management firms.
These visits are being supplemented by investigatory questionnaires intended to uncover the degree to which asset management firms are successfully dealing with potential market abuse infringements. Mike Sheen, reporting for Investment Weekly, states that the following questions are included in the questionnaire:
- Do you require order and trade rationales to be documented before being submitted?
- Do you undertake surveillance (automated or manual), outside of front office, of your trading activities for market abuse?
- Do you have any communications surveillance in place (e.g. Bloomberg keyword monitoring, email monitoring, phone monitoring)?
Looking forward, it seems likely that MiFID II’s continued implementation will only increase the FCA’s efficacy and their ability to discover inadequate measures being taken against market abuse in asset management firms. The extent to which this will alter the procedures put in place by said firms, however, is still yet to be seen.