Market Abuse Regulation three years on: is this still a priority for the regulator?

Charlotte Longman, Senior Principal Consultant, ACA Compliance Group

This week marks three years since the Market Abuse Regulation (MAR) overhauled the civil market abuse regime across Europe, repealing and replacing the Market Abuse Directive (MAD) and the UK’s own domestic legislation.

Developed in parallel with the revised Markets in Financial Instruments legislative package (MiFID II), MAR significantly extended the reach of the European regulatory regime to capture a wider scope of markets, instruments and behaviours, and contained specific provisions to address the proliferation of technology-driven trading practices and platforms. Designed to tackle misconduct and restore market confidence, MAR aimed to increase both market integrity and investor protection. 

Three years on, we examine the impact of the regulation and ask if market abuse is still a priority for the FCA. Here are eight outcomes resulting from the legislation:

A rise in STORs submissions indicate an increase in firms’ awareness of risk:
It‘s evident that MAR had a galvanising effect on the industry as seen from the substantial increase in the submission of Suspicious Transaction and Order Reports (STORs). There was a 70% increase in submissions in the six months post-implementation, and a further 30% increase between H2 2016 and H2 2018. Market participants are clearly more alive to the risks present within their organisations.

Understanding of obligations is good, but actions still fall short:
In 2018, the FCA issued its Market Abuse Questionnaire, which was announced at the Asset Management Conference in the summer. The survey was issued to over 400 firms, a statistically significant portion of firms supervised in the alternative and asset management portfolio and focussed on firm’s systems and controls. The findings were published in Market Watch 58. These generally indicate that many market participants have a good understanding of their obligations, however there are areas which present challenges, including surveillance of all orders and transactions. Quote surveillance technology was in its infancy when MAR came into force but, given the lapse of time since July 2016, the FCA now expect firms to be fully in compliance. 

The FCA is turning a more focused lens on market abuse: We saw a flurry of market abuse related communications from the FCA late in 2018. This followed little new guidance or clarity from the FCA during the preceding period, aside from the consultation and subsequent enactment of the updates to the Financial Crime Guide, which also took effect in December. This rise in communication indicates that the FCA is increasing its focus on this topic in an attempt to improve standards and ensure that the UK has a clean, orderly and transparent market in which participants can trust.

Regular reinforcement from the regulator:
Published in April each year, the FCA’s business plan is the best indicator of the regulator’s priorities for the forthcoming year. Preventing and detecting market abuse features regularly in these publications. The plan released after MAR implementation focused on embedding the new regime but also pointed attention to MiFID II and the enhanced transaction reporting obligations under the accompanying Regulation. In its 2018/19 plan, the regulator explicitly highlighted that supervision on fixed income, commodity and non-standard derivative markets has historically received less focus than equities, noting “we will monitor, detect and investigate potential abuse in these markets and enforce against unlawful behaviour where appropriate.” The FCA’s most recent business plan for 2019/2020 highlights that the regulator will concentrate on “key areas in firms’ control frameworks, focusing on areas such as the control of inside information”. It states its “work will aim to ensure that firms respond appropriately to the 2018 update to the FCA’s Financial Crime Guide for Firms on the risks of insider dealing and market manipulation.”

In addition, earlier this year, the FCA issued a Dear CEO letter to wholesale broking market participants. The FCA feel that “the wholesale broking business model poses an inherently high risk of market abuse” as it can be used to facilitate abusive trades but also regularly hold confidential, or inside, information. The FCA warned that the dissemination of this style of informationmust be carefully managed as it can be easily abused, with the inference being that employees use it in their personal trading as low levels of trading were being reported in some firms. All firms can take this as a warning to ensure their Personal Account Dealing policies and procedures are sufficiently robust.

Complete and accurate transaction reporting is instrumental in supporting the prevention of market abuse: MiFID II significantly expanded the FCA’s ability to survey for market abuse by increasing the number of firms in scope of the reporting requirements, whilst simultaneously increasing the data within the reports to include, for examples, individual decision makers and where executions involved in algorithms. The importance of this change in regime was highlighted by the FCA in its 2017/18 business plan, where it noted that information in the expanded transaction reports “will significantly increase the effectiveness of our market abuse work”. Additionally, the message has recently been repeated in the context of enforcement action for transaction reporting failings. This highlights the reliance the FCA place on complete and accurate information in helping “the FCA identify potential instances of market abuse and combat financial crime”[1].

Prevention is better than cure:
Julia Hoggett was appointed Director of the Market Oversight Division of the FCA in April 2017. Hoggett has since made two important speeches on Market Abuse, the first approximately six months after her appointment in November 2017. The initial speech discussed compliance with MAR being a ‘state of mind’ and involves critical thinking and enhancing trust, plus evolution. The second speech in 2019 built on the evolution point asking the industry to do more to improve its capacity and ability to conduct surveillance in the non-equity space, with a focus on prevention rather than detection of market abuse. Evolution was also considered in the context of the changes to the market environment – for example the increase in the use of algorithmic trading, and the need to ensure that market participants keep pace.

Enforcement is real:
The FCA continues to pursue enforcement action where it has identified breaches of rules, both in criminal and civil proceedings. We’ve seen a number of high profile sanctions on both individuals and investment firms for a variety of crimes ranging from insider dealing and engaging in market abuse, to inadequate systems and controls preventing the firm from identifying and reporting suspicious activity. 

Effective trade surveillance for all Financial Crimes is imperative:
Most recently, the FCA published the findings of its thematic review into money laundering risks and vulnerabilities in capital markets, which highlighted that many firms’ “main focus was detecting market abuse”. It also identified “a potential disconnect between some participants’ trade surveillance for market abuse and AML transaction monitoring functions, with the result that participants were not always recognising the potential for correlation between market abuse and money laundering.” The FCA also confirmed its expectation that firms must have regard to both their obligations under the Proceeds of Crime Act for submitting a Suspicious Activity Report (SAR), and the Market Abuse Regulation, for submitting STORs.

What’s next?

Protecting and enhancing the integrity of the UK financial system is, and continues to be, a key operational objective for the FCA. Over the next few years, we expect the detection and prevention of market abuse will remain an absolute priority area for the FCA.