The FCA recently published the latest edition of Market Watch, which covers three topics – information handling requirements, legal privilege, and transaction reporting.
1. Information handling requirements
The FCA states that information requirements made by the FCA to authorised firms and issuers (for example under sections 122B, 165(1) and 173 of the Financial Services and Markets Act 2000 (“FSMA”)) should remain confidential. The FCA indicates that when the requests are made of firms, the need for confidentiality is effectively a requirement the FCA imposes and that requests should not be discussed with staff outside Compliance without the prior agreement of the FCA. Although it is recognised that Compliance is likely to need to speak to other teams in order to respond to the request, it is not very clear whether this would include getting prior consent before Compliance speaks to Legal. The implication from the worked example provided in the Market Watch is that internal legal advice can be sought without the FCA’s consent. It is not clear if this would extend to cover external legal advice but we believe that must be the correct interpretation.
The FCA explains that it is aiming to take a proportionate approach to this but that its primary focus is on avoiding the inappropriate dissemination of knowledge of its enquiries, including the risk of tipping off or the risk of inappropriate destruction of evidence. The FCA provides a stark reminder that failure to comply with the confidentiality requirements of a request presents the risk of regulatory scrutiny or action. In addition, inadvertently facilitating tipping off of the fact of an FCA investigation may hinder the FCA’s objective of enhancing market integrity.
The Market Watch provides some practical examples of best practice including that the confidentiality requirements set out in the FCA’s requests should be followed. Having gained the FCA’s consent to contact staff in other departments for help with responding to requests, firms should:
- Carefully select staff who will be asked for help (on the implicit basis that the help is required in order to fulfil an FCA information requirement); and
- Inform them:
- That they must not contact others without first telling Compliance and being told by Compliance that the FCA has approved the contact;
- That the information is required in order to fulfil an information requirement; and
- Of the possible consequences of the confidentiality not being maintained.
2. Legal privilege
The Market Watch also provides a useful reminder to firms on the importance of a firm maintaining any privilege in relevant documents by not inadvertently waiving privilege when providing documents to the FCA. In particular, the FCA explains that it has had incidents of firms disclosing material (as part of suspicious transaction reporting) to the FCA which relates to firms’ clients that could be subject to legal professional privilege.
The FCA warns that material which is subject to privilege which is disclosed as above may become disclosable by the FCA in the event of subsequent enforcement action being taken. In addition, any extracts should not be provided in the body of the disclosure in order to avoid loss or waiver of privilege. Where relevant to the narrative of the notification, the existence of the material should be made known to the FCA.
It is interesting to note that the FCA does not refer to the appropriate use of a “limited” or “qualified waiver” as an alternative to withholding the information or providing a full waiver. This is a route that, in our experience, is commonly asserted in disclosures to the FCA, although the FCA may say that it would not be constrained and therefore would not accept disclosure on that basis.
3. Transaction reporting
- Scope of reporting: non-EEA listed indices. Some firms have misinterpreted the scope of the transaction reporting rules and failed to submit transaction reports for transactions executed in non-EEA listed indices or baskets composed of one or more financial instruments admitted to trading on an EEA trading venue. Firms must have arrangements in place to determine when an instrument is in scope for transaction reporting.
- Timing breaches. Some investment firms are executing transactions in reportable financial instruments while not having the infrastructure in place to submit transaction reports no later than the close of the following working day. These breaches should be notified to the FCA promptly using the errors and omissions notification form. In line with the FCA’s broader expectations for the use of this form, the FCA does not expect firms to delay submission of the notification until the issue has been remediated and back reporting completed.
- Data services providers. Where a data reporting services provider has indicated that it will stop providing a data reporting service, affected firms should make necessary arrangements to continue meeting their transaction reporting obligations.
- Immediate vs ultimate underlying. For transactions executed in derivatives and other financial instruments with an underlying, the underlying instrument code (RTS 22 Field 47) should be reported with the International Securities Identification Number (“ISIN“) of the immediate underlying instrument. The FCA has observed transaction reports where the “ultimate” underlying instrument has been identified and erroneously used to determine whether the financial instrument is in scope for transaction reporting.
- Inconsistent trading venue transaction identification codes. Investment firms are required to report the Trading Venue Transaction Identification Code (“TVTIC“) in transaction reports (Field 3) for the market side of a transaction executed directly on a trading venue. The FCA has identified inconsistent dissemination of TVTICs by trading venues to investment firms and recommends that trading venues review their procedures for the generation and distribution of TVTICs to ensure they facilitate the consistent reporting of a unique code to be used by both the buying and selling parties. Investment firms have also failed to report TVTIC accurately (e.g. field has been left blank, reported with an internal code or reported a code which fails to follow guidelines provided by trading venue) and should review their processes.
- Country of branch fields. The country of branch for the buyer (Field 8) and seller (Field 17) should only be populated where the buyer or seller was a client of the firm. The FCA has noted firms reporting a country code in these fields where the buyer or seller was not a client of the firm, or using this field to highlight the geographic location or nationality of the buyer or seller. These are not permitted by RTS 22.
- Systems and controls.
- Firms must not assume a transaction report was accurate because it was accepted by the FCA. Some firms erroneously use transaction report acceptance rate as a standard for assessing the completeness and accuracy of their transaction reports.
- Firms are making data extract requests for the purposes of reconciling their transaction reports with front office records. The FCA reminds investment firms not doing so that this is a requirement in Article 15(3) of RTS 22. See the FCA website for further information on data extract facility.
- To avoid misreporting, firms should consider whether their understanding of transaction reporting requirements is sufficient to identify errors where front office reconciliations may not highlight the issue.
- On back reporting, the FCA has reiterated that firms are expected to take steps to ensure that all reports affected by an error or omission have been identified and corrected. The same transaction reference number should be used for a corrected transaction report.