Charities and internal investigations
On 23 February the Financial Conduct Authority (FCA) took action against W H Ireland Limited (WHI) handing down a £1.2million fine and confirming that the company was restricted for a period of 72 days from taking on new clients in its corporate broking division. The FCA found that during a period from 1 January and 19 June 2013, WHI failed to ensure it had the proper systems and controls in place to prevent market abuse being detected or occurring.
The FCA identified a number of failings relating to deficient controls to ensure inside information did not leak from the private to the public side and as regards ensuring disclosure to external parties was conducted in a controlled manner with proper safeguards in place. The absence of a formal risk management framework for market abuse was a key complaint, alongside the failure to produce an effective written conflicts of interest policy and inadequate personal account dealing rules for employees. The FCA also flagged the inadequate post-trade surveillance systems, in which “parameters did not match WHI’s specific business activities" or the full breadth of its market abuse risks. It confirmed that these were set too narrowly to be effective and produced exceptions that were not reviewed in a timely and consistent manner.
The FCA confirmed that it considered these failings, which amounted to a breach of Principle 3, to be particularly serious given the range of services that WHI performed at the time, meaning it was exposed to a broad range of market risks, and the fact that WHI received inside information on a regular basis. As such, there was significant scope for an adverse impact on the market and on a large number of other market participants if that inside information was mishandled. In the timeframe under scrutiny, WHI had around 9,000 private wealth clients with approximately £2.5 billion of assets under management, which the FCA said may have been advised “without the necessary protections in place”. WHI also had 87 corporate broking clients. The FCA concluded that “due to the lack of proper systems and controls in place, the firm could not protect against the risk of market abuse in respect of the information provided by these clients.”
In announcing the decision, the FCA set out how the failings were identified by a Skilled Person appointed by the FCA in a report of August 2013. Almost a year later in July 2014, WHI commissioned a follow-up report to look at the extent to which it had complied with the Skilled Person’s recommendations. This second report showed that there were some recommendations which had not been implemented adequately within the time set. WHI’s failure to adequately implement the recommendations was considered by the FCA to be an aggravating feature: “In this case, WHI’s failings were aggravated by the failure to implement adequately the skilled person’s recommendations. It is one thing to be given a chance; for the chance not to be taken up is especially culpable.” In addition, throughout this period the FCA had also been communicating widely with all firms about their responsibilities for countering the risks of market abuse by having effective controls.
WHI received a 20% Stage 2 settlement discount, without which the fine would have been £1.5 million and the restriction would have been 90 days. In imposing this penalty, the FCA has sent out a clear message to the market of the importance of adhering to recommendations by external bodies when reviewing compliance. Moreover, the penalty emphasises the FCA’s commitment to actively addressing the risks of market abuse by ensuring preventative measures are in place, and its expectation that companies follow its published guidance. This is a clear signal for those operating in the regulated sector of the need to be both proactive and reactive when it comes to regulatory compliance; to keep policies and procedures up to date and ensure employees receive sufficient training. We can expect the FCA to continue to investigate, monitor and ultimately penalise those who fail to ensure proper systems and controls. Not least given that later on this year the market abuse regime will be bolstered with the application of the Market Abuse Regulation (Regulation 596/2014) (MAR) from 3 July 2016. This updates the civil market abuse framework established by the Market Abuse Directive (MAD) and covers insider dealing, market manipulation and the improper disclosure of inside information.
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