Market Watch 86 assesses the robustness of UK retail brokerage firms’ market abuse governance and control frameworks. While the below findings relate to retail brokerage firms only, other firm types should ensure that they familiarise themselves with the findings and make enhancements to their own market abuse governance and control frameworks where required.
KEY WEAKNESS IDENTIFIED AND RELATED TAKEAWAYS
Don’t set the bar too high for Suspicious Transaction Order Reports (“STORs”)
- Several firms applied a threshold that was too high which limited the number of STORs submitted to the FCA; and
- Some procedures inadvertently prompted analysts to close alerts rather than escalate them for further review.
Takeaway: Firms should have clearly articulated policies and procedures outlining how STORs are investigated, escalated and subsequently reported to the FCA. Having reasonable suspicion of market abuse is the key threshold for onward reporting to the FCA.
Challenge your surveillance systems
- Alert calibrations were not suitably tailored to the firm’s business model, creating a risk that market abuse may go unidentified;
- Individuals with market abuse monitoring responsibilities were unable to articulate how their surveillance framework worked; and
- Some firms had not tailored their third-party surveillance system post-implementation.
Takeaway: Implementing a third-party surveillance system is not enough. The appropriateness and effectiveness of these systems should be subject to ongoing review by individuals that have the requisite skill, knowledge and experience.
Strengthen governance and oversight
- Senior managers responsible for maintaining oversight of surveillance had limited understanding of key elements of the related framework;
- Some senior managers were unaware of issues identified by their surveillance teams meaning these were left unresolved; and
- Some firms had limited or no alert management quality assurance (“QA”) processes in place.
Takeaway: Senior managers with surveillance responsibilities must ensure they have effective oversight of the end-to-end processes to enable timely resolution and escalation of suspicious activity.
Revisit your Market Abuse Risk Assessment (“MARA”)
- Some firms’ MARA was not appropriately tailored to its business model (i.e. not considering all traded financial instruments or the nuanced market abuse risks presented by different client types)
Takeaway: The MARA is the foundation for an effective market abuse governance and control framework. The maintenance of a MARA should be dynamic, reviewed in light of new products, client types, regulatory developments and publications.
THE OVERARCHING MESSAGE?
The FCA is looking beyond policies, procedures and the existence of automated systems. It expects firms to demonstrate that their surveillance arrangements are appropriately designed, rigorously tested and effective.
WHAT SHOULD FIRMS DO NOW?
- Review the appropriateness of your STOR policies and procedures
- Assess whether your surveillance system is appropriately tailored and calibrated to your business model
- Strengthening market abuse Management Information (“MI”) and awareness of suspicious activity amongst senior management.
- Review your MARA to ensure that the risks of each instrument traded have been considered
HOW COSEGIC CAN HELP?
- Review and update your market abuse policies and procedures to ensure they are aligned with FCA expectations and satisfy the requirements of UK MAR;
- Undertake a deep-dive review of your surveillance systems to ensure tests are appropriately calibrated;
- Develop, review or update your MARA;
- Review your existing market abuse governance arrangements and recommend enhancements to ensure effective oversight can be maintained by senior management; and
- Deliver ongoing support to ensure your market abuse governance and control framework remains fit for purpose.
If you would like to discuss any of the FCA’s findings, our suggested key takeaways or how Cosegic can help you, please contact us.
