Market Watch 68: Data & eComms Surveillance practices under the spotlight.
23rd November 2021 by Brielle Hewitt
The FCA is placing a strong focus on the ‘what, who and how’ of Market Conduct, Surveillance and compliance oversight.
The Financial Conduct Authority has published its last Market Watch for 2021, directly off the back of announcing final notices and fines given to multiple financial firms this year. These notices were related to operational negligence due to inadequate systems and controls to effectively detect market abuse and financial crime. So, it is no surprise that Market Watch 68 focuses on similar risk themes.
The headline paragraph from Market Watch 68 states:
“Previous topics [of Market Watch] have included record keeping, market abuse surveillance and the use of market abuse risk assessments. We explained that surveillance appeared to be less developed for some asset classes, making it possible that firms were not identifying instances of potential market abuse… We are now returning to these topics to address what we perceive as a growing area of risk.
We are concerned that requirements for market abuse surveillance are still not being fully met, five years after the introduction of the Market Abuse Regulation (MAR) in 2016.”
There seems to be an air of frustration coming from the FCA, focused on sectors of the financial industry that appear to be struggling with getting their compliance/ surveillance operations in order when it comes to having adequate oversight and surveillance processes and technologies in place to mitigate these risks.
To clarify the expectations of the FCA set out in the MAR handbook around surveillance:
“Article 16(2) of UK MAR requires persons professionally arranging or executing transactions to establish and maintain effective arrangements, systems and procedures for detecting and reporting potential market abuse.”
The critical areas of concern highlighted by the FCA:
- Disparate data – firms have noted challenges to the FCA around getting their data into a standardised, useable format suitable for surveillance. The regulator has seen a small number of firms employing tactical solutions, but there remains a significant gap in many firms’ surveillance programs.
- Disconnected front & back-office operations – The regulator has found firm’s Compliance / Surveillance teams have varying levels of knowledge about their front office’s use of web-based collaboration platforms, including their ‘chat’ facilities, and associated surveillance gaps. Some Compliance / Surveillance teams are unaware of the trading mediums used by their front office staff or lack knowledge concerning the quantity of business undertaken on them, the contents of the chat, along with the associated market abuse risks.
- Gaps in data capture and retention, lack of action to mitigate risk – The regulator has also seen the significant disparity in firms’ steps to identify gaps in data capture. These steps can range from taking no action to considering the offboarding of platforms where they cannot get the necessary data to report and surveil appropriately.
- Inconsistent oversight of the entire canon of data when undertaking Market Abuse Risk Assessments – Encouragingly, many firms undertake extensive and detailed risk assessments; however, these assessments often do not include business entered on web-based platforms and associated the associated chatter. This risk is particularly evident around orders which are deleted or otherwise do not result in a trade, connecting back to gaps in data capture. These inconsistencies in oversight have forced the FCA to question whether firms have adequately assessed the market abuse risks facing their businesses in their entirety and subsequently whether firms have appropriate surveillance in place.
- Non-Compliant record-keeping practices & processes – If firms are not capturing all relevant data and associated chatter around trades and transactions, they will breach their regulatory requirements as described in Article 25(1) of UK MiFIR order handling and record-keeping requirements. These require investment firms to keep data relating to all orders and transactions for five years and eCommunications to be continuously monitored and supervised to prevent suspicious activity. As well as limiting a firm’s ability to monitor its activity, failing to capture, retain and have this data readily available may also affect the regulator’s ability to monitor the market appropriately.
Interestingly the FCA has reiterated that using the excuse that peers are failing in a similar way will not be accepted:
“Some firms consider that their own failings can be excused by a perception that some of their peers are failing in the same way. We reiterate that our previous acknowledgement that industry in general faces specific challenges will not lead to us accepting failure to comply with UK MAR because other firms are in a similar position. Also, where we have not published Enforcement action on particular failings, firms should not assume we will not take appropriate Enforcement action.”
Market Watch 68 is one of the more direct publications to come from the FCA in recent times, with the regulator being very prescriptive regarding its expectations. Reading between the lines, the FCA is drawing a hard line – it is time to get your house in order and quickly to ensure you are on the right side of a potential review or investigation. As a firm and a responsible SM&CR lead, wouldn’t you prefer to be perceived in the market as a case study of ‘best practice’ instead of being called out for negligence and slapped with a final notice and fine? The reputational damage and financial loss both in the short and long term are not worth the continued ‘it won’t happen to us’ attitude that the FCA is calling out. The FCA, in a recent enforcement, referred to inaction as negligence.
Do you need guidance on how to address many of these risks? We will explore these themes thoroughly in our industry whitepaper, due for release in December 2021, published alongside our industry partners and thought leaders.
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