Following a hearing in front of its Regulatory Decisions Committee (RDC), the FCA has issued a Final Notice to Interactive Brokers (UK) Limited (IBUK). IBUK is a London based broker, which arranges and executes transactions in instruments such as contracts for differences (CFDs), futures and options for its online clients. The RDC fined it £1.05m for failings in its post-trade systems and controls for identifying and reporting suspicious transactions.
Like others operating in the sector, IBUK is required to have systems in place to identify potential instances of market abuse (such as insider trading) committed by its customers or staff. IBUK's systems for post-trading monitoring was undertaken at a group level by another company within the Interactive group (IBLLC Compliance) in the United States.
However, according to the FCA, the monitoring conducted by the group was ineffective. Prior to being notified of the FCA's concerns, IBUK had failed to submit any suspicious transaction reports (STRs) in relation to insider dealing during the relevant period of the investigation and the FCA identified three occasions where IBUK should have submitted STRs.
The FCA identified a number of root causes of the failure, which included:
- IBUK's failure to tailor its generic policy on market abuse to IBUK's own circumstances and risks
- IBUK's policy not describing the circumstances in which IBLLC Compliance should escalate potentially suspicious transaction to IBUK for further consideration
- a failure to require IBLLC Compliance reviewers to document their reviews
- a failure on the part of IBUK to monitor the quality of IBLLC Compliance reviews
- a failure on the part of IBUK Board or senior management to consider whether its policy met UK legal and regulatory requirements
- a failure to ensure that IBLCC Compliance staff were conversant with the unique features of the UK's market abuse regime (as compared to that which operated in the United States or other jurisdictions)
- the use of global statistics reports which reported at a group rather than IBUK level.
- the use of an algorithm to identify suspicious trading that had an over-reliance on a client's own declaration of whether he was an insider, rather than appreciating that trading on inside information is rarely conducted by the insider themselves.
This case demonstrates the difficulties that firms operating internationally face in designing systems and controls that can operate effectively throughout the group, whilst at the same time taking account of local risks, laws and regulation.
In many cases firms are encouraged to operate global compliance policies. For example, article 45 of the Fourth Money Laundering Directive requires firms to implement "group-wide policies and procedures" for anti-money laundering. However, as this case makes clear, regardless of the systems and policies which operate at a group level, the ultimate responsibility for complying with UK regulation is that of the UK regulated firm and its senior management. In some cases, this can present difficulties for UK compliance staff who may have a direct reporting line to their group superior but need to forcefully assert the UK position, where global policies may not be adequate or provide sufficient local resource.
The case also demonstrates the need to operate a holistic approach to identifying and assessing potentially suspicious transactions. An overreliance on one type of data alone can mean that reportable transactions are missed. For example, the FCA criticised IBUK for putting too much emphasis on whether the size of a potentially suspicious transaction was consistent with previous trading, rather than looking at the full range of applicable factors, particularly proximity to positive RNS announcements (ie the timing of trades) and size of profit.
Interestingly, in this case IBUK chose to challenge the FCA rather than settle, something which firms have in the past been reluctant to do. What is more, despite the availability of partial settlements under the new FCA settlement regime, the firm chose to challenge the entire Notice and accordingly received no settlement discount from the RDC.
Finally, the case illustrates the message that the FCA wishes to send about clean markets and the policing role it expects firms to have. In that respect, readers may well be interested in the speech we report on elsewhere in this issue FCA pulls no punches in its quest for clean markets".