C&G Regulatory Solutions has examined two major trading related enforcement actions announced by the UK Financial Conduct Authority (“FCA”) in Q4, 2022 and summarised them for ease of reference. A set of self-assessment questions accompanies each case to help you analyse their implications for your business.

(1) FCA fines inter-dealer brokerage firms / operators of UK trading venues £4,775,200 after discount

 

On 8^th December 2022 the FCA announced that it had fined BGC Brokers LP, GFI Brokers Limited and GFI Securities Limited for breaches of Principle 3 and Article 16(3) of the Market Abuse Regulation (“MAR”). To summarise, the breaches included:

 

• communications monitoring and trade surveillance programme weaknesses:

 

• • inadequate market abuse risk assessment;

 

• • insufficient coverage of asset classes;

 

• • inconsistent performance of manual tests;

 

• • limited (sample focused) or non-existent monitoring of voice communications;

 

• • monitoring not being performed on a timely basis;

 

• • staff lacking understanding re: operationalising a new trade surveillance system;

 

• • lack of scrutiny over personal account dealing or house dealing by persons on insider lists;

 

• lack of challenge offered by the board:

 

• • red flags escalated to management not adequately discussed;

 

• • progress in addressing action items not recorded;

 

• • delays in the implementation of surveillance system upgrades;

 

• • overreliance on 1^st line of defence to detect and escalate issues;

 

• poor apportionment, including:

 

• • no clear allocation of responsibility within the compliance function for trade surveillance;

 

• • a trade surveillance manager lacking authority; and

 

• • shortage of staff in proportion to volumes traded.

 

Self-assessment questions for compliance officers and senior managers

 

• Are you confident that your firm’s communications and trade surveillance programmes sufficiently cover all asset classes in which the firm is actively involved?

 

• If your firm relies on manual monitoring, what steps does it take to ensure that this is being consistently performed and remains adequate?

 

• Where the board identifies, or receives notice of, issues, what is it doing to ensure these are addressed? Is the board retaining sufficient evidence of its challenge and oversight?

 

• Can the firm demonstrate that the knowledge of staff responsible for trade surveillance functions is tested and kept up to date, particularly when the firm plans to add more business lines?

 

• Are the trading activities (house and personal) of persons on insider lists routinely examined for potential evidence of front running or insider dealing?

 

• Is manual monitoring being conducted on an arbitrary sample basis or can the firm demonstrate that it has sufficient depth and range?

 

• Is the apportionment of responsibilities documented, clear, up to date and appropriate to the business the firm is engaged in?

 

The full case can be found here.

 

(2) FCA fines brokerage firm £531,600 and penalises three directors for oversight and reporting failures

 

On 6^th October 2022 the FCA announced that it had fined Sigma Broking Limited for breaches of Principle 3, SYSC 6.1.1, SUP 15, SUP 17 and Article 16(2) of MAR. Three directors were also fined, with two also receiving industry bans. In announcing the enforcement action that it had taken, the FCA stated:

 

“Many of these failings originated in the wholly inadequate governance and oversight provided by Sigma’s governing body, namely its Board compromising of three directors”.

 

Among the failures cited were:

 

• launching products that posed a significant market abuse risk (CFDs and spread bets) without first conducting a risk assessment;

 

• inadequate governance:

 

• • not holding regular board meetings;

 

• • not producing or receiving adequate management information, including from the compliance officer;

 

• • not putting in place terms of reference setting out the board’s responsibilities;

 

• • not meaningfully tracking the progress of action items;

 

• • lack of agreed and signed job descriptions;

 

• • no statement of compliance officer’s responsibilities in his employment contract;

 

• • approval not sought from the FCA prior to the reallocation of functions requiring approval;

 

• • risk register not used to inform decision making;

 

• • unclear reporting lines and apportionment;

 

• • emergence of a corporate silo and sub-culture in respect of the CFD desk that was “run as a separate company”. The Compliance Officer claimed it did not fall within his responsibilities;

 

• inadequate or non-existent policies and procedures:

 

• • no policies and procedures prohibiting the use of unrecorded devices to take customer orders;

 

• • brokers maintained power of attorney arrangements with clients that were not declared as conflicts of interest or monitored by Compliance;

 

• • brokers using encrypted chat applications on personal devices to communicate with, and take orders from, clients;

 

• the employment of “eat what you kill” remuneration arrangements where brokers, who did not receive a fixed salary, instead received 60% of the revenue generated;

 

• the Compliance Officer was only remunerated on the basis of brokerage activities in direct conflict with the performance of his duties as a CF10;

 

• lack of competence and training:

 

• • Compliance Officer appointed without having experience and skills to perform the function;

 

• • no training provided on transaction reporting;

 

• • neither board nor compliance had prior experience or expertise of CFDs and spread bets. Nevertheless, steps were not taken to address this;

 

• • no guidance provided to front desk re: how to recognise a suspicious transaction, despite it being relied upon to “managed own compliance issues”;

 

• weak trade surveillance and escalation procedures:

 

• • surveillance remained manual despite addition of new business;

 

• • no evidence of monitoring kept;

 

• • failure to identify 97 suspicious transactions for a sustained period, with no suspicious transaction reports / suspicious transaction or order reports submitted to the FCA;

 

• • no steps taken to implement the Market Abuse Regulation;

 

• transaction reporting failures:

 

• • failure to report 56k transactions accurately, or at all; and

 

• • failure to use FCA’s sample facility to compare front office records with reports submitted to Approved Reporting Mechanisms (“ARM”).

 

Self-assessment questions for compliance officers and senior managers

 

• When was the last time you commissioned an independent audit into the effectiveness of your firm’s governance arrangements?

 

• Are you confident that your firm’s remuneration arrangements are compliant with the requirements in MiFIDPRU?

 

• Is the adequacy of trade surveillance coverage a core component of your firm’s product and/or new business governance processes?

 

• Can you demonstrate that employees have received training to recognise abusive behaviours that typically arise in the context of the business they are engaged in?

 

• Has your firm ever taken an Market Data Processor download and reconciled this to front office records to check the completeness of its MiFIR transaction reporting?

 

• Can your firm evidence that it has warned its representatives from taking customer orders on unrecorded medium?

 

The full case can be found here.

 

About us

C&G’s consultants have substantial, C-suite level, experience of trading operations and compliance. Please contact us if you have any questions about the contents of this newsletter.