On a regular basis, Ian shares his thoughts with Practical Law Financial Services subscribers on topical developments in the area of market conduct. In his column for April 2020, Ian considers market abuse in the time of COVID-19.
To read Ian's previous columns, see Practice note, Ian Mason's market conduct columns.
Market abuse in the time of COVID-19
Times of crisis such as wartime and economic depressions create increased opportunities for illicit activities such as "black market" goods. The coronavirus pandemic is no different, and it has been reported that scams (face to face and online), cyber fraud and similar activities are on the increase, with criminals taking advantage of a captive audience working from home.
The coronavirus emergency has also created fertile conditions for market abuse. The FCA's announcement of two months' temporary relief for listed companies to complete audited financial statements may result in companies sitting on potentially inside information which they would otherwise have disclosed sooner. With most office-based people working from home, the normal controls around the protection of inside information will also be weaker. There is a higher risk that confidential documents are left lying around the home, or are not disposed of securely. Some financial institutions prohibit the printing of work-related documents at home. In addition, the current volatility of financial markets makes suspicious patterns of trading or transactions harder to spot. It's not clear what is "normal" in the current markets. Firms will need to consider what the "new normal" is in relation to parameters previously set for price changes or profits generated.
It is important to be clear that despite the current challenges, there is no relaxation or amnesty on MAR. In its statement of policy on listed companies and recapitalisation issuances during the coronavirus crisis, the FCA states:
"The Market Abuse Regulation (MAR) remains in force and companies are still required to fulfil their obligations concerning inside information as soon as possible unless a valid reason to delay disclosure under the regulation exists. Companies must continue to assess carefully what information constitutes inside information at this time, recognising that the global pandemic and policy responses to it may alter the nature of information that is material to a business's prospects."
The definition of inside information under MAR remains unchanged. The information must be of a precise nature, and also likely to have a significant impact on the share price of a financial instrument (see Practice note, MAR: inside information: disclosure and control). Issuers and other market participants need to apply this test on a case by case basis, and there will always be some grey areas. For example, if the CEO or other senior management at a listed company contract the virus, this could have a significant impact on their business. BT Group made a market announcement that its CEO, Philip Jansen, had contracted the virus, and was self-isolating at home, with mild symptoms. He is (thankfully) reported since to be recovering well.
Some individuals may also be tempted to take advantage of the current fertile conditions for market abuse, while the FCA is focused on dealing with the COVID-19 crisis and may be distracted. This would be unwise. The FCA has a much larger detection net as a result of the increased reporting implemented by MiFID II. In 2019, the FCA received 9.8 billion MiFID II transaction reports, an increase of 17% on 2018. The FCA also ingests the FTSE 300 order book which generated around 150 million order reports per day. Its systems are now able to consolidate the order book so it can aggregate orders in the same stock across different platforms. It also receives around 6,000 suspicious transaction and order reports (STORs) per year (see the 2019 figures). That is a lot of data.
When the current crisis is over, the FCA will look back at any suspicious trading patterns over this period (to the extent that it is not doing so now, it will still be receiving real-time information). There is no need to commence an immediate enforcement investigation, it can always be started later. There are clearly logistical difficulties at present with the movement restrictions imposed in terms of conducting some aspects of the enforcement process, for example conducting face to face interviews. However, these difficulties are not insuperable; it may still be possible to conduct interviews online, if adequate recording facilities are available, or interviews can be postponed until the restrictions have been lifted.
FCA progress on tackling market abuse
In the meantime, how is the FCA meeting its objective to combat market abuse on its current caseload? In a speech in February 2020, Mark Steward, the FCA's Executive Director of Enforcement and Market Oversight, revisited the market cleanliness metric that the FCA uses as a proxy for potential insider dealing ahead of takeovers. The metric was first published in 2008, when it found that approximately 30% of takeovers showed abnormal price movements two days prior to an announcement. The latest figure, published in 2019 (see the FCA annual report and accounts 2018/19, page 40), is currently at its lowest score at around 10%. The FCA has also developed a new measure, the abnormal trading volume (ATV) ratio, which has produced a lower figure of 6.4%.
Mr Steward suggests some possible reasons for the lower scores. A higher level of enforcement activity (more investigations) is an obvious driver. Mr Steward also indicates that decisions will be made shortly on some market abuse investigations connected with dividend stripping tax avoidance. These are complex investigations involving a number of EU jurisdictions, as well as the US, and will be significant cases when published. However, Mr Steward also highlights a more strategic approach (which he terms "dynamic interaction") involving greater collaboration between the enforcement and supervision teams, and also ensuring that market participants play their role in detecting and reporting market abuse (and taking robust action against them where they do not).
Mr Steward also points to a step change in market manipulation cases. In previous years, by far the majority of market abuse investigations undertaken by the FCA involved insider dealing. The FCA has made a strategic decision (facilitated by its access to enhanced data on equity trading in the order book) to investigate more manipulation cases, and in fact these now comprise 40% of market abuse investigations. This is a big (and brave) call by the FCA, because market manipulation cases are typically highly complex, are resource heavy in terms of data and staff, and take longer. They are hard cases. But the FCA must be (and must be seen to be) active in tackling market manipulation, as well as insider dealing.
The future
The FCA recently published its Business Plan for 2020/1. As a result of the coronavirus, the FCA had to rewrite this to some extent, and the plan runs to a stripped-back 25 pages. The main focus, understandably, involves responding to the current crisis, and there is also the small matter of Brexit still scheduled for the year end. In terms of market conduct, maintaining orderly markets must be a priority. Within the "Sector work" part of the plan (see chapter 6, pages 21-23), one of the key outcomes is stated to be "Clean markets that make it difficult to commit market abuse and financial crime" and this is expanded as:
"We will continue to evaluate and adapt our supervisory and enforcement strategies to respond to external changes, such as the impact of EU withdrawal on UK and EU coordination and co-operation arrangements (including data sharing), coronavirus and technological developments."
However, realistically for the FCA over the next few months, it will need to focus on fire-fighting and planning for the post-COVID-19 world, which may look different from the current one.
Finally, this column would like to send its readers my best wishes in these challenging times.
This document is published by Practical Law and can be found on the Practical Law website.