FCA Warns About Market Sounding Disclosures and Inside Trading Controls

The FCA’s Market Watch 83 puts a spotlight on weak market sounding and inside information controls, raising the stakes for both corporate finance firms and hedge fund recipients.

This goes beyond a compliance reminder; the FCA’s in-depth analysis into corporate finance firms reveals systemic weaknesses in managing inside information, especially during market soundings. With hedge funds often on the receiving end of these disclosures, the risks and regulatory expectations are shared across both firm types.

FCA Findings

Market Watch 83 summarises the regulator’s findings from reviews of corporate finance firms advising small and mid-cap companies.

Key concerns listed include:

• Over-extended market soundings: Firms contacted large numbers of market sounding recipients (MSRs) without clear justification, increasing the risk of unlawful disclosure.
• Gatekeeping failures: Inside information was shared with individuals who did not agree to be wall-crossed, breaching UK Market Abuse Regulation (MAR) protocols.
• Inconsistent disclosures: Firms lacked controls to ensure all MSRs received the same level of disclosure information.
• Multiple brokers with no oversight: Multiple brokers conducted soundings without the issuer’s knowledge, undermining safe harbour protections.
• Personal Account Dealing (PAD) breaches and weak governance: Ongoing failures in PAD and conflict management indicate deficiencies in the firm’s compliance culture, as well as increased risk of insider trading.

These concerns are particularly relevant for hedge funds who may unknowingly receive inside information without proper gatekeeping, exposing them to market abuse risks.

Avoid These Missteps

Corporate finance firms should use Market Watch 83 as a checklist to assess their current control environment and framework, and confirm it is proportionate to the specific and inherent risks of the firm:

• Review market sounding procedures: Evaluate market sounding procedures to ensure MSR lists are properly approved and disclosures are standardized.
• Strengthen gatekeeping: Limit the number of insiders and ensure proper wall-crossing protocols.
• Audit PAD and conflict policies: Review and test PAD and conflict-of-interest policies regularly.
• Ensure oversight across counterparties: Where multiple brokers are involved, establish clear governance and issuer awareness to maintain safe harbour protections.

Reassess Risk Framework Regularly

Many firms fail to revisit their market abuse risk assessments frequently enough, leaving blind spots that regulators are scrutinizing. Market Watch 83 underscores the importance of regularly reviewing and updating your firm’s risk frameworks. A proactive review, conducted on a regular basis, can help ensure controls remain proportionate to your firm’s evolving risk profile.

Enlist a Third-Party to Review for Compliance

Given the FCA’s increasing scrutiny and the complexity of managing inside information across functions and counterparties, many firms are turning to external experts to validate their frameworks. A third-party review can uncover blind spots, enable compliance teams to critically assess existing controls, provide peer insights and regulatory experience, and help demonstrate a proactive compliance culture — something the FCA expects.

Contact us if you would like to speak with an ACA expert about how we can help you ensure compliance.