The Financial Conduct Authority (FCA)’s market cleanliness statistics¹ – which can be seen as an indicator of insider dealing – hit their lowest ever level for 2021, after having been relatively stable for the previous eight years.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

Up until 2021 there had been few major fines (i.e: more than £1 million) for market abuse in the UK.

However, that picture is changing. Firstly, there has been significant market turmoil on the back if interest rate increases recently, creating increased opportunities of market abuse.

Secondly, the FCA has issued several fines² related to market abuse over the past year, has appointed new joint Executive Directors of Enforcement and Market Oversight³ and has made clear in its 2023 business plan they will focus on market abuse. Consequently, we at Cognizant expect the increased opportunities to be matched by an increased regulatory focus to counter it.

So what should firms do to ensure they don’t end up in the regulator’s crosshairs? We believe firms should seek to address three core areas.

1 – Firms should ensure conduct and accountability remain a top priority

No matter how good a firm’s surveillance screening is, prevention is always the best approach. A clear tone from the top and a robust control framework will help firms ensure that across the first line.

For example, in 2022 we saw significant fines for breaches of MAR for Sigma Broking Ltd. The firm, and several directors who sat on the board were fined and barred, because they were deemed to have failed to take reasonable steps to have adequate systems and controls in place and conduct appropriate risk assessments.

Clearly, a strong control framework that is embodied and championed by senior leadership is a must to set the tone and expectations for everyone else.

2 – Firms should ensure surveillance screening is effective

A recent report⁴ by NICE Actimize on trade and communications compliance indicated that detection of market manipulation was a major priority for firms. Yet, most firms acknowledge they aren’t where they would like to be on this.

The FCA’s Market Watch 69⁵ is a good starting point for guidance to close the gap. For example, it highlights the need for efficient and robust controls as well as a surveillance capability commensurate to the complexity of the business model. It also highlights the need for a culture that’s focused around prevention as essential to enforce such a focus.

3 – Firms should ensure that their wider control framework is aligned across their first and second lines

Even if setting the right conduct and accountability expectation and ensuring that surveillance screening is effective, success is not guaranteed. A common challenge is often aligning these two.

As I set out in my response to the FCA’s Market Watch 69⁶, I believe that firms should ensure that there is appropriate cooperation between the first and second line when designing their control framework as well as when risk assessments are refreshed.

Respective roles and responsibilities should be clear and aligned to the regulator’s expectations: the business is fully responsible, and the second line should be fully independent. Being able to evidence that the second line is able to robustly challenge the business will be what the regulator is looking for here.

In conclusion, it is evident there is enough for firms to consider as they look at ensuring their surveillance functions are in order. The regulatory focus will come – firms should use the time now to make sure they’re ready for the scrutiny.