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The FCA’s fine of both Sigma Broking and its directors is yet another reminder of the regulator’s efforts to raise standards around the detection and prevention of market abuse. The action follows Citigroup’s fine for nearly £13 million earlier this year.
Sigma, a global brokerage platform offering futures and options trading, was handed a £531,000 fine last month for failing to report crucial data around its market abuse controls. The FCA also issued fines and prohibition orders to the firm’s former and current directors, totalling over £200,000, for inadequate governance arrangements and oversight of the business.
Although the penalty was smaller, Sigma’s failings were more wide-ranging than those highlighted at Citigroup as they encompassed both transaction reporting and market abuse controls. The weaknesses in governance, and the action against individual directors should serve as a stark reminder of personal accountability when it comes to compliance oversight.
Summary of failings
The FCA highlights that, during the period concerned, Sigma did not have adequate systems and controls in place to prevent and detect market abuse. According to the regulator’s Final Notice, the firm’s exposure to market abuse risks materially increased following the launch of its contract for differences (CFD) and Spread-Bet desk, as those committing market abuse often seek out these new product types. Sigma failed to anticipate this or manage the increased risk. The notice emphasises the “wholly inadequate governance and oversight” provided by the firm’s governing body, which included directors carrying out roles without the appropriate skills, knowledge or oversight.
Before launching the new offering, the firm did not carry out a risk assessment or “any other meaningful preparation” to analyse where market abuse risk could arise, despite the significant change to the firm’s risk profile. Once operational, the firm did not put in place adequate controls specific to the activities of the trading desk. This included:
- A lack of policies, procedures and manuals specific to the activities of the desk.
- No monitoring of telephone recordings.
- No written policies prohibiting the use of unrecorded devices.
- An absence of training on the restrictions of personal devices and encrypted applications.
- Inadequate policies and procedures relating to the identification of suspicious transactions and the submission of Suspicious Transaction and Order Reports (STORs).
In its investigation, the FCA identified 97 trades that it deemed suspicious. These should have amounted to a total of 24 STORs but in fact, the firm didn’t submit any STORs during this time.
In addition, the FCA found that Sigma did not take preparatory steps for the introduction of the Market Abuse Regime when it was introduced in June 2016.
As well as market abuse failings, the FCA found weaknesses in the firm’s transaction reporting processes resulting in inaccurate and incomplete transaction reports. Sigma was trading CFDs and Spread-Bet products on a matched principle basis, so the firm would be expected to submit a transaction report for each leg from both the market and client side. By not reporting from the client side, Sigma hindered the regulator’s ability to monitor, detect and investigate instances of market abuse.
Following a letter from the FCA’s ‘Markets Reporting Team’ setting out concerns with the completeness and accuracy of Sigma’s transaction reporting, the firm instructed a specialist regulatory reporting firm to review a sample of historical reports. The specialist identified cases of under-reporting and other significant failures associated with CFD trades.
Key reports were issued verbally with no records or minutes to evidence what was presented, discussed, challenged or agreed. The board was also not provided with and did not seek out adequate management information to allow it to carry out its oversight duties effectively, with a particular lack of oversight of the CFD and Spread Bet desk. Despite internal memos and a risk register which highlighted deficiencies in policies, procedures and governance arrangements, the board failed to act to make improvements.
There were fundamental errors in the allocation and performance of controlled functions, with the directors being uncertain of their responsibilities and with allocated responsibilities that did not reflect the realities of their day-to-day duties.
The Compliance Oversight Officer failed to ensure that the firm’s Compliance Department operated in an effective manner with the department being insufficiently resourced and lacking clear reporting lines. Compliance staff were also not suitably qualified, impacting the departments’ ability to act as an effective second line of defence.
Ultimately, the FCA found that the failings of the business originated from the fact that the directors had been appointed into roles with little regard given to each director’s capacities, training or previous experience.
Demonstrating reasonable steps when it comes to market abuse risk
These fines reveal two things. Firstly, and not surprisingly, the FCA is still very active in ensuring that firms have effective systems and controls in place to tackle market abuse. CFD brokers continue to be a focus for the FCA, but all investment firms must thoroughly consider their market abuse framework.
Secondly, recent enforcement cases, along with Market Watch 70, serve as a reminder that the FCA will not fail to investigate instances of misreporting. You should ensure that your processes and procedures for identifying reportable transactions and reporting compliantly are adequate, and that you have robust mechanisms in place to deal with errors and omissions, when needed.
For individuals involved in compliance and governance of a firm, it’s important to seriously consider what it means to be approved by the regulator and take reasonable steps to carry out the role competently. You must be proactive in identifying concerns or weaknesses in your firm’s systems, controls or governance arrangements. Taking on an approved role means that you’re not only taking responsibility for managing risk in your business, but also taking on the risk that you’re personally, and financially, culpable when things go wrong.
Overall, transaction monitoring, transaction reporting and the oversight and governance of these areas is something not to be taken lightly.
How we can help
We help clients assess the market abuse risks they face, designing effective policies, procedures and controls on the back of these assessments. We can test the robustness of your surveillance systems and provide training on the key market abuse risks and obligations.
We also help you understand the complex rules regarding transaction reporting, ensuring your transactions are being fully captured and reported to the regulator.
We regularly work with firms to ensure their governance arrangements are up to speed. This includes providing training to board members, reviewing organisational structures, and helping individuals carry out their approved roles effectively and in line with regulatory obligations and expectations.
We partner with KRM22 and Qomply to provide support to firms on matters concerning market abuse surveillance and transaction reporting monitoring.