The UK Financial Services Authority (FSA) recently issued a clear warning to hedge fund managers: They must have in place appropriate systems and controls to deal with market abuse risk. The warning followed a review by the FSA of a cross-section of UK hedge funds managers. The outcome of the review was "disappointing" in relation to some hedge fund managers and will be followed by formal checks by the FSA into anti-abuse controls and procedures in the New Year.
Combating market abuse is a top FSA priority, and the FSA is ready to use the enforcement tool in response to suspected cases of market abuse. Given the increasing significance of hedge funds in the financial sector and the potential market abuse risk arising from hedge fund activities, it is hardly surprising that the FSA is focusing on this sector. While the FSA makes clear it is not specifically targeting hedge funds in relation to market abuse investigations, it is concerned with making sure appropriate risk management systems and controls are in place.
This is a significant warning to UK-based hedge fund managers. However, hedge fund managers in the US and elsewhere should also take note of the warning. The market abuse regime extends to foreign hedge funds where they are trading on the UK exchanges, and the FSA undoubtedly is prepared to investigate foreign firms who they suspect have engaged in market abuse. While the foreign-based hedge fund managers need not be directly concerned about compliance with the FSA's system and control requirements, they should at the very least be alert to the fact that combating market abuse remains a key FSA priority and that the FSA is focused on risks of market abuse in the hedge fund sector.
Details of the FSA's warning, including the FSA's recommendations as to some key anti-abuse controls, are set out in our Client Insight available on the firm's website.