Ian Mason is a Partner and Head of the UK Financial Services and Regulatory team at Gowling WLG. Ian was formerly a Head of Department in the Enforcement Division of the Financial Services Authority (FSA). He is a member of the Practical Law Financial Services consultation board.
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 2021, Ian considers recent FCA speeches and enforcement cases that demonstrate it is still "on the beat" for market abuse. He also comments on Market Watch 66, in which the FCA emphasised the importance of firms continuing to monitor market abuse risks arising from home working.
To read Ian's previous columns, see Practice note, Ian Mason's market conduct columns.
The FCA is still on the beat for market abuse
Most of last year appeared to be a quieter period for developments on the market abuse front (at least as publicised), but over the past few months, the FCA has roared back into action, with an important update from Mark Steward, its Director of Enforcement, as well as some significant new enforcement cases.
Detection and surveillance
In his speech in March 2021, Mr Steward reported there had been an overall increase of 34% in transactions and transaction reports in 2020, mainly caused by heavier trading as a result of the pandemic. However, the FCA's surveillance capabilities were well able to cope with this: although there was a temporary reduction in suspicious transaction and order reports (STORs), these had now returned to normal levels, and remained of high quality. In addition, improved transaction reporting and aggregation of order book information has provided the FCA with enhanced surveillance oversight over trading activities across asset classes.
There have also been some recent enforcement cases, which were highlighted in Mr Steward's speech. These have been a mixture of insider dealing cases and market manipulation cases, the latter reflecting that market manipulation cases are a significant part of the investigations' caseload. In the most recent case, the FCA fined Adrian Geoffrey Horn, an experienced trader, £52,500, and prohibited him for engaging in wash trades, a form of market manipulation. As Mr Horn made significant admissions to his employer and to the FCA during a voluntary interview, this would have been a more straightforward case for the FCA to bring than some market manipulation cases. Accordingly, the FCA regarded Mr Horn as having demonstrated a high level of co-operation with the investigation, and gave him a significant discount on the fine, which would otherwise have been £100,000.
A more complicated market abuse case was that brought against Corrado Abbattista, who was fined £100,000 by the FCA and prohibited for placing large misleading orders while at the same time placing smaller genuine orders on the opposite side of the order book. Mr Abbattista strongly challenged the FCA in his representations to the Regulatory Decisions Committee (RDC), including introducing expert evidence on market liquidity. Mr Abbattista referred the FCA's decision to the Upper Tribunal, but his reference was later withdrawn.
Mr Steward also highlighted increased monitoring of short selling in his speech. This is highlighted by the recent enforcement case against a Hong Kong based hedge fund, Asia Research and Capital Management Ltd, which the FCA fined £873,000 for failures to make 155 notifications to the FCA and 155 disclosures to the market, over more than 100 days, of its net short position in Premier Oil plc which constituted nearly 17% of the company's issued share capital. There are likely to be more short selling enforcement cases to come, as the breaches are easy to prove.
But insider dealing investigations remain the staple diet of market abuse enforcement cases, and there have also been some developments in this area. The insider dealing case against Fabiana Abdel-Malek, a former senior compliance officer at UBS, and Walid Choucair went to the Court of Appeal, where they challenged their convictions and sentences. Mr Steward described this case as "one of the most complex insider dealing cases I have ever encountered, not because of the trading, but because of the extraordinary challenges to the evidence by the defendants and cross allegations against the investigation, all of which were rejected by the Court of Appeal." Mr Choucair was sentenced to three years' imprisonment and ordered to pay over the sum of £3.9 million under the Proceeds of Crime Act (POCA) proceedings brought by the FCA. Who says insider dealing cases are easy?
Interestingly, in another recent speech (published in April 2021) focused on conduct risk and "tone from the top", Mr Steward referred to Fabiana Abdel-Malek's previous good character and former position as a senior compliance officer. He described her involvement in the case as "baffling" and speculated that she had made her own individual assessment of risk of detection, despite no doubt comprehensive compliance policies and strong "tone from the top".
There are more insider dealing cases in the pipeline. Mr Steward noted that the FCA has recently commenced insider dealing proceedings against four individual defendants in two separate proceedings. In one case, the FCA alleges the two defendants committed insider dealing offences in relation to trading in British Polythene Industries plc. In the second, the FCA alleges two brothers, formerly of Goldman Sachs and Clifford Chance, committed insider dealing offences in six stocks.
It will be noted that many of these cases involve defendants who worked in the financial services sector and/or the City of London, and the FCA is clearly intending to send a message by bringing cases against individuals from that background.
Increased risks from COVID-19 and homeworking
As the pandemic has continued, the FCA's most recent Market Watch 66 emphasised the importance of firms continuing to monitor market abuse risks arising from home working. Staff may be more inclined to use less formal means of communication such as WhatsApp and other social media platforms, and communications may be more difficult to monitor. The FCA does not prescribe or restrict the technologies or apps that firms can use for communications. The key point is that there is no relaxation of the recording regime in SYSC 10A for telephone calls and other electronic communications, and the FCA expects firms to have robust recording policies and procedures in place.
The use of personal devices is clearly a risk area, and Market Watch 66 suggests firms could have a clear policy banning the use of privately owned devices for in-scope activities where recording cannot be carried out by the firm. The FCA also suggests senior managers have an important part to play in establishing and embedding the right culture and governance within firms to promote a rigorous monitoring regime.
This article is published by Practical Law and can be found on the Practical Law website.