FCA publishes observations on the effectiveness of firms’ surveillance operations under the Suspicious Transaction Reporting (STR) regime
The FCA has released another issue (no. 50) of Market Watch, its newsletter on market conduct and transaction reporting issues.
There is some prominent commentary on surveillance operations used by firms to identify potential incidents of market abuse. The FCA has conducted a program of visits to firms over the last few years to better understand and assess the way in which firms are carrying out this critical task.
The FCA made 38 visits in 2015. The newsletter provides the FCA’s observations from those visits and we summarise the highlights here.
Offshore surveillance teams
The FCA comments on the phenomenon of surveillance teams that have been partly or completely ‘offshored’ or ‘near shored’, i.e. moved physically away from the Compliance department (though remaining with the firm’s group).
A focus of the FCA appears to have been on how firms exercise control over these offshore functions. The FCA noted strong training for offshored staff at some firms and also mentioned that quality assurance appeared to be key in ensuring that analysis was consistent and in line with centrally set standards. It commented that regular visits from the central compliance function may contribute to the effective integration of the team into surveillance processes. The FCA noted the presence of Service Level Agreements to ensure that work is carried out to a sufficient standard and timeframe.
The FCA also highlighted the importance of giving the offshore team full access to necessary systems and data to facilitate the investigation of alerts. The benefits of empowering analysts to investigate each alert fully with access to a wide range of data is something that the FCA has referred to in a previous issue of Market Watch (no. 48).
Independence of market abuse surveillance functions
The FCA referred to some instances where firms may be transferring some element of their surveillance operations from the second line of defence (i.e. Compliance) to the first line of defence (i.e. the front office). The FCA referred to potential issues around conflict of interest where this occurs and commented that in its experience the most effective surveillance generally comes from the function being independent, well-resourced and situated within the second line of defence.
The FCA also highlighted the benefits of a direct reporting line to senior management that is as far as possible not conflicted.
Under-reporting of STRs
The FCA states again, as in Market Watch 48, that it believes that there is under-reporting of STRs from the industry. It encourages firms to be cautious of seeking reasons not to submit an STR and says that it has seen a number of examples where the bar for the ‘reasonable suspicion’ test has been potentially set too high.
New regime under MAR
The commentary on the STR regime finishes with a reference to MAR, which comes into force on 3 July. The FCA highlights the broader scope of MAR, which requires reporting of suspicious orders as well as trades. Firms will be required to use new forms for reporting suspicions and the FCA will be issuing further communications about this in advance of 3 July.
Here at Clutch Group we will be providing updates on the key impacts of MAR over the coming weeks.
Charles Hastie is Regulatory Head at Clutch Group, working out of the company’s London office. Charles harnesses his long-standing regulatory investigation experience to develop strategic solutions for Clutch’s financial services clients. He establishes ongoing liaisons with key opinion leaders, government officials, and regulatory bodies to ensure that significant developments in the field are monitored and relayed to clients. For more information, contact Charles at firstname.lastname@example.org.