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Market abuse in a time of coronavirus - what the FCA has and has not seen

Chris Hamblin, Editor, London, 12 October 2020


Julia Hoggett, the director of Market Oversight at the UK's Financial Conduct Authority, spoke recently to City and Financial's online audience about the trends that her organisation has seen during the pandemic. Her observations are of interest to exchange-facing private banks, many of which were in attendance.

Hoggett was addressing the City Financial Global event from the safety of her own home. Her speech contained much in the way of warnings such as "behaviours that risk disrupting capital-raising activity will not be tolerated," but it also contained some information about trends that the FCA has seen since the beginning of 'lockdown.'

Her main revelation concerned the quality of suspicious transaction and order reports or STORs: "I am happy to say that whilst we saw a reduction in the number of STORs in the early months of the crisis, we did not observe a reduction in the quality of STORs or observe a significant number of ‘missing STORs’ compared to our own surveillance of the market. In recent months, we have also observed the pattern of STOR submission returning to more normalised levels and typologies."

Backlogs have occurred, however, and any firm that has a significant one ought to talk to the FCA's STOR supervision team about it. The FCA has found, however, that the quality of STORs has remained high throughout. Nor has its surveillance effort spotted much in the way of ‘missing STORs’ - i.e. STORs that firms should have generated in these circumstances.

A rosy picture?

Another piece of good news is the fact that the UK saw a greater volume of follow-on equity issuance than the next seven major European bourses combined. The FCA believes that the infrastructure of (and participation in) British wholesale markets has functioned remarkably well in lockdown, although of course ticket sizes and liquidity measures declined, bid/offers widened and volatility indices increased amid substantial repricing. Hoggett said that the markets had been quick to find new ways of operating, although she did not say what these were.

Innovation in a time of crisis

There has been a dramatic increase in trading activity and volatility, especially at the start of the crisis. At most firms this has led to a surge in alert volumes. Firms have dealt with the surge in a variety of ways – some have transfered staff from one compliance discipline to another in response to sudden, short-term spikes in alert volume. The FCA is pleased about this because it is proof that they had had the foresight to organise cross training and make their people more flexible. Other firms have added more filters to their alert-generating regimes to make the alerts more 'meaningful' - another decision that has earnt them praise. An example is the use of benchmarking against such macro-metrics as indices to allow for greater volatility in markets.

Insider dealing and other market abuse

Firms are obliged to look for signs of market abuse within their portals. Hoggett poured cold water on the idea of them looking purely for the kinds of behaviour that recitals in the European Union's Market Abuse Regulation (MAR) describe. Nor did she approve of reliance solely on "out-of-the-box alerts" from software vendors.

More vigilance is necessary, in the eyes of the FCA, because of new additions to the factors that consitute "inside information." These now include any knowledge that an entire businesses’ operations have to shut because of the pandemic, or indeed might start up again; knowledge of whether a company has used the furlough scheme or any of the pandemic lending schemes; and information about the pace of cash-flow burn.

Fears for the future

Surveillance is one important function for every firm that tries to quash market manipulation. The FCA bemoans the fact that the pandemic has brought with it a risk of less self-policing amongst front office staff. Interestingly, it does not say that it has ever encountered such a phenomenon. It is, however, sad that people at desks are less likely to overhear (and then, presumably, report) something incriminating.

There has also been a significant increase, especially among the young, in the opening of new personal trading accounts over the course of the pandemic. Wherever firms facilitate the access of private (perhaps HNW) individuals to regulated markets, the FCA wants them to concentrate on the risks that this type of trading may pose in their monitoring.

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