FCA Fines Broking Firm and Bans Former Directors Over Reporting Failures
A large global brokerage firm has been hit with a £531,000 fine from the FCA for failing to make reports crucial in fighting potential market abuse. In its review, the UK regulator found that these failings had their origins in the inadequate governance and oversight provided by the firm’s board, which resulted in potential market abuse being left undetected. This led to fines being issued to three board members, with two issued further prohibitions, preventing them from holding significant management functions in firms regulated by the FCA.
As detailed in its Final Notice, the FCA identified that the brokerage firm:
- Did not submit transaction reports either accurately or in some in cases at all for 56,000 contracts for difference (CFD) transactions between 2014 and 2016;
- failed to identify 97 suspicious transactions or orders that should have been reported to the regulator under the form of 24 STORs;
- failed to organise and control its affairs effectively as it did not have adequate risk management systems and controls to enable its board to review the business activities of the CFD desk and put an effective compliance function in place; and
- did not implement and maintain adequate policies and procedures sufficient to ensure compliance with its obligations and for countering the risk that it might be used to further financial crime.
Between 2008 and 2014, the brokerage’s core business was to offer its customers futures and options trading. However, in late 2014, it expanded its business to include – amongst other products – CFDs and Spread-Bets, referenced to the share-price of listed companies by recruiting several brokers and establishing a desk that provided these products to its customers (“the CFD desk”). Despite being aware of the significant change to the risk profile of its business, the firm failed to:
- perform an adequate risk assessment; or
- engage in any other meaningful preparations to ensure its compliance with regulatory standards prior to expanding its business into these new areas.
Its compliance resourcing remained unchanged, and no additional training was provided for staff overseeing this aspect of its business.
Failure to establish, oversee and resource an effective compliance function
The FCA found that the brokerage operated without clear reporting lines, apportionment of responsibilities or appropriately qualified staff, and did not ensure that it had adequate policies and procedures in place relating to the conduct of its CFD desk brokers. The policies that did exist were not properly communicated to, or adequate steps taken to ensure their observance by, its brokers.
The firm failed to identify and address systemic failures in relation to its market abuse systems and controls and transaction reporting obligations
The number of CFD trades executed by the firm increased steadily following the implementation of the CFD desk. In the first quarter of 2015, the firm executed just over 1,900 transactions which rose to nearly 6,000 transactions a year later. Despite having up to 100 positions open per day by 2016, the brokerage’s trade surveillance remained entirely manual; neither automatic electronic monitoring tools, nor basic case management software, were used to facilitate monitoring of the trading activity or to maintain an audit trail. As a result, the firm failed to identify transactions which were potentially suspicious.
Breaches of SUP 17
The firm executed its client trades in CFDs and Spread-Bet products using a “matched principal” methodology. For each trade executed, two trades were in fact carried out. While the first leg of the trade was reported, the second client-side transaction was not. Additionally, the brokerage failed to accurately report a number of other CFD transactions. As a result, the firm failed to report or accurately report an estimated 56,000 transactions.
The firm did not make use of the data sample service for reconciliation
In February 2016, the regulator’s Markets Reporting Team wrote to the firm setting out concerns regarding the completeness and accuracy of its transaction reporting. A specialist regulatory reporting firm was subsequently instructed to review the reports it had submitted across a one-week sample and its findings revealed significant reporting failings in respect of the activities of the CFD desk which included:
- A mismatch between the instrument description and the derivative type in the case of 1,314 out of 1,346 CFDs reported from a one-week sample.
- CFDs were reported in GBP currency although the price stated reflected the pence at which the stock traded.
- Although the specialist regulatory reporting firm was able to match all 383 CFD trades from its raw data to transactions accepted by the FCA from a one-day sample, these trades represented only the hedging portion of firm’s CFD activity, while its client-side CFDs were not being reported as required.
Breaches of SUP 15 and Article 16(2) EU MAR
From 2015 to 2016, the firm failed to identify 97 suspicious transactions or orders, which likely would have been reported collectively to the regulator as 24 suspicious transaction reports (“STRs”) / suspicious transaction and order reports (“STORS”). In fact, during the relevant period (2014-2016), not a single STR/STOR was reported to the FCA.
