Last week saw the Financial Conduct Authority's (FCA) annual public meeting and this follows the recent publication by the UK's principal financial services regulators (including the FCA) of their annual reports for the last year. The Bank of England's (BoE) annual report for 2017 was published on 6 July, alongside the annual report of the Prudential Regulation Authority, now fully part of the BoE under its One Bank strategy. 5 July saw publication by the FCA of its annual report, detailing key work undertaken by the UK's conduct and markets regulator during 2016/17, accompanied by supplemental reports including the enforcement annual performance account and the annual competition report.
FCA Achievements According to outgoing FCA Chairman, John Griffith-Jones, the FCA's single most important achievement is to have embedded the importance of good conduct in the UK's financial sector. This process has been helped by the roll out of the Senior Manager's Regime (SMR) in deposit takers, larger investment firms and insurers. The FCA is eagerly anticipating its implementation across the remainder of the financial services sector in 2018, bringing in its view, to those firms and their customers the benefits of increased individual accountability. Besides the SMR, but still on the theme of integrity, is a renewed focus on improving market cleanliness and to tackle abusive behaviour on financial markets.
Market Integrity The FCA's strategic objective is to ensure that relevant markets function well which includes an operational objective to protect and enhance the integrity of the UK financial system. This specifically includes countering market abuse and protecting the transparency of the price formation process in financial markets. One of the tools used by the FCA to measure its performance against the integrity objective is its Market Cleanliness Survey. This is a rough and ready test that analyses the scale of a share's price movements in the two days prior to a regulatory takeover announcement looking for abnormal movements that might suggest insider dealing or market manipulation. According to the FCA's Annual Report for the four years before 2009, the market cleanliness statistic for takeover announcements remained at around 30%. However, from 2010 onwards, there was a sizeable decline to 15.2% in 2014. This happily coincided with the FCA "credible deterrence" strategy, where it developed a case load of criminal insider dealing prosecutions (e.g. Operation Tabernula) while imposing tougher penalties for civil market abuse. Nonetheless, the measure rose again in 2015 to 19% and in 2016 has remained unchanged. In part, this may be explained by distractions the regulator has faced including the need to bring significant resources to bear on major FX and Libor fixing investigations.
Market Abuse & Insider Trading The stand out enforcement action last year saw the FCA publish a final notice finding that Tesco plc and its subsidiary had engaged in market abuse. This was in relation to a trading statement made in August 2014 which overstated its expected profit and in respect of which Tesco was required to pay restitution to investors who suffered loss as a result of the creation of a false market and had overpaid for its securities. The FCA estimated that the total amount of compensation payable amounted to approximately £85 million, plus interest. This decision is of note because it is the first time that the FCA has used its restitution powers under section 384 of the Financial Services and Markets Act 2000 to require a listed company to pay compensation for market abuse. Please click here to see our client alert on the Tesco case. Some commentators have, nonetheless, suggested that this was not the best use of scarce enforcement resource and that investors in the company's securities were capable of seeking redress for themselves in the courts. In any event, the Tesco case reminds listed companies that disclosure and transparency are at the heart of the UK's listing regime enabling investors to make informed decisions. It is therefore critical that market disclosures by listed companies are both timely and accurate. In addition to secondary markets, the FCA reiterates their commitment to ensure the cleanliness and smooth operation of primary markets as well as the operation of the sponsor regime for premium listed companies. Enforcement Annual Performance Account The figures in the FCA's enforcement annual performance account show a jump in the number of cases opened in respect of market abuse. With the end of the FCA's FX and Libor investigations it is likely that additional resources will be available to pursue more enquiries. The increase no doubt reflects the importance the authority gives to combatting market abuse, but it may also reflect changes to practices within the Enforcement and Market Oversight Division in the light of the Green Report and the Enforcement Review. As a result, there is now a greater readiness to open new cases and investigate, if only to close them if it becomes apparent that there are insufficient grounds to proceed further.
Market Abuse 2016/17
Cases opened Cases closed Case live (31 March 2017) Financial Penalties Value of Financial Penalties Criminal convictions
120 52 122 3 0.6 million 6
Additionally, last year saw the FCA obtain six criminal convictions for insider dealing. These included guilty pleas from three individuals which the regulator put down to the quality of its investigatory work and reputation as a prosecutor! Of particular interest, exemplifying the FCA's campaign against market abuse by city professionals, is the guilty plea by a former Equity Portfolio Manager at Blackrock. The former star trader received a one year sentence for insider trading helping the FCA to reach a tally of in excess of 30 plus convictions. It is also noteworthy, that the second half of 2016 saw a significant increase in reports by investment firms on suspected market misconduct to the FCA under the new and more broadly based Suspicious Transaction and Order Reports (STOR) regime. The new regime was introduced by the new Market Abuse Regulation that took effect on 3 July 2016 replacing Suspicious Transaction Reports. This may lead to more enforcement action over time.
The key messages from this year's FCA annual report as regards market conduct are:
- The FCA's focus on improving integrity in markets continues and can be seen from the further roll out of the SMR, to increased enforcement activity in respect of market conduct issues.
- As the UK's conduct and markets regulator, the FCA' enforcement and market oversight division has the resources and the tools, for example, through MAR and the SMR, to bring enforcement and disciplinary action.
- Issuers and investment firms need to ensure that they take steps to foster the right compliance cultures and put in place systems and controls, processes and procedures to comply with their regulatory obligations and to reduce the risk of contraventions and of financial crime.