With almost a 400% increase in the number of suspicious transaction reports received by the Financial Conduct Authority (FCA) since 2007, you may assume that the monitoring and reporting procedures put in place by firms have increased in quality. However, although this may be a logical conclusion to draw, a recent FCA newsletter highlights that, whilst there is some improvement, there is still more work to be done to achieve satisfactory detection and reporting procedures.
The FCA’s ‘Market Watch’ newsletter no. 48 provided a disguised warning shot to firms: those failing to implement robust market abuse detection procedures and policies, or provide accurate and complete suspicious transaction reports, will be watched carefully.
The key points to take away from the newsletter are:
- The FCA believes that STR submissions are not consistent across all areas of the market, and in some areas submissions are viewed as being “low”
- Some firms submit significantly fewer than their peers and, in some asset classes, surveillance is not as well developed, resulting in incidents of market abuse being missed
- It is believed that “cultural obstacles” exist in detecting market abuse for some asset classes.
The FCA does not state which asset classes or firms are responsible for the comparatively low numbers of reports, but it may be inferred from the newsletter that they will target and carefully observe those which fall on the low side.
Hints and tips
If you are a firm that believes – or indeed knows – you may fall under the threshold, then the FCA offers a few hints and tips on how to achieve STR best practice. The suggestions range from the undertaking of a risk assessment to staff training procedures and include the following points:
- Firms may want to undertake an in-depth risk assessment of their exposure to market abuse and tailor their procedures for those asset classes and areas of the market where they are assessed to have exposure to market abuse
- The FCA promotes the use of management information systems to identify desks and/or sectors that are potentially underperforming in identifying and reporting market abuse
- Where it was observed that the data integrity was questionable, the FCA recommended that firms employ market abuse surveillance analysts as part of their internal audit procedures, which will increase the chances of issues being self-diagnosed. In addition, in those firms that submit reports consisting of good data, allowing surveillance analysts to challenge that data and escalate concerns where they see fit will validate and enhance the efficient reporting of STRs
- It is suggested that the training of staff should consist of online theory in combination with face-to-face discussions on what suspicious transactions look like.
The unanswered question
It is clear, as a result of the shared hints and tips, that the FCA wants to avoid firms increasing the number of STRs submitted through defensive reporting, for example, reporting through fear of being targeted as a result of previous low levels of reporting.
Those firms which do not currently satisfy the FCA in relation to STRs will also have a long way to go in implementing suitable procedures for the new suspicious order obligations under the Market Abuse Regulation.
JWG’s analysis, resulting from discussions at our recent CDMG meeting covering MAD2/MAR, indicates that there still remains the issue of what constitutes “suspicious”. Before MAR comes into effect in 2016, firms will need clarity and guidance on this, especially when they’re trying to implement a system to incorporate the detection of ‘suspicious orders’ next to ‘suspicious transactions’. Whilst the FCA’s hints and tips are worthy of taking to the board for assistance in implementation planning, this definition of “suspicious” is paramount to achieving greater compliance.