FCA Market Watch 77

FCA Market Watch 77

Introduction

FCA Market Watch 77[1] was published in February shedding some light on the trading activities of organised crime groups (OCGs) within equity markets. The UK regulator emphasises the risks that OCGs pose to market integrity and the actions firms can take to mitigate these risks.

This article is a bitesize recap for busy professionals.

 

Characteristics of OCG activity in in equity spread bets and CFDs

An OCG has a purpose of carrying on criminal activities (e.g. insider dealing) and consists of 3 or more persons who act, or agree to act, together to further that purpose.

Indicators of OCG activity include:

  • trading before merger and acquisition (M&A) announcements or press speculation;
  • recruiting individuals with access to inside information;
  • using intermediaries who broker inside information;
  • using umbrella accounts at overseas broking firms which can obscure the identities of account holders;
  • using facilitators, including employees of authorised firms, to open accounts with such overseas firms;
  • feeding stories about mergers and acquisitions, both true and false, to major financial media outlets, to benefit from the ensuing price movements; and
  • links with other types of serious crime.

 

Identifying Suspicious Activity

Executing firms may be in danger of executing trades on behalf of an OCG where:

  • clients are regularly generating Suspicious Transaction and Order Reports (STORs);
  • clients are frequently trading before M&A announcements;
  • clients are opening positions before, and closing those positions immediately after, M&A speculation in the media;
  • several clients are trading in the same security for the first time; and
  • clients have a connection to other current or former clients who have been involved in suspicious activity or transactions.

Advisory firms should be alert to the risk that staff members might be tempted or pressured by OCGs to disclose inside information.

 

Actions for firms

Executing firms should consider:

  • communicating that the firm operates zero-tolerance policy on market abuse and reports any suspicions to the regulator and/or law enforcement agencies as appropriate;
  • requesting evidence of adequate surveillance arrangements and policies on market abuse from clients that are overseas broking firms; and
  • viewing trades before M&A media reports as potentially suspicious and filing STORs if necessary, even without public confirmation.

Advisory firms should warn M&A advisory staff against signposting their access to inside information on social media profiles. Firms should consider limiting mentions of M&A staff names on social media to senior contacts to reduce the risk of junior staff members being targeted for OCG recruitment.

 

Enforcement Powers

Firms are reminded of the FCA’s enforcement powers, including s.166 reports, voluntary requirements, and variations of permissions, to ensure compliance with regulatory obligations aimed at protecting market integrity.

 

Conclusion

Market Watch 77 underscores the risk of OCG involvement in market abuse and urges firms to remain vigilant, adopt risk-mitigation techniques, and comply with regulatory obligations. It is important for firms to remember that a single suspicion of insider dealing can trigger an obligation to submit both a STOR and a Suspicious Activity Report (SAR). The FCA published a letter in 2019[2] that provides a useful overview of the STOR and SAR regimes, including where they overlap.

 

How C&G can help

We offer ongoing advice, health checks on existing controls, policy drafting and bespoke training solutions to firms. Contact us with your requirements if you need assistance in this area.

 

References

[1] 2024. Market Watch Newsletter 77. Financial Conduct Authority, available at: https://www.fca.org.uk/publications/newsletters/market-watch-77 (last accessed 5th March 2024)

[2] 2019. Suspicious Activity Reports (SARs) and Suspicious Transaction and Order Reports (STORs). Financial Conduct Authority. Available at: https://www.fca.org.uk/publication/correspondence/letter-uk-finance-sars-stors.pdf (last accessed 5th March 2024)

Lewis Gurry

Lewis Gurry

Lewis Gurry

Receive our latest insights straight to your inbox