Today marks the fourth anniversary of the European Union's Market Abuse Regulation which replaced the previous Market Abuse Directive. In this article we ask a compliance expert to review its progress.

On 3 July 2016, Article 16 of MAR brought in the Suspicious Transaction and Order Reports (STOR) regime, which added substantially to their obligations to report suspicious transactions in accordance with the old directive. Various regulated firms and other persons (‘notifiers’) were required to detect and report any suspicious behaviour or activity which was in scope of MAR including instruments traded on a wider range of trading venues and also including suspicious orders and not only suspicious transactions. They were also obliged to spot attempted manipulation and attempted insider dealing.

No place to hide?

Benny Johal, the managing director of ACA Compliance Group, the compliance consulting giant, today told Compliance Matters: "On the four-year anniversary of MAR, we see global regulators ramping up their real-time market surveillance. Market abuse must be high on every firm's agenda as the UK's Financial Conduct Authority warns that no firm is immune from detection.

"Globally, regulators continue to reinforce their focus on detecting and punishing insider trading, market abuse, code of ethics, and other misconduct. Effective surveillance tools play a crucial role in identifying market abuse".

Compliance Matters asked Johal whether it was really true that no firm is immune from detection in the UK, or whether the FCA was guilty of exaggeration. He stopped slightly short of an answer, replying that the FCA's Director of Enforcement and Market Oversight had said that no firm was immune.

Regulatory priorities and the pandemic

He added: "Combine this with the recent run of Market Watch alerts from the FCA, and we can see that market abuse is a priority for the regulator.

This is not just a UK concern. In recent months, the US Securities and Exchange Commission, FINRA [the Financial Regulatory Authority, the SEC's 'little brother'] and Hong Kong's Securities and Futures Commission have all highlighted their continuing focus on detecting and punishing insider trading, market abuse, [contraventions of] codes of ethics and other misconduct. This focus runs parallel to the regulators themselves investing. For example, in a speech delivered at the Chief Data Officer Exchange Financial Services conference in London, the FCA’s director of innovation, Nick Cook, spoke of the need for the regulator to embrace technology and innovation to keep pace with technological change in the markets it regulates.

"The current pandemic also widens the opportunity for market abuse due to more home working and downward economic pressures placed on many firms. Market dislocation and alternative working arrangements represent a higher risk which is, perhaps, why we are seeing global regulators ramping up their own real-time market surveillance to help detect and punish insider trading, market abuse, [infractions against] codes of ethics and other misconduct. This is why it is key that firms examine their own surveillance programmes, to identify and prevent misconduct."

When asked to pinpoint the most troubling problem about MAR, he replied: "The biggest challenge is not so much the regulation itself – which is ultimately designed to protect the markets and investors – it is instead the ever-changing landscape in which firms work. This is evidenced by the numerous obstacles recently posed by the pandemic.

"For example, as issuer will need to seek additional capital. This will increase primary market activity – this is more activity to be controlled and monitored. Issuers coming to the market to recapitalise or raise funds increases engagement and flows of inside information between them, advisors and other participants. Furthermore, remote working puts constraints on the existing controls in place for handling such information. Therefore, all participants should continue exercising good judgment and monitoring their behaviour to ensure that they're in line with the obligations in place."

In the run-up to MAR's enactment, the FCA and the old Financial Services Authority, its predecessor, had made substantial efforts to punish cases of insider dealing and other market abuse. Compliance Matters asked Jopal whether that era of intense enforcement activity had passed. He replied: "The FCA clearly remains committed to prohibiting illicit market behaviour in its quest to ensure that the UK has a clean, orderly and transparent market in which participants can trust. This is evidenced by the frequency in which the subject is covered in speeches and communications to the markets.

A fall-off in enforcement?

"Our view is that insider trading and market abuse will continue to be focus areas for regulators in the US and UK, particularly as relates to how firms are monitoring their own trading, employee trading and conduct, e-comms, telephone conversations, and other surveillance practices. This is why it’s key that firms review the surveillance of their electronic communications, firm-wide trading, and employee personal trading and conduct. An increased volume of e-comms and personal trading requests during work from home and volatile markets, respectively, warrant a fresh look at existing surveillance programmes."

He noted in conclusion that the EU was not planning any reforms related to MAR specifically but was reviewing other pieces of its legislation, notably its Benchmark Regulation, its second Markets in Financial Instruments Directive and its Alternative Invesment Fund Managers Directive in respect of disclosure, 'transparency' and other things.