Eight ways to protect your organisation from market abuse

Originally published on www.complinet.com by Thomson Reuters GRC Feb 16 2011 Ruth Gevers

No one, and least of all senior managers and compliance officers, will have failed to notice that the Financial Services Authority has been on something of a roll with successful market abuse case outcomes, especially insider dealing; it has had a steady stream of successfully concluded civil and criminal cases. The regulator has secured criminal insider dealing convictions against 10 individuals, is currently prosecuting a further 12 and investigating many others. This is in addition to civil market abuse findings against 18 individuals in the last year alone. The FSA has demonstrated its commitment to tackling the most complex of cases involving multiple individuals, requiring patient sifting through high volumes of data to secure the necessary evidence for cases which are always challenging to prove. The first guilty plea in an insider dealing trial, in January 2011, demonstrated the weight of evidence gathered by the FSA in that case. The FSA is increasingly focused on taking action against "City professionals" who may abuse their positions of trust to disclose or trade improperly on price sensitive or confidential information or to manipulate the markets. The FSA has continued to push for tighter industry-wide controls to prevent the leakage of sensitive information (thereby reducing the opportunities for insider dealing). It has been conducting "leak enquiries", and has put pressure on the industry to do more to embed an "anti-leak" culture. It has attempted to create a culture in which abusing sensitive information is seen as inherently wrong and where people who witness people committing abuse feel compelled to hold up their hand to make a report. The regulator has also concluded a number of cases against firms for failures regarding transaction reporting. The FSA considers accurate reports vital to its efforts to identify suspected cases of market abuse, and they will become even more important when the FSA's new, smarter, detection capabilities become fully operational. An important precedent was set when the FSA concluded its first case against an individual for failing to make a suspicious transaction report, where such failure could have frustrated its efforts to identify and investigate an insider dealing case. It is clear, therefore, that senior management at firms handling price-sensitive information simply cannot afford to take their responsibilities in this area lightly. The advice which follow is based on the author's experience of six years spent leading the team at the FSA which conducted the preliminary investigations into market abuse. It will always be a challenge to prevent intelligent and devious people from abusing the market if they are determined to do so, but if the regulator finds anti-market abuse systems and controls lacking, however, tough action could follow against the firm as well as the individual. The cost of this will involve not only fines but also reputational damage and significant management distraction during the FSA investigation, with a subsequent need to spend money on systems and controls anyway. The clear question, therefore, is how to protect an organisation from market abuse. Although there are no perfect answers, as so often is the case, prevention is better than cure and firms should take a hard look at their procedures in the following eight areas before trouble strikes. Culture It may seem an obvious point but it is crucial that a firm has a strong culture, driven and demonstrated by senior management, that market abuse is unacceptable. There could be a higher risk of incidents of market abuse at firms where it had not been made clear that every effort would be made to detect, investigate and report potential failures. Some quick wins to implement this culture might include relevant training courses and regular discussions of recent FSA cases at staff meetings. Policy and procedures It is essential to ensure that policies and procedures are easily accessible and up-to-date. Best practice is to reflect lessons learnt from FSA cases and good practice, e.g., articles in FSA's MarketWatch newsletters (sign up at market.watch@fsa.gov.uk). A compliance monitoring programme should have sufficient focus on detecting potential market abuse by staff, clients and counterparties. Too many organisations the author worked with had focused most of their resources on identifying rather than preventing abuse.

Training An inclusive and thorough approach is really important. Training should cover all relevant staff who come into contact with price-sensitive information or deal with client trades. It should include new hire induction training and ongoing staff training. Best practice is to provide practical examples, based on actual cases, so that staff understand the rules, appreciate the grey areas, the professional judgement required and are encouraged to work with their compliance department on a collaborative basis. Suspicious transaction reporting controls One method of prevention that seemed to prove consistently effective was a regular assessment of whether the reporting regime was working effectively, i.e., whether your staff know and understand the regime and are complying (e.g., what is the frequency of concerns escalated to the compliance department, what is FSA feedback on the number and quality of their STR submissions, etc.,). Leak handling The FSA will tend to look for evidence that firms have assessed their vulnerability to being the source of a leak (particularly in relation to merger and acquisition deals), and implement strong controls to offset the risks, set out how they would identify hotspots where risk is heightened, document their media handling arrangements and the approach it would take to investigating potential leaks. (Marketwatch Nos. 21, 27 and 37). Rumour handling Firms need a suitable policy in place and to communicate with staff about the risks of inappropriate handling of market rumours (Marketwatch No. 30). Transaction monitoring Transaction monitoring is high on the FSA's radar. Firms need to ensure the accuracy of their transaction reporting, taking into account what they have learnt from recent FSA enforcement cases (significant fines) and published good practice material. Insider lists Large or incomplete insider lists remain a significant red flag for the regulator. It will almost always be worthwhile for firms to invest time to assess whether there could be reductions to the number of staff who are made insiders (Marketwatch Nos. 21 and 27) and whether lists are accurately maintained (Marketwatch No. 24). Author Biography: Ruth Gevers is director at Promontory Financial Group, and formerly manager of the FSA's market conduct team investigating market abuse.