13 February 2019

FCA's Hoggett: Market abuse requires a dynamic response to a changing risk profile

Julia Hoggett, Director of Market Oversight at the FCA, says that firms need effective risk assessments and must consider for themselves the manner in which their systems and controls evolve as the risks within their businesses evolve.

When it comes to mitigating the risk of market abuse, you could say that we are not seeking to be in the business of closing the stable door after the horse has bolted.

While my last speech on this topic focused on laying out the role that minimising market abuse plays in enhancing trust in our markets, this year, I want to delve deeper into some of the specific issues that we worry about at the FCA. To help frame how market participants should think about the risk of market abuse taking place and hopefully add useful colour to my colleagues’ recent publications on the subject in Market Watch.

The life blood of all well-functioning markets is the timely dissemination of information, without which effective price formation cannot take place. The malignant form of that same life blood is the misuse or inappropriate dissemination of that information.

In the investment banking advisory and sponsor businesses, each and every day, dialogues are held with listed companies seeking to acquire other firms, unlisted companies seeking to acquire listed companies or listed companies seeking to undertake radical strategic transformation.

Ideas are developed, pitched, explored in painstaking detail and, whilst sometimes rejected, on other occasions, those kernels of thought turn into market defining events.

At the FCA we look at the controls firms have in place across their investment banking and advisory platforms. As a theme, we believe that the access controls, surveillance capabilities and general mindset in this part of the business is not yet as evolved as it should be.

More importantly, it has not had as much focus as the risk profile would suggest it should have.

Firms should avoid overly relying on the permissions process for insider lists and deal-teams. Essentially, move away from the assumption that if someone legitimately has access to information, they will always act legitimately with that information.

Firms should ensure that they proactively review who is permissioned to access inside information and whether access is still required. This will go some way in helping firms mitigate some of the risks associated with inside information.

Taking a step back, firms should also consider who in their institution is able to access inside information outside of specific deal teams.

I have often said that the FCA cares about systems and controls. You would expect us to, we are the regulator after all. However, we only care about systems and controls for one very simple reason – so that they work effectively. The existence of a system or a control, in and of itself, may not necessarily be interesting to us, particularly if it does not work to mitigate the actual risk profile of an organisation. If anything, if it doesn’t work, it would much more likely make me concerned about the firm.

Firms need to undertake a proper assessment of the nature of their businesses, the market abuse risks that may arise as a consequence, and the systems and controls that are most suited to mitigate those risks.

MAR and MiFID II define what constitutes unacceptable conduct and practice, including behaviour that amounts to giving false or misleading impressions to the market. There are some occasions when this behaviour will be clearly abusive and where it may represent a breach of the FCA’s Principles for Business.

These are nuanced issues but they reflect that the cleanliness of our markets is not just founded in the avoidance of clear acts of criminal or regulatory breaches which produce enforcement outcomes.

The standards of a market are made up of the behaviours of its participants, each and every day. Where and how we set those standards and support staff to uphold those standards, is equally critical to maintaining a clean market.

Whilst as the securities regulator, we may enforce against those actions that are clearly and demonstrably in the wrong, we also have an absolute interest in ensuring that market participants meaningfully and carefully consider how they operate within the shades of grey.

Without the right state of mind, I continue to believe, we will not have effective compliance with the market abuse regime.

Equally, without the ability to constantly evolve our assessment of the risks, we will not be able to achieve a market that relies less on post hoc systems and controls and more on the pre-emptive recognition of those risks. Without this, we will not be able to support the good behaviour we need in our markets as effectively.

Put simply, whilst it is important that both regulators and participants have controls to detect suspicious behaviour, it is critical that we consider how we protect the market from such behaviour occurring on our watch in the first place.

Full speech

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