Breaches of Principle 3
The brokerage failed to organise and control its affairs responsibly and effectively with adequate risk management systems in relation to the business activities of the CFD desk generally – and specifically its compliance with the MiFID transaction reporting requirements.
Many of these failings originated in the wholly inadequate governance and oversight provided by its governing body, namely its board, which comprised of its three directors. The firm did not have any adequate, formal systems and controls to enable its board to review in a structured fashion the business activities of the CFD desk. In particular, the firm failed to:
- Conduct board meetings with sufficient regularity to enable the board to have effective oversight by its directors.
- Maintain board minutes that recorded attendees, the matters discussed, the nature of any challenges made, and decisions reached – sufficient to demonstrate effective oversight.
- Obtain and circulate to members of the board prior to its meetings, adequate management information regarding the business of the CFD desk.
- Undertake an adequate risk assessment prior to the commencement of the CFD desk’s business activities – sufficient to enable its directors to review and understand the regulatory requirements and market conduct risks associated with such activities and to prepare accordingly.
- Ensure that those directors with responsibility for compliance oversight and money laundering reporting had the necessary skills and training to perform, and were effectively performing, those functions.
- Monitor and reasonably satisfy itself as to the adequate resourcing and proper functioning of the compliance department, including the implementation of policies and procedures. During the relevant period, the brokerage did not monitor any telephone conversations, daily or at all.
The FCA considered these failings to be serious because they inhibited its ability to conduct effective surveillance of the market and detect potential insider dealing and market abuse
The firms’ system and control arrangements were wholly inadequate to furnish the board with the information it needed to play its part in identifying, measuring, managing and controlling the risks associated with the CFD desk’s activities. Its reliance on manual oversight of its CFD trading, without the benefit of proper analysis or case management tools, hindered its ability to capture types of suspicious activity and identify patterns effectively. There was confusion as to who was responsible for post-trade surveillance to identify potentially suspicious trading activity including market abuse. The firm:
- Failed to put in place policies or procedures that outlined the post-trade monitoring which should have been undertaken whilst no thresholds, parameters or criteria were in place to assist staff with identifying suspicious orders or transactions; and
- Did not deliver training to enable staff to identify and escalate suspicious transactions.
Given the daily volume of trades executed, the firm should have implemented an in-house solution to collate the trading data and to track and evaluate emerging suspicions.
This enforcement is a stark reminder of the serious impact that widespread governance failures can have on firms. While fundamental errors existed in the allocation and performance of controlled functions – with the firm’s directors not being certain of their responsibilities and with allocated responsibilities not reflecting the realities of their day-to-day duties – the FCA concluded that the firm’s failings originated from the fact that the directors had been appointed into roles with little regard given to each director’s capacities, training or previous experience.
Firms should ensure that they have:
- robust governance arrangements in place and effective systems and controls embedded at all levels across the business;
- board meetings held with sufficient regularity to demonstrate effective oversight;
- board minutes to record adequate detail to enable the firm’s activities to be effectively reviewed by its governing body and any issues of concern identified, challenged and any remedial measures proposed and monitored;
- organisational structures (and prescribed responsibilities), which are reviewed on an on-going basis to ensure that that they remain current; and
- regular training for all staff to enable them to carry out their roles effectively and in line with their regulatory obligations.
As market abuse remains an on-going focus area for the FCA, firms should also ensure that they have:
- safeguards in place to identify and reduce the risk of market abuse and other financial crime by reviewing their market abuse framework to ensure it remains comprehensive and tailored to a detailed risk assessment;
- processes in place to test the robustness of their surveillance systems and ensure that sufficiently detailed policies and procedures are implemented and easily accessible by all staff; and
- regular team training on the key market abuse risks and obligations.
Following close on the heels of Market Watch No.70, firms should ensure they:
- review their transaction reporting monitoring framework to ensure that monitoring processes are robust, sufficiently detailed and reflect the business's unique activities and that arrangements remain independent from first line controls; and
- use data samples from the FCA to regularly review the content of their transaction reports, both to ensure accuracy and completeness.
These bans and the scale of the fines imposed serve as a stark reminder of personal accountability when it comes to compliance oversight and demonstrate the regulator’s determination to ensure firms – and those who lead them – meet the required reporting standards.
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