Out-Law News | 23 Feb 2015 | 5:01 pm | 3 min. read
The Market Practitioner Panel (MPP) said existing methods of monitoring for illegal trading practices, such as 'key word surveillance', were flawed and that deploying big data technology is a "possible longer-term solution" to uncovering malpractice.
'Big data' is a term that refers to the growing proliferation of data and aggregation of different data sets and the deployment of increasingly sophisticated analytics software to "derive meaningful information and insights in real time", according to the UK government's definition.
The MPP warned, though, that big data technology has still to be shown to be effective in highlighting malpractice and further cautioned about the time and cost involved in implementing big data solutions. It therefore suggested 'predictive coding' could be deployed across City companies to help financial institutions spot traders' misconduct.
"[Predictive coding] goes beyond simply looking for key words and instead looks to identify irregularities in patterns of behaviour such as; communications through unofficial channels (personal e-mail, messenger / chat forums); leaving the office at peculiar times or unusual working hours; missing mandatory block leave; consideration of previous roles and responsibilities within the organisation," the MPP said.
Financial services litigation and compliance expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said: "It is understandable that monitoring technology will be used as part of a wider compliance programme run by financial institutions given the risks of sanctions and to reputation if trader malpractice is uncovered."
"Firms are becoming more aware of what to look for and it is no surprise that firms would want to use the increasingly sophisticated technology available to them to flag suspicious behavioural patterns. However, firms do need to exercise some caution and accept that there will be some behaviours and trades that appear suspicious on the face of it but which are in fact perfectly legitimate. Technology can be used to flag malpractice but there should be follow up procedures to ensure firms understand the context of traders' actions before taking any disciplinary action."
Data protection law expert Kathryn Wynn of Pinsent Masons said firms must resist the temptation to use big data technology to look closely at individual traders' activity unless they can justify the intrusion on the basis of suspicions raised from more general monitoring.
Wynn said: "With big data analytics, there is the temptation to use the technology to build up a precise profile of each individual traders' behaviour and practices. However, intrusions into individual privacy must be proportionate and necessary to comply with data protection laws."
"Firms should be open with traders that they will be subject to monitoring technology but ensure that close scrutiny of individual traders' behaviours and communications only takes place after a broader, more general pattern of irregular activity is identified through analysis of data. If there is a reasonable suspicion of wrongdoing then more targeted and intrusive surveillance will be justified," she said.
The MPP's comments were contained in its response to the Bank of England's Fair and Effective Markets Review (FEMR) (112-page / 1.01MB PDF). The MPP is an independent body set up in 2014 to advise the Bank on FEMR matters.
The FEMR is a joint initiative by the Treasury, Bank of England and Financial Conduct Authority (FCA) and is aimed at understanding more about the way wholesale financial markets operate. A final report on the FEMR is expected to be published in June this year.
In its response paper, the MPP also said there should be better measures in place to ensure 'bad apples' operating as traders can be weeded out of the industry.
"There is recognition that recently firms have wanted to be seen to be taking hold of their approach to ‘bad apples’ more proactively rather than holding on to such individuals," the MPP said. "However, there is evidence that ‘bad apples’ can move into the shadows of the industry (i.e. unregulated areas or weakly-regulated jurisdictions), and that firms should be mindful of individuals moving into same / similar capacity roles within the industry beyond the scope of effective regulation."
"One way to address this challenge would be to improve the current limitations of references for new employment in conjunction with the reinstatement of a central register of accreditation which the regulators have moved away from. The industry is keen to engage with the regulator in this regard," it said.
The MPP also said that consideration should be given to allowing businesses fined by regulators over trader malpractice to recoup some of the cost of those penalties from "employees’ bonus pools". It said, though, that this approach "would need to be proportionate, targeted and balanced with firms’ current disciplinary practices".