Out-Law Analysis | 30 Oct 2020 | 4:29 pm | 6 min. read
In a recentspeech to an online audience Julia Hoggett, director of market oversight at the UK Financial Conduct Authority (FCA), set out the regulator's expectations regarding firms' compliance obligations during the Covid-19 crisis.
Hoggett's speech was an important reminder that market participants must remain alert to their obligations under the Market Abuse Regulation (MAR) regardless of the current conditions. The FCA is committed to ensuring that the UK is a safe place to do business. Firms must ensure they have adequate compliance measures in place, while individuals have a responsibility to adhere to their firms' personal dealing policies and to broader civil and criminal law requirements.
As firms have adapted to the 'new normal' during the pandemic, with large numbers of employees working from home, the challenge of handling inside information appropriately has become even more acute. Policies and procedures originally designed to manage the flow of this information within the four walls of an office have now had to be applied more widely in the context of home working.
Firms will need to be in a position to demonstrate the steps they have taken should the FCA make enquiries of them. This will require more than simply pointing to a stack of policies and procedures, but showing how these have been applied in practice during the pandemic.
In the early days of the pandemic, the FCA recommended that firms review how they would supervise staff working from home who have access to inside information. This approach has evolved, with Hoggett highlighting in her speech the FCA's expectation that office and working from home arrangements "should be equivalent - this is not a market for information that we wish to see be arbitraged".
The FCA is making it loud and clear that just because an employee is working from their kitchen table, rather than their office desk, the regulatory obligations with regard to managing market abuse risks that both firms and their employees are required to meet are not diminished. This does not mean that a firm will necessarily be able to prevent every single breach – but it will need to make sure that it has robust and proportionate systems and controls in place to identify, monitor and escalate market abuse issues and regulatory breaches as an when they arise - whether in the office, or at an employee's home.
In particular, firms will need to be in a position to demonstrate the steps they have taken should the FCA make enquiries of them, or commence investigations into suspected breaches. This will require more than simply pointing to a stack of policies and procedures, but showing how these have been applied in practice during the pandemic - by reference, for example, to staff training and updates, risk assessments and compliance and audit reviews. The FCA is likely to take a dim view of firms who struggle to demonstrate how they have proactively monitored potential market abuse risk.
Identifying what amounts to 'inside information' during the Covid-19 crisis has also become increasingly challenging. As Hoggett highlighted in her speech, developments which might not have previously warranted consideration as inside information may now fall to be disclosed: "knowledge that an entire business' operations would have to shut, or indeed could open again; knowledge of whether a company had utilised the furlough scheme or any of the pandemic lending schemes; information about the pace of cash-flow burn – all issues that might either not have come up in the past, or not have been material, but which now are".
Again, this highlights the need for companies to have in place robust mechanisms to monitor developments so that they may properly identify when such developments constitute inside information which needs to be disclosed to the market in accordance with article 17 of MAR.
Assessing what constitutes inside information and whether disclosure may be delayed under article 17(4) MAR can often involve finely balanced value judgements. This has always been the case – but since the arrival of the pandemic, and the resulting extreme economic instability, these assessments have sometimes become even more fraught and complicated as companies grapple with fluctuating financial performances and market expectations.
Similar considerations will also need to be borne in mind by companies whose securities are traded on the AIM market, where they will not only have to consider their disclosure obligations under MAR but also under rules 10 and 11 of the AIM Rules for Companies, which require timely and accurate disclosure of price sensitive information to the market.
Ultimately, companies will need to make sure that they have really clear audit trails of their discussions when making assessments of whether or not to disclose, and whether to delay disclosure. Not only does this represent good corporate governance, but it may also help to mitigate the risk of disciplinary action should a company find itself under regulatory scrutiny.
Hoggett's speech was also a reminder to firms to evaluate their internal investigation protocols. Proper investigation of alleged misconduct is critical not only in demonstrating compliance with the FCA's requirements but also to avoiding prejudice to FCA enquiries.
In its latest Market Watch newsletter, the FCA included an anonymised case study in which an employee of an advisory firm who was subject to a criminal insider dealing case was tipped off. When the FCA raised a query with the firm around the individual's trading patterns, the firm's compliance team notified the relevant deal team manager who then questioned the individual, tipping them off and prompting them to resign and leave the country. Although the tipping off was unintentional, Hoggett said: "Investigating and prosecuting market abuse is difficult, and events such as these make it even more challenging - ultimately harming our markets for everyone".
Firms must be mindful of every stage of their compliance programme. Preventative and detective controls around transaction monitoring of suspicious activity are vital, but they are only the start of the process. Consider, once concerns have been raised, how these are treated and by whom. A robust investigation procedure should be embedded within the business and clearly understood by staff, with clear guidelines around preservation of data, maintenance of confidentiality and legal professional privilege.
Moreover, the market abuse regime extends beyond the financial services sector – everyone must comply with MAR and the criminal law around insider dealing. Non-financial services businesses for which handling and disclosure of inside information is a live issue cannot afford to be complacent.
Hoggett also had an important message for individuals in her speech. The FCA "can see activity down to the individual account level", she said. "If you trade suspiciously and you receive a letter from us asking for your reasons for trading, it is because we are watching."
Earlier this year the FCA's executive director of enforcement and market oversight, Mark Steward, delivered a speech on market integrity to the Practising Law Institute. He said that, in 2019, the FCA received 9.8 billion MiFID II transaction reports from FTSE 300 companies; 150 million order reports every day; and 6,000 suspicious transaction and order reports.
Preventative and detective controls around transaction monitoring of suspicious activity are vital, but they are only the start of the process.
In her speech, Hoggett also highlighted the regulator's ability to harness 'big data' from a variety of sources. This data, she said, "enables us to assess more holistically the risks in the market and the effectiveness of our vigilance".
The FCA produces a growing suite of statistics from its use of this data, including its new Potentially Anomalous Trading Ratio (PATR) metric. PATR allows the FCA "to attempt to scale the possible prevalence of potentially anomalous trading in UK markets". According to the data, only 0.8% of all relevant trading in 2019 met the necessary prerequisites to justify further review on these grounds and, of that 0.8%, 6.7% of activity was considered potentially anomalous and worthy of further enquiries, according to Hoggett.
These warnings are just as relevant to individuals as the firms that they work for, as misuse of inside information received in any context could amount to a criminal offence under part 5 of the 1993 Criminal Justice Act. Moreover, even if individual conduct falls short of market abuse or insider dealing, it may yet breach their employer's personal account dealing policy.
The FCA is actively pursuing these cases, with a clutch of enforcement actions over the past year and its latest annual report confirming 88 open insider dealing and 29 market manipulation investigations as at 31 March 2020. Even accounting for duplication, this represents a sizeable proportion of the regulator's overall enforcement case load.
Co-written by Anthony Harrison of Pinsent Masons
14 Sep 2020
02 Sep 2019