In the highly regulated world of finance, compliance officers and financial institutions must remain vigilant to prevent market abuse and manage conduct risk effectively. Despite the lack of Financial Conduct Authority (FCA) enforcement actions over market abuse in the past two years, the August 2022 case where a Systematically Important Financial Institution (SIFI) was fined £12,553,800 for breaching Principle 2 of the FCA’s rules highlights the critical need for due diligence and skillful business operation.
The Importance of MAR Compliance
The Market Abuse Regulation (MAR) is central to maintaining market integrity within the European Union. The regulation aims to prevent insider trading, market manipulation, and other abusive behaviours. The recent fine underscores the necessity for financial institutions to understand and implement MAR comprehensively.
Key Implementation Steps for Conduct Risk and Market Abuse
- Understand the Regulations: Institutions must have a thorough grasp of MAR, including amendments and supplementary legislation. This understanding forms the foundation of compliance efforts and ensures that no stone is left unturned when identifying potential abuses.
- Impact Analysis: It is crucial to assess how these regulations impact various business lines, jurisdictions, divisions, and trading desks. This analysis helps identify areas of potential risk and ensures that all parts of the organisation are aligned with regulatory expectations.
- Comprehensive Risk Assessment (CRA): A robust CRA is pivotal. It should be the living document that drives the entire surveillance programme. The CRA identifies the data to be ingested, behavioural gaps, and prioritises tactical and strategic solutions. It must be updated annually to reflect any changes in the business or regulatory environment.
- Surveillance Programme Alignment: The CRA should directly influence the surveillance programme. Any change in risk assessment should prompt an update in the surveillance programme, ensuring continuous alignment and effectiveness.
The Case of the SIFI
The aforementioned SIFI’s failure began at the first stage. It did not conduct a sufficiently comprehensive risk assessment, leading to gaps in its surveillance programme. This oversight was a key factor in the FCA’s decision to impose a significant fine.
This case serves as a reminder that a well-documented and regularly updated CRA is not just best practice; it is essential for FCA audits and regulatory reviews.
How Davies Can Help with Market Abuse and Conduct Risk
Our industry practitioners bring extensive experience in market abuse and conduct risk, Davies is well-positioned to assist financial institutions in navigating these complex regulatory landscapes. Our team can help you identify risks, design effective surveillance programmes, and ensure regulatory compliance.
For further information on how Davies can support your organisation’s compliance efforts, please contact Nic Hull EMEA Practice Lead, Financial Crime & Regulatory Compliance.
Looking Ahead
In our next instalment, we will explore how the Comprehensive Risk Assessment should drive your surveillance programme and the role Davies can play in advising firms to enhance their compliance efforts.
About the Author
Jason Merritt is a Subject Matter Expert on Market Abuse and Conduct Risk. Having worked across a broad spectrum of managerial roles in the sell-side industry, Jason has advised, designed, and remediated market abuse, anti-money laundering (AML), and conduct prgrammes with the Davies client base, bringing expertise in solutions like Steeleye, Onetick, Actimize. His experience with SIFIs, brokers, vendors, and exchanges provides a wealth of knowledge to improve and maximise surveillance solutions.
