Reported by Maria Evstropova and Tammy Li

Market abuse and insider trading may often be associated with nefarious TV hedge funds, slick-haired Hollywood characters or, simply, bad actors making opportunistic decisions. However, recent publications and notices from the UK Financial Conduct Authority (FCA) may point to the increasingly treacherous and shrouded world of criminal enterprises targeting the UK financial services sector, meaning market surveillance must, in turn, become more sophisticated and consider a far broader range of information.

In its recent Market Watch 77 newsletter, the FCA warns of indicators that so-called “Organized Crime Groups” (OCGs) may form a significant proportion of those committing market abuse, and in particular, insider trading through UK-regulated firms. As defined in the Serious Crime Act 2015, “an OCG is a group consisting of three or more persons, who act or agree to act together, to further the purpose of carrying out criminal activities.”

As the FCA ramps up its supervisory and enforcement efforts to take assertive action against market abuse, it should be no surprise then to see the FCA issue various press releases regarding multiple arrests of OCG members, successful court cases and sentencing linked to market abuse.

While market abuse and the wider aspects of financial crime have long been a foundational area of concern for the FCA, this flurry of activity appears to indicate an uptick in scrutiny by the UK regulator. Regulated firms are being put on notice to review not only how effective their market surveillance and financial crime controls are but also to ensure that these often-disparate areas are working together to pool data and create an accurate picture of connected clients, potentially suspicious behaviors and trading anomalies. Failure to do so may result in an institution becoming the broker of choice for an entirely unwanted clientele.

With the issuance of Market Watch 77, the FCA is clearly demonstrating that it expects firms to adopt a more integrated and holistic approach to the oversight and monitoring of potential market abuse indicators, including working proactively with front-office staff and financial crime teams. While market surveillance systems may flag up specific trades or behaviors based on certain triggers, escalation of such activities to the level of a Suspicious Transaction or Order Report (STOR) or a Suspicious Activity Report (SAR) will require a more holistic view and assessment to determine whether the often subjective “suspicious” threshold is met. As OCGs and other bad actors continue to find new, smarter ways to abuse the financial market through UK-regulated firms, it is incumbent on these firms to deploy smarter ways to detect and investigate potential market abuse to avoid becoming a weak link that can be exploited.

For example, the FCA expects firms to tie together not only patterns of STORs from individual clients but also to recognize patterns and connections between current or former clients and other connected ties. This will require close interactions between the market surveillance and financial crime teams who perform know-your-customer (KYC) and anti-money laundering (AML) checks on clients at the onboarding stage, as well as ongoing monitoring and review of clients, their transactions and payments. 

The other aspect of a firm’s holistic review of market abuse risks and controls is to identify those within the firm that may be at risk of being approached by the aforementioned OCGs. Firms should consider those individuals who are regularly exposed to inside information and those who publicize having access to inside information on their social media profiles. As the FCA warned, junior members of staff in these roles are often the key targets for OCGs to extract information. Therefore, appropriate and targeted measures for these individuals may be required, including specific training, policy on social media content and social media monitoring. 

The question of subjectivity when assessing and reporting STORs and SARs is also exacerbated should a firm maintain a “5 STORs and you’re out” rule or variant upon this. At what point does the risk become too big for a firm to continue having relations with a client? Firms will need to navigate the balance and conflicts of interest very carefully and conservatively between terminating clients based on thresholds of suspicion and commerciality. The FCA makes it very clear in Market Watch 77, this should be based on “very low thresholds of suspicion.”

Read full report: https://www.kroll.com/en/insights/publications/financial-compliance-regulation/organized-crimes-growing-influence-in-financial-markets