Market Watch 77 puts spotlight on organised crime

Insider dealing made up 84% of all STORs in 2022. In its latest Market Watch the FCA focuses on organised crime groups, which it says are actively recruiting insiders and dealing on the basis of information they gather. The FCA is familiar with and maintains a list of these “repeat offenders”. If you are an executing firm, it is essential to identify and distance yourself from such clients, and to be able to evidence that your market abuse controls are watertight.

Market Watch 77 outlines a number of activities the FCA views to be characteristic of organised crime groups – or OCGs. These are most common in spread bets and CFDs, as those instruments provide leverage and are well suited to bets placed on the basis of illegally obtained information that may appear “certain”.

OCG members may feed stories about mergers and acquisitions, both true and false, to the media to benefit from the ensuing price movements, closing positions immediately after publication of the speculations. They may also trade around issuers’ announcements.

The Market Watch provides a checklist for identifying suspicious trades in that context, including the need for your surveillance controls to be equipped to spot unusual, out-of-pattern activities. This is especially true around announcements, particularly by accounts trading in cohort.

It also emphasises the use of umbrella accounts at overseas broking firms, which do not display equivalent standards of safeguards to UK firms, and through which the identities of the account holders may be masked. Facilitators, including employees of authorised firms, may be used to open accounts with such overseas firms. On that front, market abuse controls should work hand-in-hand with your broader AML and financial crime frameworks and cannot operate in isolation.

FCA recommendations for executing firms

Market Watch 77 included specific recommendations, including:

  • communicating to clients that the firm has a zero-tolerance approach to market abuse, has an open relationship with its regulator, submits STORs, terminates accounts based on very low thresholds of suspicion and liaises with other law enforcement agencies as appropriate.
  • requesting all overseas broking firms that are clients to submit documentary evidence of adequate surveillance arrangements and a zero-tolerance approach to market abuse.
  • regarding trades placed before media reports of M&A as potentially suspicious, and submitting STORs where appropriate, even if no public confirmation of the matter described in the media reports is made.

Interestingly, recommendations have also been made for advisory firms, which may be less alert to the risk of having their staff recruited as sources by OCGs. These include:

  • advising M&A staff, especially juniors who are most likely targeted, of the risks of including references to having access to inside information in their social media profiles.
  • considering whether it’s appropriate to reference the names of staff engaged in M&A advisory in the firm’s own social media profiles, beyond its principal senior contacts

Questions to ask of your market abuse set up

  1. Do you have the systems to detect this type of criminal activity and is your surveillance system equipped to flag clients trading in cohort, with the appropriate calibration, in line with your market abuse risk assessment?
  2. Are your market abuse controls integrated with your broader AML / financial crime framework, allowing a holistic approach?
  3. Do you have offboarding guidelines – that is, clear rules to deal with clients who are repeatedly the subject of STORs or suspicions, and do these deal effectively with repeat offenders?

The last point in particular is key to demonstrating that your firm places market abuse consideration above business interests, and takes seriously its obligation to counter the risk of being used to further financial crime.

We can help

We regularly help firms select surveillance systems, calibrate alerts and design case management processes. Our team can design an offboarding policy, with guidelines on when to consider terminating client relationships based on market abuse suspicions.

We also carry out case reviews where suspicions of market abuse have arisen and offer a market abuse managed service in partnership with KRM 22.