Locking down market abuse

The FCA has recently taken action against a number of individuals for market manipulation and insider dealing. This is a clear sign of the regulator re-focusing its attention on these offences, and is something that readers need be aware of to ensure they stay on the right side of the rules.

On 11 February 2021, Mr S. Bayes and Mr J. Swann were both charged with insider dealing. Bayes, by virtue of his employment at a large European packaging supplier, was privy to insider information which he then disclosed/used to encourage Swann to engage in dealings in relation to an upcoming acquisition by Bayes’ company of a packaging manufacturer. The dealing involved the trading of shares for a profit of approximately GBP138,700.

The FCA has also commenced criminal proceedings against Mr M. Zina, a former analyst for an international investment bank, and Mr S. Zina, who was a solicitor at a prestigious City law firm, for 6 offences of insider dealing, and 3 offences of fraud by false representation. The alleged offence relates to the trading of 6 stocks, resulting in a profit of approximately GBP142,000. The alleged insider trading was funded by 3 personal bank loans, amounting to GBP95,000. The use of these loans for this purpose is the subject of the fraud charges.

Most recently, on 4 March, the FCA fined Mr A. Horn, a former market making trader, GBP52,500 for market abuse and blocked him from performing any further functions in relation to regulated activity. An FCA investigation found that Horn was executing share trades with himself in a practice known as ‘wash trading’ which resulted in him giving false and misleading signals as to the demand of shares in the market. Horn was motivated by a belief that this would help the company he was trading in stay in the FTSE All Share Index, and that he would benefit from the relationship between that company and his employer.

Key Takeaways

The nature of FCA action:

• In the FCA press announcements above the regulator has taken the opportunity to stress that it has “developed ways to detect…manipulation as well as other forms of market abuse [and] will take robust action.”
• While proportionate to the seriousness of the breach, the FCA acknowledges that one aspect of their enforcements is to deter other market players from committing similar abuses.

Points to remember:

• Companies should have proper systems and procedures in place to control and monitor the flow of insider information. Regular risk assessments should be conducted across the company’s products/services, identifying potential risks and strategies for mitigation. Similarly, companies should be prepared to continually monitor and report suspicious behaviour to the FCA.
• Employees should be fully trained on what their obligations are surrounding the definition of market abuse, and the proper prevention mechanisms. In the FCA enforcement announcement for Horn above, the FCA made particular note of the fact that Horn “was aware of the risk that his actions might constitute market manipulation but recklessly went ahead with those actions anyway”. On becoming aware of risks, Horne should have checked the company’s internal procedures; whether acting recklessly or deliberately, the FCA are poised to impose severe penalties on those involved with market abuse.

Recent FCA Initiatives

More evidence of the heightened focus on insider dealing and market abuse came on 8 March when the FCA delivered a speech at the Expert Forum addressing the direction of market abuse regulation in 2020/2021. This speech highlighted several recent trends within the FCA which we will see continue to shape the way for market abuse regulation.

In the last year the FCA has increased its “proactive market monitoring”, likely motivated by the 34% overall increase in market transactions and a reduction in suspicious transaction and order reports (STORs) made by firms who have the obligation to detect and report market abuses. The FCA has introduced several initiatives, such as a new short position reporting mechanism, which are intended to give the “market a very high degree of transparency” over short selling positions. In particular, the Electronic Submission System (ESS) introduces automated alerts which will identify delayed notifications and follow-up issues. Removing the need for initial human oversight will produce consistent data which will give insight into the integrity of the market.

Practical Points and Long Term Implications

Moving forward, the regulator has pledged to “continue to look for measures that are meaningful and allow [them] to assess trends over time” in order to ensure high levels of protection for capital markets. Already in the works is a FCA initiative to roll out a similar mechanism to the ESS in place for short positions, for long positions, given that the system has proven to facilitate the “scrutiny and detection of illegal practices like delayed or missing reports”. It is clear that the FCA is motivated to further develop its practices and ensure “the mechanisms for efficient and reliable value and price, for genuine supply and demand, continue to work well”. The regulator has emphasised their commitment to developing mechanisms and controls for the detection of market abuse and ensuring they “remain as sensitively calibrated as possible”. One reason for this increased scrutiny could be the impact of Covid-19 on business operations. These proceedings may represent a wider initiative of the FCA to crack-down on cases of insider trading in response to the vulnerability of existing business operations brought to light by the pandemic.

It is unlikely that this scrutiny will soften in the coming months. The direction of the FCA’s future focus can be observed by the statement on market trading and reporting updated on 8 January. The regulator now expects and requires firms to “record all relevant communications (including voice calls) when working outside of the office” as well as to “take all steps to prevent market abuse risks. This could include enhanced monitoring or retrospective reviews.” The FCA has made it clear that it will not accept the pandemic as an excuse for poor oversight or reporting from firms.