Dear CEO letter focus on market abuse for retail firms

The recent FCA Dear CEO letter to Wealth Managers and Stockbrokers is a timely reminder that the FCA continues to increase its scrutiny on firms’ implementation of the Market Abuse Regulation. Now is a good time to have a look at your controls.

The Market Abuse Regulation – or MAR – was initially overshadowed by MiFID II and perhaps has not always got the level of focus it warranted. But it’s clear that market abuse controls should now be firmly at the front of compliance officers’ minds.

The statement of intent in the Dear CEO letter should also be viewed in the context of the FCA’s wider efforts to counter abuse, fraud and money laundering in financial markets, with wholesale brokers likewise being put on notice to improve their controls in a parallel Dear CEO letter. In the same period, the FCA also published a thematic review on money laundering risks in capital markets, which will be of interest to Wealth Managers and Stockbrokers as significant end-users of such markets.

In the case of Wealth Managers and Stockbrokers, the FCA’s stated focus is on the risk that firms’ own staff may misuse clients funds for the purpose of fraud or market abuse, or that firms may get caught up in investment scams. In turn, the FCA sees a risk that if firms do not have in place sufficient controls to prevent such activity, that there is a risk that confidence in the sector will be undermined.

But firms should also be aware of the other market abuse and money laundering risks inherent in their business. Where you offer execution only services, the risk of market abuse from clients will be an equally important consideration, with the execution only business line likely requiring different controls and surveillance activities.

What you should do to stay ahead of the Market Abuse Regulation

Conversations with the regulator on market abuse typically begin with a focus on the firm’s own risk assessment. You should ensure that you have in place a robust, comprehensive risk assessment, which:

  • weighs different sources of risk, such as staff versus client
  • considers all risks identified by MAR – and ideally supplemented by the delegated acts, guidelines, and recent FCA cases
  • presents a realistic view of your current control environment, looking at net versus gross risk.

The control environment should then be designed around the risks faced by the firm. A mix of controls will likely be needed, to match the various sources of risk, and should include robust PA dealing restrictions, physical and logical environment considerations, and surveillance activity tailored to the specific risks faced.

Once established, the risk assessment and control environment should then be reviewed regularly, to account for changes in the business mix and the risk environment.

How Bovill can help

Bovill regularly works with firms to provide an independent assessment of their financial crime and market abuse risks. We also assist firms to develop an appropriate, risk-based control environment, linked to the risk assessment.

Smaller firms may find that getting the right technology solution and resourcing for market abuse surveillance is a challenge. Bovill offer a managed service outsourcing model for market abuse surveillance activities, tailored to the needs of smaller firms.

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