Combatting financial crime continues to be a key supervisory and enforcement priority for the FCA. The importance of this area was reiterated by the FCA’s February 2024 newsletter - Market Watch 77 - which sets out observations on insider trading and market abuse by organised crime groups (OCG), and advises firms on how to mitigate the risks of being used by OCG to facilitate such trading.

Activity that firms should look out for

Market Watch 77 states that suspicious trading by OCG forms a “significant component” of the overall volume of suspicious trading that the FCA observes in equity markets. It describes the characteristics of suspicious trading that firms should be alert to, including:

• a pattern of trading before merger and acquisition (M&A) announcements or press speculation;
• recruitment of sources of inside information, or use of intermediaries to broker inside information;
• the use of facilitators or umbrella accounts at overseas broking firms that have fewer safeguards than UK firms; and
• clients feeding stories about M&A announcements to financial media outlets to benefit from ensuing price movements.

The FCA suggests that, in particular, firms should look out for clients that frequently trade before announcements of M&A activity; clients that regularly generate Suspicious Transaction and Order Reports; and potential links between different clients, for example multiple clients trading in the same security for the first time or otherwise trading in similar ways. 

Steps firms can take to guard against OCG

There are various steps firms should consider taking to protect themselves against these risks. These include:

• Sending clear communications that the firm has a zero-tolerance approach to market abuse.
• Requesting evidence from overseas broking firms to confirm that they have adequate surveillance processes.
• Regarding as potentially suspicious all trades placed before media reports of M&A.
• Guarding against junior staff being recruited by OCG as sources of inside information, for example by training junior employees who may be approached by OCG on how to spot such approaches and report suspicions internally. The FCA have even suggested that firms consider whether or not to include names of junior staff who are engaged in M&A advisory work on firms’ and/or employee’s social media profiles.
• Physical pen testing of premises where sensitive data may be held, as well as ethical hacking.  

Analysis

Continued focus on financial crime

Market Watch 77 demonstrates the FCA’s continued focus on financial crime. It is probably no coincidence that this newsletter was published in the same month as announcements of arrests by the FCA and National Crime Agency (NCA) of three individuals on suspicion of insider dealing, conspiracy to insider deal and money laundering allegedly linked to an OCG. There is limited information available beyond what is in the FCA’s announcement, but the arrests probably mark the culmination of a major investigation for the FCA, particularly given the involvement of 38 FCA and NCA officers. The prosecution of these individuals may be a major case for the FCA in the coming months, so it is not surprising that organised crime and insider trading are at the top of the FCA’s agenda. 

Beyond these recent arrests, reducing and preventing financial crime was one of the FCA’s objectives in its 2023/34 Business Plan. The FCA released a progress update on this objective in February 2024, which highlighted other areas of financial crime (beyond OCG) that are areas of focus for the FCA. We will post further on this progress update in the coming weeks. 

Assertive supervision – the double victim 

Falling victim to an OCG also opens victim firms’ doors to FCA enforcement for systems and controls failings. 

At the end of this newsletter, the FCA highlights its ability to take action in ways other than through enforcement investigations, for example skilled person reviews under s.166 of FSMA; voluntary requirements; and own-initiative variation of permissions, which we have seen the FCA use frequently over the last twelve months. 

While skilled person reports may now be a familiar prospect for firms, the other two examples are part of the FCA’s ongoing efforts to be a more innovative and assertive regulator. Voluntary requirements involve the FCA asking a firm to accept the imposition of requirement(s) on its permissions; if the firm refuses, the FCA may decide to impose a variation of permission or requirement under its own-initiative powers. These own-initiative powers allow the FCA to impose variations, requirements, or even cancel the firm’s permissions without going to its Regulatory Decisions Committee, as was previously required.

WilmerHale’s global team can help firms to mitigate these risks, stress test systems and controls, train staff, engage with law enforcement agencies and regulators, and respond to assertive supervision and enforcement.