In May 2020, Mark Steward, the FCA's Executive Director of Enforcement and Market Oversight, told Financial News that "the regulator was bracing for an uptick in market abuse cases in the coming months". The FCA has made clear that irrespective of COVID-19 the Market Abuse Regulation remains in force. This article considers why there could be an uptick in investigations and the FCA's capabilities and motivations in this space.
Why the potential uptick?
Given COVID-19 has created an environment where more inside information is generated and an almost absolute reliance on technology for communication, there are greater opportunities for inside information to be generated and exploited.
Greater generation and holding of inside information
The financially detrimental impact of COVID-19 is likely to result in the generation of more inside information which companies are holding on to for longer than they usually would. This, in turn, creates greater opportunities for the information to be exploited. A significant example of this is that on 26 March 2020, the FCA allowed listed companies an extra two months to publish their audited annual financial reports. Further, what if the CEO of a listed company contracts COVID-19 and is taken ill? Should this be disclosed to the market? If so, when? Is this precise information that would be likely to have a significant effect on price?
Changes in the control environment
The combination of more inside information being generated and a significant number of people working from home potentially creates the environment for an uptick in instances of abusive behaviour – whether deliberate or negligent. The tried and tested controls imposed in the office environment may not operate as effectively (or at all) in the home environment. Physically working together means that rules and norms are more easily enforced. With people working from home the three lines of defence model cannot function as effectively. For example, with regard to the first line policing and guiding, rules such as not using personal mobile phones whilst trading, to ensure all voice communications are recorded, are difficult to enforce. One cannot necessarily question or guide a colleague in 'real time'. In the work from home setting, conversations being overheard or printed documents being left unattended may be problematic if those without a proper understanding of the rules, or, the unscrupulous, trade based on that information.
Volatility in markets
COVID-19 created significant volatility in stock markets. Volatility in markets arguably makes suspicious trading harder to spot and may also make the incentive to commit market abuse even greater than usual.
Reliance on technology
The pre-COVID-19 world significantly relied on technology for communication. The immediate post-COVID-19 world is almost absolutely reliant on technology for all forms of communications. Face-to-face meetings may have been more likely to occur with regards to some price sensitive information. These discussions are now likely to be taking place over the internet and perhaps over platforms such as Zoom, which are considered fallible. This provides more scope for inside information to be illegally accessed. On this point, see for example, our COVID-19 Cyber Security Update here. Similar conduct was already a reality before COVID-19 - cyber-attacks have occurred where hackers have broken into news wires where companies issue press releases before they are publicly released.
The FCA's capabilities and motivations
Whilst market abuse might potentially be more difficult for the FCA to detect in the immediate short term, the FCA clearly has the tools and the motivation to tackle those cases most corrosive to market integrity.
On 6 February 2020, Steward delivered a speech on the FCA's approach to market integrity to the Practising Law Institute's Annual Institute on Securities Regulation in Europe, London. He explained that in 2019, the FCA: received 9.8 billion MiFID II transaction reports, with regard to the FTSE 300 order book, received 150 million order reports per day and has the ability to aggregate orders in the same stock across different platforms and received 6,000 Suspicious Transaction and Order Reports. As Steward explained, this gives the FCA with the ability to examine what is happening in markets with increasingly bright lights in close to real time.
In the same speech, Steward highlighted how the FCA was willing to take on the hardest cases, which he said was illustrated in its taking on challenging cases in the market manipulation space. He explained that given the corrosive nature of market manipulation to market integrity, the FCA's focus was now 60:40 between insider dealing and market manipulation cases. Previously the FCA's focus had been almost exclusively on insider dealing.
The FCA's Business Plan 2020-2021 makes 'clean markets that make it difficult to commit market abuse and financial crime' a priority in the wholesale space. The FCA's expectations, motivations and capabilities with regard to the Market Abuse Regime coupled with the challenges posed by the current environment mean it is likely that there will be an uptick in investigations. Perhaps in light of this, the FCA has refreshed the instructions on its website for firms and individuals on how to report suspected market abuse.