14 November 2017

FCA: Effective compliance with the Market Abuse Regulation – a state of mind

Julia Hoggett, Director of Market Oversight at the FCA, said that market abuse impacts the smooth operation of the markets by adding costs or reducing returns for participants and ultimately eroding trust in the UK markets.

[...] one of the key things we are focused on is how that state of mind is developing. One might argue that this is not a new request of the industry or those in a position to impact the price of securities, more a renewed call to arms in the development of those skill-sets. My second observation is that the effective oversight and pursuit of compliance with the regime – across its many strands – cannot and should not stay still – either for regulators or for firms. The manner in which the FCA is set up to surveil the markets today is very different from our structure several years ago and will continue to evolve.

The first difference is in seeing the functioning of the markets holistically, from primary to secondary and from disclosures to trading behaviours, and adjusting our structures accordingly.

t has been observed in the media that the FCA now has a greater focus on the quality of disclosures of listed issuers and this is indeed true. Whilst one of the most visible indicators of that focus is our enforcement action, the simple reality is that it is reflected across the supervisory, monitoring, investigation and enforcement activities – much of which is undertaken by Primary Market Oversight.

Here we are focused on ensuring that issuers meet the expectations that MAR, we as regulators and indeed investors set for timely and accurate disclosures. We view issuers as having an essential role to play in upholding the obligations of MAR. In understanding the regime, having the appropriate systems and controls in place to ensure they can make timely and accurate disclosures and this is about state of mind, being conscious of their obligations to be both aware of and manage the conflicts of interest they may feel they manifest when potentially challenging business results should be disclosed.

We also recognise that with the introduction of MAR, the sense is that obligations on issuers have increased and therefore as part of our ongoing assessment of the implementation of MAR, we are seeking to understand the areas where issuers (and indeed any other parties captured by the regime), are finding compliance with the regime most complex. It is fair to say that of all the communities with whom we engage, often the issuers are the most disparate - and hardest therefore for the FCA to communicate with - so we would very much welcome more engagement with the issuer community on MAR.

There will be a great many firms where the adaptation to the expectations of MAR is a challenging task, but one nevertheless that they are putting a great deal of time and effort into. However, where listed institutions have not met their obligations, be that under the listing rules or indeed under MAR or more broadly, we will seek to take action where it is appropriate. We will also however, increasingly seek to coordinate with other institutions such as the FRC and the Insolvency Service in order to ensure that the appropriate suite of powers available in the UK has been applied to those cases where institutions have not organised themselves in a fashion that means they are able to make accurate and timely disclosures to the market.

It is worth noting that the introduction of MiFID II also introduces the second tranche, so to speak, of MAR implementation. January will see new obligations crystallise regarding instruments listed on OTFs and Emission Allowance products, which we hope the industry is well ready to meet. There are also changes for issuers listed on the newly designated SME growth markets.

In seeking to constantly evolve, the FCA has also significantly adapted its organisational structures, in order to ensure we are looking for an appropriately broad range of market behaviours. Yes we will continue to and always focus on insider dealing, however it manifests, both in individual instruments and cross-market, but we have significantly bolstered our resources allocated to market manipulation as well.

Insider dealing may be the poster-child of market abuse, the behaviour that comes to mind the most, but clean markets rely on participants having faith in appropriate price formation taking place, and tackling market manipulation is clearly critical to this. We have therefore also developed our capacity to collect and consolidate order book data from all equity venues along with equity derivatives into a single view. The logistical challenge of aggregating this data is no small obstacle, but thanks to technological innovation and heavy lifting, it is now possible.

Ultimately, the test of a clean market is one that has efficient and effective price formation and provides a venue that attracts those seeking to raise or invest capital, because its behaviour is reliable and trusted by all parties. Market abuse, in all its forms, impacts the smooth operation of our markets by adding cost or reducing returns for participants and ultimately eroding trust in the UK markets.

Trust is essential in any society. For example, me taking the DLR is an act of trust on many levels. Without trust in the safety of the service, the quality of the construction of the elevated tracks, the reliability of the service and its inevitable termination at Bank Station, I would not be here today and you would not have had the fortune or misfortune to have had the opportunity to hear me speak.

My point however, is that without that trust, I would have been at best ineffective at worst, frozen with inertia.

Markets require a dynamic allocation of capital and responsiveness to the needs of its participants in the context of global events. The multiple decisions of trust that are made in the market each, and every day, are essential to its functioning and efficacy – as arguably we found out, for other reasons, during the financial crisis.

Whilst it is easy to think of MAR and the market abuse regime more broadly, as a series of systems and controls and sometimes frustrating components, I hope that I have illustrated that at its most effective compliance with the regime is indeed a state of mind that we all - as either market participants, or members of society who benefit from the activity in the UK markets - would do well to understand, and seek to uphold.

Full speech

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