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The FCA has set out its expectations when it comes to mitigating market abuse risk during the coronavirus pandemic. They have made it clear that they expect risk assessments to be revisited in light of the current situation, and necessary measures taken, for example in IT, surveillance and training.
Market Watch 63, released in May, looks at the current heightened risks of market abuse. In particular the regulator focuses on risks arising from the new working arrangements and the surge in capital raising events, which may lead to an increase in unlawful disclosure of inside information and insider trading.
Issuers and their advisers are reminded by the FCA of their obligations and the importance of having in place adequate controls around the identification and disclosure of inside information. Issuers must judge whether information resulting from Covid-19 could be inside information and publish it as soon as possible. Information which may fulfil the ‘reasonable investors’ test includes, amongst others, access to finance and funding; its ability to return staff to work or supply chains. Likewise, firms’ employees must be able to judge whether information they receive is inside information (especially when it’s not labelled as such) or may become inside information when combined with other information they already hold.
Firms need to assess whether controls continue to be as effective as they were in an office environment, and it doesn’t facilitate abusive behaviours around unlawful disclosure or insider trading through PA dealing. Repeating or updating training is mentioned by the FCA as a useful tool to refresh employees’ understanding of their obligations and prohibitions under MAR, and other conduct rules.
The FCA also recognises in Market Watch 63, the challenges firms are facing with a surge in alerts and expects them to review their market abuse risk assessments to ensure their systems are calibrated accordingly. They recognise firms are dealing with this issue in different ways, but expect them to develop a plan to ensure they continue to have appropriate and effective surveillance arrangements.
What should firms do in response to Market Watch 63?
Review and update market abuse risk assessment
The FCA expects firms to review their market abuse risk assessment to identify new and emerging risks in the context of coronavirus. This will be the starting point to identify areas of new or heightened risks that may require alternative or enhanced controls.
Review procedures around market soundings
Current market conditions are resulting in an increased need for issuers to raise capital, and the FCA expects market participants who handle inside information to assess whether controls continue to be robust and effective under current working arrangements.
Ensure there are adequate IT controls
Firms must ensure that access to files containing inside information is restricted to those individuals who need it for the proper fulfilment of their role. Even access to the insider list itself should be restricted. In addition, firms are expected to carry out monitoring on who has access to inside information.
Update or repeat market abuse training
Repeating market abuse training in light of current working arrangements is a useful tool to ensure employees are aware of their obligations under MAR and other relevant conduct rules. In particular the prohibitions to disclose inside information, which can only be disclosed on a ‘need to know’ basis and cannot be disclosed to any person simply because they owe a duty of confidentiality. Equally, making employees aware of PA dealing policies at the firm may reduce potential abusive behaviour.
Review and monitor personal account dealing
With staff working from home there is a heightened risk that employees may trade through their personal accounts. Firms must ensure that current policies and procedures around PA dealing are sufficient to minimise risk that its trading results in market abuse (eg. front running), or creates a conflict of interest with clients, including conflicts between employees’ personal interest and their regulatory obligations to report STORs.
Review surveillance and calibrate systems
The FCA recognises the challenges, particularly around a firm’s surveillance, as volumes have surged with market volatility. This has left many firms insufficiently resourced to review an increased number of alerts. Calibration of systems takes time and for smaller firms which rely on third parties’ surveillance providers, this is an even bigger challenge. The FCA acknowledges that firms are dealing with this issue in different ways and suggests either a subsequent thematic analysis, or a retrospective review focusing on areas that are either higher risk or may have been undetected due to the volumes of alerts.
How we can help
Bovill can help you assess your market abuse risks in the context of coronavirus and carry out a health check on your current systems and procedures to ensure they are still effective and aligned to the FCA’s expectations. We can help you to:
- Perform a full assessment of the market abuse risks in your business
- Design effective market abuse policies, procedures and controls
- Help you interpret and refine the outputs of your automated trade surveillance
- Triage and investigate alerts generated by your surveillance software
- Test the robustness of existing surveillance systems to provide assurance to senior management
- Provide training on the key risks, your obligations and the potential civil and criminal sanctions
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