Market Abuse Regulation: What does the future hold?
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Market Abuse Regulation: What does the future hold?

18 November 2019

By Jay Dodd, Business Development Director, Equiniti Toplevel

It’s been three years since the Market Abuse Regulation (MAR) was brought in to replace the Market Abuse Directive (MAD) by the Financial Conduct Authority (FCA). MAR widened the scope, clarified market abuses as “insider dealing, unlawful disclosure of inside information and market manipulation” and introduced a framework for legitimate disclosures.  It gave financial organisations far clearer guidance on how to police insider trading but it was also heavily criticised at the time for increasing administrative workloads. 

Fast forward to the present day and surveillance technology has advanced considerably, enabling effective list creation, management and monitoring to provide a complete audit trail. There’s now no justification in the eyes of the FCA for firms not to be compliant and the regulator is becoming increasingly exacting. Issuers now need to maintain “adequate procedures, systems and controls” and insider lists of “all persons working for them that have access to inside information” must be submitted within two days of a request from the FCA or five days in the case of a full chronology request.  

List lapses

This tightening up follows a review carried out in late 2018 when the FCA carried out a survey of 400 firms, the results of which were published in Market Watch 58. In it, the regulator asserted that insider lists are essential in demonstrating “robust systems and controls” and for ensuring insiders are made aware of their duties and the repercussions of insider dealing or unlawful disclosure. But it also observed the “varying quality” of the insider lists it had received and identified the following issues:

  • Omission of some staff: lists should include all staff with access to inside information and this includes those that are shown to have accessed information as evidenced by electronic access logs.
  • Partially completed lists: all of the relevant fields included in the template should be completed, including name, contact details, national ID, the reason why they are an insider, and the date at which access began and was rescinded. 
  • Confusion over data protection: some intermediaries including investment banks are being asked for their employees’ details to complete issuer insider lists. To avoid any concerns over personal data, these intermediaries are now advised to provide a complete list directly to the regulator.
  • Catch-all lists: while permanent insider lists that document individuals to access to insider information were welcomed, the regulator warned against the tendency for these to grow “disproportionately large” and all inclusive. It emphasised the need to categorise those that aren’t permanent insiders under “deal-specific” or “event-based” lists. 

On a positive note, the FCA found that 93% of those surveyed were also keeping additional lists, such as confidential, project or prohibited lists. This move was welcomed by the regulator as it was seen as a way to ease the transition that can often be necessary when confidential information then crosses over to become insider information. 

In concert with the review, the FCA also issued its ‘Revisions to the Financial Crime Guide for Firms’ (FCGF) in December which included a new chapter on MAR. This move was designed to rationalise the two pieces of regulation and saw the FCA identify examples of good (and bad) practice under the themes of governance, risk assessment, policies and procedures, and ongoing monitoring. 

Immediate targets

In its Business Plan 2019/20 the regulator stated it will “aim to ensure that firms respond appropriately to the 2018 update” to the FCGF and that it intends to “focus on key areas in firms’ control frameworks” including “the control of inside information within M&A businesses and corporate broking functions” going forward. 

This was followed by a shot fired across the bow of brokerage firms operating in wholesale markets in April in the form of a Dear CEO letter. In it, the FCA refers to the “urgent” need to “raise standards” in a sector that has failed to keep pace with and has “under-invested in the requirements of this new legislative and regulatory environment”. It warned that brokers hold “significant non-public information... and sometimes inside information on companies with publicly quoted securities” which is not properly managed and controlled and went on to say it has found evidence of personal account dealing. 

Scrutiny can also be expected to intensify following the introduction of additional measures to ascertain market cleanliness. In July the regulator announced it would be introducing a new metric to detect abnormal increases in trading volumes. Under the Abnormal Trading Volume (ABV) ratio, benchmark and announcement period data are compared, helping to create a metric that can isolate announcements that have seen a significant increase in trading volume. The new metric captures a wider range of products and events and will be a key weapon in the FCA’s armoury in identifying potential instances of market abuse. 

Brexit and beyond

In addition to increasing its vigilance, the FCA will also be overseeing the conversion of what is fundamentally a European piece of legislation into UK law post-Brexit. At the time of writing it was still unclear as to whether the deal agreed by Boris Johnson would be accepted by parliament. But whether a hard or soft exit is agreed, the FCA makes clear in its Primary Market Bulletin 21 that MAR will still stand. UK MAR will be “broadly the same” in terms of requirements and reporting but will see disclosure reporting to the FCA as well as any EU authority for issuers with a UK trading venue. 

So what does this all mean for issuers and market makers? MAR is now fully established. Firms are aware of the need to comply and the technology now exists to ensure the regulations are observed to the letter. The FCA has addressed areas of overlap with other related regulations and is now in the position to enforce the rules. It will undoubtedly step up its activities by focusing on sectors that pose the greatest threat to the viability of the market to begin with but it will also use tools such as the ATV to help focus its attentions on potential areas of abuse. Consequently, its vital that all firms seek to address the issues highlighted in the review to ensure they are above reproach and make sure they have the systems and processes in place to demonstrate their compliance.

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