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FCA launches consultation on its proposed guidance on financial crime systems and controls on insider dealing and market manipulation

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management

10-04-2018

The Financial Conduct Authority (“FCA”) recently issued a consultation paper seeking views on its proposed amendments to the Financial Crime Guide (“FCG”) which includes a number of miscellaneous changes as a result of recent regulatory changes (such as the introduction of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (please see our previous briefing on this here)) and the introduction of a chapter on insider dealing and market manipulation (the “New Chapter”).

What is insider dealing and market manipulation?

Insider dealing is a criminal offence pursuant to s.52 of the Criminal Justice Act 1993. In broad terms, the offence is committed where an individual or firm deals in securities on the basis of inside information which is not publicly known and which would affect the value of the securities if it was known.

Market manipulation is a term used to describe a number of behaviours described in s.89 -91 of the Financial Services Act 2012 and includes:

  • Any act or engagement in any course of conduct which creates a false or misleading impression as to the market in or the price or value of any relevant investments
  • Any act or engagement in any course of conduct which creates a false or misleading impression as to the interest rate appropriate to any transaction
  • Making a false or misleading statement, recklessly or otherwise, in the course of arrangements for the setting of a relevant benchmark

Insider dealing and market manipulation are both types of financial crime and it is critical that firms that offer access to relevant financial markets have adequate policies and procedures in place to counter the risk that the firm might be used to further insider dealing and market manipulation (as per SYSC 6.1.1R).

Proposed changes under the consultation

The FCA’s proposals for the New Chapter, which is said will apply to all firms subject to SYSC 6.1.1R, introduce the FCA’s observations on good and bad market practice.  In addition, the New Chapter states that FCG guidance in relation to governance, risk assessment, policies and procedures and monitoring of financial crime will also be applicable to countering the risk of insider dealing and market manipulation;

  • Governance – The New Chapter states that the FCA will expect senior managers to take responsibility for the firm’s measures in relation to insider dealing and market manipulation; which includes understanding the risks that their firm is exposed to and establishing adequate policies and procedures to counter these risks. Senior management should also be able to manage conflicts which can arise between countering financial crime and generating revenue. Oversight of, and engagement with, compliance functions as well as receiving relevant management information will be key in this area
  • Risk Assessment - A firm should assess and regularly review the risk that it may be used to facilitate insider dealing or market manipulation. The New Chapter identifies a number of factors which should be incorporated into a firm’s assessment, and these include: client types, products, instruments and services offered/provided by the firm
  • Policies and procedure – A firms’ policies and procedures, which should derive from its risk assessment, should cover measures for identifying and preventing attempted financial crime before any trade is executed as well as addressing measures of mitigating future risks posed by clients who have already been identified as having traded suspiciously. Further, a firms’ policies and procedures should state clearly how they identify and monitor their employees’ trading, in addition to their clients’ trading
  • On-going monitoring - In recognition of the fact that the EU Market Abuse Regulation (No 596/2014) already imposes monitoring requirements on market operators and firms that operate a trading venue, the New Chapter proposes that it may be appropriate for the results of such monitoring to be used for the purposes of countering insider dealing and market manipulation. On-going monitoring processes should enable firms to conduct enhanced due diligence and monitoring where there is a high risk of insider dealing/market manipulation and firms should be prepared to exit relationships, if necessary

Next Steps

Responses to the consultation are due by 28 June 2018 with a finalised amended FCG expected in Autumn 2018.

For more information contact

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