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Fines and felons: Why you need to demonstrate accountability to the FCA

Wed 13 Nov 2019

Insider trading legislation is now starting to bite with several high-profile prosecutions over recent years.

Since the inception of the Financial Services and Markets Act in 2000, which gave the Financial Conduct Authority (FCA) the power to investigate and prosecute insider dealing, the regulator has secured 36 convictions, while the introduction of the Market Abuse Regulation (MAR) in 2016 has equipped the FCA with further powers. These include the ability to demand information from issuers and other persons, to compel the publication of information by issuers and the publication of corrective statements by issuers or other persons, all of which can be used to prove accountability.

As a result, regulators now have the evidence they need to bring prosecutions and the net is now closing in on insider trading and market abuse. The most recent case to dominate the headlines, brought by the Securities and Exchange Commission (SEC) in the US, is against investment bankers Benjamin Taylor and Darina Windsor. The couple, who worked in separate banks in London at the time, are alleged to have sold insider information about 22 companies internationally, netting them $1million (although the value of the information disclosed is estimated to run into the tens of millions).

Getting personal

The Taylor/Windsor insider trading ring is thought to have seen information disclosed to the couple by Bryan Cohen, a Goldman Sachs Vice President. In the UK, MAR sets out strict criteria for senior personnel who are privy to insider information compelling them to register their interest. Persons Discharging Managerial Responsibility (PDMR) are required to complete a PDMR notification form related to any trades that exceed the annual allowance of 5,000 euros. Persons Closely Associated (PCAs) with them, such as family members, must also be disclosed. This then acts as evidence in the event of an investigation, protecting the individual and their family.

The FCA is quite prepared to pursue individual prosecutions and has done so in the past. For example, in 2017, it imposed a £60,000 fine on an individual bond trader, Paul Walter, who during his time at the Bank of America Merrill Lynch International Ltd manipulated stock prices for Dutch State Loans (DSLs). Walter placed quotes to buy DSLs, cancelling these quotes before then selling, but not before he’d caused the price to rise, resulting in a profit of 22,000 euros for his book.

More recently, we’ve seen the FCA use the Market Abuse Regulation (MAR) to clamp down another Bonnie and Clyde couple. Fabiana Abdel-Malek and Walid Choucair were both sentenced to three years in prison for acquiring and exploiting confidential information about mergers and acquisitions from investment bank UBS AG. Abdel-Malek passed information on five company takeovers to Choucair who made £1.4 million from trading ahead of press announcements and corporate takeovers in a case described as “insider trading at its most venal”.  

Above reproach

These cases are examples of flagrant market abuse but what’s interesting is that the FCA is increasingly looking not just at deliberate acts but also negligence. MAR now gives the FCA the power to assess whether the systems and processes firms have in place are fit for purpose in complying with the regulations. One firm that failed in this regard is Interactive Brokers (UK) Ltd which was fined over £1million last year for “failings in its post-trade systems and controls for identifying and reporting suspicious transactions”.

So what does this mean for traders and firms? Individuals clearly now have a vested interest in making sure that they complete insider lists and PDMR/PCA notification forms. It’s a vital way of proving that they have taken personal responsibility and acted in accordance with MAR to the best of their abilities. “The insider list is a key tool for investigating possible market abuse infringements,” states the European Securities and Market Authority (ESMA), indicating that those that fail to register their interests can expect to come under the full scrutiny of the regulator.

For firms, there’s also now a real incentive to look again at their processes to establish if they have gone far enough in demonstrating compliance. Robust mechanisms need to be in place that don’t just provide insider lists but also track workflow and monitor activity. This then enables the regulator to conduct a digital audit trail to determine if and when permission to trade was sought. In this way the firm can show it has taken steps to both maintain insider and confidential lists but also to identify those seeking to trade under the radar, again proving that it has done everything in it power and is therefore above reproach.

Contact Equiniti TopLevel to find out more about our MAR solution.