17 August 2015 - Post by:
Tackling market abuse has long been a priority of the FCA and the FSA before it. However, in recent years there has been a noticeable decline in the number of successful civil market abuse cases brought by the FCA, with only two public outcomes published in 2014/15 (a drop of 88% from the number of public market abuse outcomes published by the FCA in 2010/11). But this decline may be short-lived. A recent set of FCA Board minutes indicate that the FCA has a number of market abuse cases in the pipeline.
The number of ‘open’ market abuse investigations is at an all-time high
The lack of public market abuse outcomes that the FCA has seen in the past few years is not for lack of trying. As the chart below shows, the number of ‘open’ market abuse investigations that the FCA has, has continued to increase over the past three of years, reaching an all-time high of 60 as at 31 March 2014.
So why the decrease in successful market abuse cases brought by the FCA?
Until very recently, the FCA had made no comment as to why it is achieving fewer successful public outcomes in market abuse cases. This was somewhat surprising given that, based on comments made by the FCA in its latest Business Plan and other published materials, combatting market abuse continues to be a priority for the FCA.
As at 31 March 2015, the FCA had 49 open market abuse investigations. As a result, it does not seem that the FCA is finding it difficult to identify a considerable number of instances of suspected market abuse. Rather, it appears that the FCA is finding it difficult to successfully conclude as many market abuse cases as it once did. Why is this? As the FCA Board minutes for July confirm, cases of suspected market abuse are becoming increasingly complex and are therefore taking longer to investigate and conclude. They also often involve more technologically-advanced trading techniques, including algorithmic and/or high frequency trading (see, for example, the FCA’s successful market abuse cases brought against Swift Trade and Michael Coscia, as well as the recent permanent injunctions that the FCA secured against two firms and three individuals).
These developments make investigating and proving market abuse more difficult and resource-intensive for the FCA, which, as the FCA has now confirmed, goes some way to explaining the decline in the number of successful market abuse cases concluded by the FCA over the past few years. This is an issue that is likely to have been compounded by the fact that a considerable portion of the FCA’s enforcement resources over the past few years has been dedicated to large, high-profile enforcement cases, such as those relating to LIBOR and FX.
What the future holds
Firms should not take the lack of enforcement action on the part of the FCA in relation to market abuse as a sign that they can relax or de-prioritise the risk that market abuse poses. As the chart above shows, the FCA has a large number of open market abuse cases – a sign that the FCA is still actively looking for enforcement outcomes in this area. The recent comments made to the FCA Board seem to confirm this.
In addition, next year will see the implementation of the long-awaited Market Abuse Regulation, which, the FCA says, will reinforce its ‘investigative and administrative sanctioning powers’. It will also allow the FCA to take action for market abuse in relation to a broader range of market misconduct across more markets. Although the FCA has encouraged firms to start preparing for the implementation of the Market Abuse Regulation, little has been publicly said about how the FCA is preparing itself for this event. However, it is unlikely that the FCA will fail to see the implementation of the Market Abuse Regime as an opportunity to reinvigorate its appetite to secure more successful outcomes in market abuse cases.
Source of data used in this post: FCA and FSA Annual Reports and Final Notices published by the FCA and the FSA, both of which are available on their respective websites. Please note that prior to 2013/14, the FCA categorised market abuse cases in its Annual Reports as relating to ‘market protection’. From 2013/14 onwards, this category was renamed ‘market abuse’.