05 August 2015 - Post by:Philip Annett
The FCA has issued the industry with a further warning relating to Suspicious Transaction Reports (known as STRs). Although the FCA appears to be broadly satisfied with the quality of STRs it receives, the FCA continues to have concerns about inconsistent approaches to STRs across the industry and that submission levels are too low in some places.
The FSA has previously taken enforcement action where it felt that STRs were not submitted when required. As a result, this warning shot should not go unnoticed by firms, that should take note of the following key takeaways for firms coming out of the FCA’s most recent Market Watch Newsletter and Annual Report for 2014/15 in relation to STRs.
We have also published analysis regarding the decreasing number of market abuse cases that have been successfully concluded by the FCA, which is available here.
#1: Firms are submitting more STRs to the FCA than ever before
In 2014, 1,626 STRs were submitted to the FCA, representing an increase of almost 400% from the number of STRs submitted in 2007 (the year that they were introduced). Although some have suggested that this increase is due to firms being more ‘trigger-happy’ in terms of submitting STRs, the FCA has reported that less than 5% of STRs submitted in 2014 failed to meet the required ‘reasonable suspicion’ test.
However, the FCA has identified some firms that submit significantly fewer STRs than their peers, as well as some asset classes where it believes trading surveillance is less developed and therefore potential incidents of market abuse are being missed. Although the FCA did not name the firms or asset classes it was referring to, it is likely that the FCA will be watching these firms and asset classes closely over the coming months.
In order to ensure that firms’ market abuse surveillance programmes are fit for purpose, the FCA has recommended that firms should undertake detailed assessments of the specific market abuse risks to which they are exposed. However, a ‘one size fits all’ approach is unlikely to satisfy the FCA. Rather, firms should consider whether it is necessary for them to assess the risk of market abuse on a per asset class, business or desk basis.
#3: Employees should be provided with tailored, practical training as to what suspicious transactions may look like in their business area
During supervisory visits to firms the FCA has identified some firms that have ‘under-invested’ in the training provided to their front office staff relating to suspicious transactions and market abuse. The FCA believes that this has led to a low level of understanding – and commensurately low reporting – of potential incidents of market abuse. As a result, the FCA has suggested that firms should train their employee using a mixture of in person and online training, and that training should incorporate focused and practical examples of potentially suspicious transactions that may occur in an employee’s specific area.
#4: Firms may want to re-think the data that they use for surveillance purposes
The FCA has also cast doubts over the integrity and completeness of data being used by firms for market abuse surveillance. Firms should ensure that the data they use for this purpose is regularly validated and that constant refinement and testing of alerts or surveillance routines is undertaken.
#5: What the future holds – reporting suspicious orders as well as transactions
When the new Market Abuse Regulation comes into force next July, firms will be subject to new requirements relating to the submission of information relating to suspicious transactions. For example, in addition to suspicious transactions, firms will also be required to report suspicious orders (even if they are not eventually executed). This additional reporting requirement means that firms may need to re-think their market abuse surveillance strategies, to ensure that suspicious unexecuted orders can be detected.