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Reporting and governance failures lead to a suite of fines and bans

Posted on 27 October 2022

On 6 October 2022, the FCA published a set of Final Notices in relation to Sigma Broking Limited (Sigma), to two of its former directors and one current director.

Background

Sigma is a privately owned brokerage firm. Between 2008 and late 2014, its main business was offering its customers futures and options trading. In December 2014, it expanded its business to include other products including spread bets and contracts for difference (CFDs). CFD trades executed by Sigma increased steadily from December 2014.

During the relevant period (December 2014 to August 2016), Sigma's Board comprised three directors:

  • Simon Tyson CF3 (Chief Executive), CF1 (Director) and CF11 (Money laundering reporting);
  • Steven Tomlin CF1 (Director) and CF10 (Compliance oversight); and
  • Matthew Kent CF1 (Director).

Firms are required to submit transaction reports to the FCA in order to help it maintain clean markets. In addition, the FCA requires firms to submit Suspicious Transaction and Order Reports (STORS) (referred to as Suspicious Transaction Reports before 2016) where there are reasonable grounds to suspect that market abuse has occurred.

In January 2016, the FCA was alerted to transaction reporting irregularities at Sigma. It subsequently emerged that Sigma had failed to report any of the Spread Bet and equity CFD transactions that it had executed since the creation of the CFD Desk in 2014. It also emerged that Sigma had not submitted a single Suspicious Transaction Report to the FCA during the relevant period.  

The FCA conducted a supervisory visit to Sigma in June 2016 which raised further concerns about Sigma's compliance with its regulatory obligations.  

The Final Notices state during the relevant period that, amongst other things:

  • Sigma failed to report or report accurately 56,000 CFD transactions to the FCA, and it failed to identify 97 suspicious transactions/orders that it should have reported.
  • The Board did not have any, or any adequate, formal systems and controls, to enable it to review in a structured fashion the business activities of the CFD Desk, and the three individuals were at fault for not taking reasonable steps to ensure that it did have.
  • The Board did not ensure that the directors with responsibility for compliance oversight and money laundering reporting had the necessary skills and training to perform, and were effectively performing, those functions.
  • On 28 November 2014, a memo was sent to the Board which identified a number of governance areas that required remedial action, including risks and policies relating to CFDs.  There was no evidence that the Board sought to monitor the progress of any remedial action being carried out in relation to the areas identified or that it sought updates from the members of staff that were tasked with carrying out the remedial action.

As a result, the FCA found that there were breaches of transaction reporting rules, rules relating to notifications of suspicious transaction and systems and controls breaches.  Further, that each of the individuals was in breach of the Principle at the time for those performing a significant influence function to take reasonable steps to ensure the business for which they are responsible complies with the relevant requirements and standards. The following sanctions were imposed:

  • Sigma: £531,600 financial penalty.
  • Tomlin, Tyson and Kent:
    • financial penalties of £69,600, £67,900 and £83,600 respectively
    • for Tomlin and Tyson only: prohibition from performing significant management functions in any FCA firm.

All parties agreed to resolve their cases, qualifying for a 10% discount on the financial penalties that would otherwise have been imposed.

Comment

This case is an example of how poor governance can have serious consequences for regulated firms. The governance failures at Sigma were widespread, with the Board adopting a seemingly passive approach to risks that arose in relation to the CFD Desk. Even when those risks were brought to their attention, the Board remained unresponsive to them. 

The FCA's decision to sanction all three directors is an interesting example of the FCA punishing what it clearly regarded was a collective failure of governance, for which each individual bore a degree of responsibility. In that respect, it is noteworthy that Kent, whose involvement in the business was limited to business development and strategic decisions, was sanctioned. His lack of direct responsibility for compliance matters or the CFD Desk could not insulate him from his wider duty to provide proper oversight to the business.  As his Notice states: "There was a clear obligation on the part of the Board as a whole to provide a challenge to the actions of individual directors performing particular functions and to ensure that there were processes in place whereby it could receive the necessary information to enable it to discharge that function."

The widespread governance failures within Sigma were particularly pronounced in its compliance function. No attempt was made to ensure that Sigma's compliance systems and controls corresponded to the new level of risk that the CFD Desk introduced to the business. This was compounded by the fact that nobody had or claimed direct responsibility for market surveillance and compliance monitoring of the CFD Desk. Whatever compliance function there was in place was not utilised to effectively monitor the activities of the CFD Desk, which is why so many transactions went unreported.

The FCA is always keen to send messages on market abuse.  So much so that it took the unusual step in June this year of issuing an update on its work in the space. (see our comment piece The FCA's work on market abuse and manipulation - a timely update). Our advice echoes the words of the soon-to-depart head of Enforcement and Market Oversight for the FCA, Mark Steward, who stated in a press release on the Sigma matters: "Firms must accurately report their transactions and bring any suspicious activity to our attention. Sigma failed to do this, which left potential market abuse undetected. …These bans and the scale of the fines we have imposed demonstrate our determination to ensure firms – and those who lead them – meet the reporting standards we expect." Board members, and others, should take note.  

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