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Enforcement Watch

Ian Bean writes articles for Lexis Nexis on the latest Tchenguiz decision.

STRs: FCA warns of under reporting across most asset classes

In previous issues, we have reported on the sharp increases in Suspicion Transaction Reporting (STRs) in recent years. The FCA has now published the annual figures for 2015.

As in previous years, the FCA groups reports into three categories for the purposes of publication. Comparing the recently published figures with those from the previous year, the upward trend continues in two of those categories as follows:

  • Distortion/Manipulation: reports increased by just over 30% (214 reports compared to the previous year's 162).
  • Misuse of Information: reports again increased by just over 10% (1604 reports compared to 1451 the previous year). 

The figures for false/misleading reports remained static with 13 reports, in line with the previous year.

These figures might ostensibly suggest that firms are taking a defensive approach to reporting. However, that is not how the FCA sees it, as evidenced in its latest edition of Market Watch published in April.

In that edition of Market Watch, the FCA reported that it had in 2015 continued its supervisory programme in relation to STRs, making 38 supervisory visits to firms. Perhaps the most interesting area for enforcement watchers was what the FCA had to say about defensive reporting.

Defensive reporting: Firms had expressed a concern to the FCA to avoid defensive over reporting. Whilst the FCA said it understood that view, it had also seen examples where firms set the bar for the "reasonable suspicion" test too high. It considered that some firms had sought proof of market abuse as opposed to reasonable suspicion that it may have done. The FCA advised that firms must be cautious of seeking reasons not to submit reports[1]. Given the continuing importance of this area to the FCA, combined with the previous Final Notices we have reported on for failure to reports suspicions of market abuse, this may be an area for enforcement watchers to keep an eye on.

The FCA also interestingly commented on the following aspects, and we shall have to see how they play out in future:

Offshore surveillance teams: the FCA noted the increase in the use of offshore or "near shore" centres in the UK and the significant impact these centres may have on surveillance. In visiting such sites, the FCA saw examples of significant quality assurance being undertaking including good integrated links with onshore compliance teams and strong training programmes. However, it also found that some firms were being too prescriptive and not encouraging analysts to look beyond the alert itself to other possible issues. For example, a wash trade alert may not give rise to a suspicion of wash trading but may indicate layering.

Independence of surveillance function: The FCA emphasised the importance of having a well-resourced and independent second line surveillance function in order to provide genuine challenge to the business. Where firms had moved the surveillance function from second line to first line, they had not adequately considered the potential conflicts of interest. In addition, the effectiveness of second line could be compromised where first line had too much technical knowledge of the surveillance function.