Tucked away in chapter 4 of Quarterly Consultation No.2 is the FCA’s proposal to clarify the requirement for firms to submit suspicious transaction reports (STRs), currently set out in the FCA Handbook at SUP 15.10.2R and SUP 15.10.3R. As a result of discussions with industry, the FCA has lighted on a potential disparity in the scope of these two rules, and is now consulting on an amendment to enhance clarity – effectively to confirm that the reporting obligation in SUP 15.10.2R extends to a wider set of transactions than the corresponding Directive obligation.
The current rules
The obligation to report (implementing Article 6(9) of the Market Abuse Directive):
SUP 15.10.2R requires firms which arrange or execute a transaction with or for a client in a qualifying investment admitted to trading on a prescribed market, and which have reasonable grounds to suspect that the transaction might constitute market abuse, to notify the FCA without delay. The Financial Services and Markets Act 2000 (Prescribed Markets and Qualifying Investments) Order 2001 defines qualifying investments by reference to the definition of “financial instruments” in Article 1(3) of the Market Abuse Directive. (Separate provisions also extend the definition to auctioned products).
Assessment of grounds for suspicion by credit institutions and investment firms (implementing Articles 1(3) and Article 7 of Implementing Directive 2004/72/EC , which in turn implement Article 6(9) of the Market Abuse Directive):
SUP 15.10.3R requires firms that are investment firms or credit institutions must decide on a case by case basis whether there are reasonable grounds for suspecting that a transaction involves market abuse. However, rule SUP 15.10.3 is not confined to transactions in a qualifying investment admitted to trading on a prescribed market, and as the FCA points out, refers back to the definition of market abuse in section 118 of the Financial Services and Markets Act 2000 (FSMA). That definition extends to behaviour not just in relation to qualifying investments, but also in relation to “related investments” (investments whose price or value depends on the price or value of a qualifying investment) in respect of insider dealing and disclosure of information in sections 118(2) and (3) of FSMA – so this includes a broader range of investments than are covered by the Market Abuse Directive and the present version of SUP 15.10.2R.
Provisions in SUP 15.10.5R – 15.10.7R govern the timeframe, content and means of notifications to be made by investment firms and credit institutions, which are also subject to an obligation not to inform others of the notification (in particular the underlying client).
The FCA proposes to remove the reference in SUP 15.10.2R to a qualified investment admitted to trading on a prescribed market, so that the reporting obligation in SUP 15.10.2R will apply to all firms which arrange or execute a transaction with or for a client, which are required to notify the FCA without delay if they have reasonable grounds to suspect that the transaction might constitute market abuse.
The FCA is not amending SUP 15.10.3R, so only investment firms and credit institutions are subject to that and the following provisions in SUP 15.10 (including timeframe, content, means and no tipping). The primary STR obligation in SUP 15.10.2R applies to all firms.
The FCA’s cost benefit analysis states that the majority of firms that would be affected by the proposed change have already implemented the required systems and controls to comply with the STR regime across all instruments, and that the modifications are being proposed largely in response to requests for enhanced clarity from the industry. Market Watch articles and issued guidance in relation to STRs will not be affected by this proposed clarification.
Firms have until 6 November 2013 to respond to the consultation.
From a policy perspective, it makes sense that the suspicious transaction reporting requirement should extend to all transactions that would fall within the scope of the UK market abuse regime. That said, the ‘clarification’ is actually a change to the ambit of the existing provision, although few UK-based firms, having identified a suspicious transaction in a “related investment”, would have taken a principled decision not to report it on the basis that the transaction they were arranging or executing was not a transaction in a qualifying investment.
More to follow
Going forward, the Market Abuse Regulation will change the ambit of the suspicious transaction reporting requirements. Market operators, investment firms operating a trading venue, and persons professionally arranging or executing transactions in financial instruments, will be required to report a reasonable suspicion that an order or transaction in any financial instrument, whether placed or executed on or outside a trading venue, might constitute insider dealing, market manipulation or an attempt to engage in insider dealing or market manipulation.
So the European requirement will be wider in that:
- it will apply to orders as well as transactions; and
- it will extend to all those professionally engaged in the reception and transmission of orders or in the execution of transactions in financial instruments, not just those who professionally arrange them (which as implemented in the UK, included only investment firms and credit institutions).
Draft regulatory technical standards (to be adopted by the Commission) will be developed by ESMA. These will determine:
- the appropriate arrangements and procedures for persons to comply with these obligations; and
- the notification templates to be used by persons to comply with the requirements.
These provisions will have direct effect in the UK once the Market Abuse Regulation comes into application (not likely to be before Q4 2015).