A deluge of regulations entering force in January will undoubtedly push compliance, regulatory, and technology resources to the limit, but the biggest headache is likely to come from the EU Market Abuse Regulation as enforcers now comfortable with the law begin to flex their muscles.
According to the Behavox Regulatory Knowledge Base, a detailed and specialist live-tracker of more than 500 enforcement actions and legal cases across the globe, market abuse enforcement actions, fines and sanctions rose across all jurisdictions in 2017.
In the UK alone, there was a 75 percent increase in the number of UK Financial Conduct Authority investigations opened during the financial year 2016/17.
"Market abuse is the number one priority for FCA enforcement," said Andrew Tuson, partner at Berwin Leighton Paisner law firm. "235 new enforcement investigations were opened in 2016/2017. Nearly 50 percent of these investigations related to market abuse, mostly insider dealing."
Political and industry lobbying has allowed more time to bed in MiFID II, but the FCA has warned there will be no more excuses for non-compliance with MAR, as enforcement cases in 2018 are set to soar.
The FCA does not think The City truly understands MAR
In November, Julia Hoggett, director of market oversight at the FCA said an air of ignorance surrounds MAR, and that a total mindset change is needed from London’s financial services sector.
Better systems are needed, investment in technology is required; staff, especially board members, can no longer simply avoid an issue to evade sanction.
A week after Hoggett’s speech, ex-Bank of America bond trader Paul Walter was fined £60,090 for market manipulation. The FCA said the veteran Walter’s ignorance of his conduct was no excuse, and his negligence came at a heavy cost.
In December, FCA ended the year with its first formal application of the MAR; AIM investment vehicle Tejoori Limited failed to disclose the reciept of inside information and was hit with a £70,000 penalty. Under MAR, Tejoori was required to disclose the sensitive information it was given regarding the sale of shares in a separate company as soon as possible.
This did not happen, and the regulator said chatter over the deal in online message boards began to drive up the price, triggering responses from other agencies, as the plot began to unravel.
"This underlines the need to put in place proper processes to identify inside information and allow decisions to be taken promptly, and within appropriate timescales," according to financial regulatory experts at law firm Baker McKenzie.
Many saw this as the FCA testing the water, and there is consensus that the penalties in future will be much worse.
In March, shortly after Tesco was slapped with an eye-watering £129 million penalty by the fraud squad and made to redress investors to the tune of £85 million by the FCA for manipulation of its share price, the FCA banned two senior executives at a spread betting firm for market abuse and said it had considered criminal charges.
To breach MAR risks an uncapped fine, and could even see firms totally barred from the market, unable to carry out any mainstream regulated activity for a period.
Criminal prosecutions are creeping up the FCA agenda according to the head of enforcement at the regulator, Mark Steward, and market abuse can carry a seven-year jail term.
The direction of travel since MAR entered force in 2016 shows compliance officers, risk and surveillance professionals and CTOs need to get ahead of the curve when it comes to using people analytics as a line of defence.
The advent of the Senior Managers and Certification Regime, the code of conduct for the sector that will place the blame for wider failings on a liable individual, also makes it imperative for executives to understand their responsibilities and effectively monitor their teams.
No more excuses
Hoggett said many were finding it difficult to comply with many aspects of the rules, especially those on surveillance, as their legacy technology was not up to the task.
“When MAR went live, industry told us that some of the surveillance requirements, notably around surveillance, required additional technical development by firms, and we recognised that this would take some time to build,” she said. “More than a year since then, we now expect firms to be compliant with all the requirements under MAR.”
Complaints that existing defence mechanisms need time to update will no longer fly, as the expectations are to “fully comply with the requirement under MAR to have surveillance solutions in place”.
One of the biggest headaches firms report is the number of false positives which arise when reviewing potential instances of market abuse; it is a costly and time-consuming process that frustrates compliance staff. Being able to monitor the sharing or receipt of material non-public information is also crucial.
The onus is on everyone to ensure their monitoring technology is in lock-step with developments in their business, as while the FCA is rapidly adapting to technological change and to evolution of market behaviours, the question is are you?
Behavox can help
Behavox are experts in establishing effective defences to help you detect and prevent market abuse using our unrivalled surveillance technology. We can help you deploy machine-learning insider dealing scenarios to monitor for evidence of trading activity following on from monitored employees receiving or discussing inside information.
The insider dealing scenarios can also overlay communications data with trade data as well as market data to provide a thorough case for surveillance teams to review.
Our technology leverages ground-breaking scenario parameters and examines relationships that monitored employees have. The scenarios are constantly revised in line with new enforcement actions by analyzing cases for contextual information and true positives.
For some firms, surveillance and machine-learning analytics is a scary and over-complex process. Behavox offers a fully-managed service with everything from primers to walk-through guides and scenario training.
Clients are also offered the chance to become part of the global Behavox compliance community; an invite-only group of compliance, risk, surveillance and technology professionals from companies all over the world who meet to dicsuss trends, share best practice and help each other steer through the increasingly choppy regulatory waters.
For more information talk to us today.