Regulators around the world are concerned with the risk of market abuse and market manipulation.
Market Abuse Regulations, including MAR in the UK, the EU Market Abuse Regulation and Section 204A of the Investment Advisers Act of 1940 in the US, prohibit insider dealing, unlawful disclosure of inside information, and market manipulation.
The FCA listed Market Abuse detection as one of its priorities last year and published an updated statement on tactics the regulator uses to tackle insider dealing and manipulation.
“Where we do detect market abuse, one of the tools at our disposal is criminal prosecution. But it is not the only tool. For example, we have taken enforcement action ourselves where we’ve seen false or misleading statements or other forms of market manipulation. This action has resulted in fines for firms and individuals.”
- FCA’s work on market abuse and manipulation – update 17 June 2022
Emerging risks including increases in retail investors, investment recommendations made via social media and employee personal use of devices have changed the regulatory landscape around market abuse.
In late 2022, ESMA published a Q&A document on the Market Abuse Regulation and its Annual Report on MAR administrative and criminal sanctions 2022. The report shows an increase in fines and values imposed by ESMA in European countries, with a total of 366 penalties totalling over €54 million in 2021/2022. Countries that received these fines under Regulation (EU) 596/2014 on Market Abuse (MAR) include Denmark, Finland, Germany, Ireland and Poland.
The SEC recently filed multiple insider trading actions, uncovering nine different schemes that yielded more than $6.8 million in illegal gains. Those charged include a former chief information security officer (CISO), an investment banker, and a former FBI trainee, all of whom allegedly shared confidential information with their friends, who then traded on that confidential information.
The multiple fines and legal actions against firms and individuals serve as a warning of the importance for organizations to review their policies and procedures, keep records of communications and insider lists and have robust compliance and risk management controls in place to detect conflicts of interest.
MNPI Remains a High Risk Area for Compliance
The SEC also recently fined a large global firm $200 million for the sharing of sensitive business matters through employees' personal devices. The fine is an indicator that regulators are paying close attention to employee use of personal devices. As individuals in the financial services industry have increased the use of unofficial channels of communication such as WhatsApp, Signal and Telegram, regulators have been increasing enforcement of record-keeping rules. To keep up, firms must have clear policies, monitoring and reporting around employee communications and books and records to minimize the risk of regulatory enforcement.
Watch the on-demand webinar Books and Records in the Regulatory Spotlight
The World Economic Forum reports that retail investors accounted for 52% of global assets under management in 2021, a number that is expected to grow to over 61% by 2030. According to a Schwab survey, 15% of current retail investors say they got their start during 2020, the first year of pandemic lockdown. And even with the downturn in the economy, retail investors are continuing to pour money into the markets.
Katharine Leaman, Managing Director at Leaman Crellin Limited, reminds firms that traditional warnings might not be sufficient for unseasoned investors, especially when they have access to quick account opening and trading coupled with persuasive marketing and unvetted investment advice from social media. Read about FCA Consumer Duty and what firms should be doing right now to ensure they are prepared to meet the regulator's expectations.
With many of these inexperienced investors utilizing apps to conduct trade, the FCA has also warned providers about gamification, where design features with game-like elements like frequent market alerts and points and celebratory messages for trading activity can lead to consumers making investments that are beyond their risk appetite.
In April of 2022 ESMA published a Final Report on the European Commission mandate on certain aspects relating to retail investor protection under MiFID II. The report put forward recommendations to protect retail investors from gamification and other unfair practices. The proposals will make it easier for investors to get the information that they need to make well-informed investment decisions and protect them from aggressive marketing and unfair practices.
The regulator also notes that they will be looking into the retail investment customer journey not only by looking at required firm disclosures, but also by looking at ‘indirect information’ about the retail investment experience, for example nudges. The report advises firms to be aware of factors that impact the decision-making behavior of retail investors including how information is presented and how the user must navigate to access it. Firms are also reminded that while many users are moving towards digital channels to manage their investments, not all retail investors have access to or interest in using digital apps. So while the deployment of digital disclosures must be scrutinized by firms, at the same time they are strongly encouraged not to abandon the use of paper-based disclosures completely.
This webinar provides an overview of market abuse enforcement trends and guidance around where compliance should focus in 2023, including:
Watch the webinar here.
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