Financial firms should review market abuse detection and reporting arrangements

The FCA’s latest newsletter (Market Watch 79) included guidance on the obligations of financial services firms. The obligations include a requirement to have appropriate market abuse and reporting measures in place under article 16 of the UK market abuse regulation (3 pages / 196 KB), and under the FCA rules for reporting suspicious transactions or orders (SUP 15.10).

The latest newsletter shows that “taking assertive action on market abuse, including on systems and controls failings surrounding market surveillance, remains a key FCA commitment in the FCA’s current strategy and business place”, said Anthony Harrison financial services regulatory expert at Pinsent Masons.

The publication provides a summary of steps firms should undertake to avoid order and trade surveillance failures. It gives guidance on data governance, model testing, model implementation and amendment. It also provides three examples of market abuse surveillance failures the FCA has recently observed in the market.

In light of the failures identified, firms are encouraged to ensure appropriate alert models are in place to identify any market risks, such as suspicious transactions made by customers. The letter also urges businesses to put in place controls for any risks identified by the alert models to quickly tackle the issues and put a stop to further market abuse.

The letter also urges firms to take a holistic approach to the monitoring or market abuse risks, requiring firms to look at risks across the business as a whole to avoid surveillance failures. This approach considers both the primary risk of market abuse, and the secondary risk of monitoring control being ineffective, operationally or otherwise.

The FCA warned that not all firms have allocated adequate focus and resource to properly protect against suspicious transactions and wide market abuse, urging more attention to increase protection across the financial services sector. Equally, the authority warned that some firms have such complex governance arrangement in place, involving layers of approvals and validations, that these undermine the timely, efficient and effective delivery of outcomes.

Sébastien Ferrière, financial services regulatory specialist at Pinsent Masons, said: “Firms subject to market surveillance should take careful note. Should they fail to take the opportunity to review the effectiveness of market surveillance controls, and the FCA later identify similar issues, the FCA can, and has a track record for, referring to such missed opportunities as an aggravating factor warranting enforcement investigation or justifying enhanced financial penalties.”