The Financial Conduct Authority (FCA) has recently published a Thematic Review “Asset Management firms and the risk of market abuse.” The purpose of the review was to examine how asset management firms control the risks of insider dealing, improper disclosure and market manipulation. The primary focus of the review was on equities and insider dealing.
The review involved 19 asset management firms, which included long-only asset managers, hedge fund managers and an occupational pension scheme. In doing so, the FCA reviewed the market abuse policies of all the firms involved and visited 17 of the 19 firms.
In summary, the FCA found that in four out of the six areas reviewed, most firms had adequate safeguards and mechanisms. However, there were two particular areas where the FCA had concerns that adequate safeguards had not been implemented.
The FCA’s first area of concern related to the monitoring of people who had access to knowledge of inside information. Although the FCA noted that all firms had a policy of limiting inside information to those who needed to know the information and that some firms monitored the “need to know” policy by keeping a list of who knew this information, the FCA was of the view that this could be improved. In particular, the FCA suggested that an improvement “may include keeping documentation of who knows what inside information, particularly in sensitive cases” as well as a system of reviewing this information and the effectiveness of the “need to know” policy.
The second area of concern was in respect of post-trade surveillance. The FCA considers that “post trade surveillance has a key role to play in both detecting and deterring market abuse.” Moreover, the FCA “expects senior management to have processes to satisfy themselves that controls to identify and manage the risk of market abuse are working properly.” The two firms that did have effective post-trade surveillance had mechanisms to identify and assess potentially suspicious trades including where trades precede price moving corporate announcements and any trading patterns that suggest market manipulation. In addition, these firms also considered patterns in trades such as an unusually high number of trades from the same person. Another suggested area of good practice is in the monitoring of telephone calls (including mobile phones).
Those in a compliance function will wish to consider the FCA’s findings closely and in particular the examples of good and poor practice set out within the review. Failure to meet with the FCA’s expectations in this regard may leave financial institutions open to scrutiny should suspicious trading activity occur. Although the costs in time and resources of implementing adequate procedures may be significant, this must of course be weighed against the considerable financial and reputational cost of any enforcement action.