A better view

The recent FCA enforcement trends, especially in the context of wholesale markets and, given the work of the AFME, the way in which MIFID 2 is already influencing the trend line.

Significant change and challenge
MIFID 2 represents a significant change and challenge not only in practice but also in essential logistics. What will remain in place, if not strengthen, is the deep relationship the FCA enjoys with our European colleagues, sharing information, intelligence and practice, on a daily basis, especially in the regulation of our wholesale markets.  I should also acknowledge the role of the AFME and its membership in helping to cultivate these mutual benefits.  Long may all of this continue.
Enforcement Trends
Let me start with enforcement with special focus on our wholesale or markets-facing work. The most significant change over the last year has been in the uptick in the number of investigations we have commenced.  The uptick is significant, representing approximately a 75% increase in the number of investigations on foot.
Three important factors at play here
First, we are broadening our shoulders.  We have commenced more investigations into capital market disclosure issues, especially where we see there may be poor disclosure practices or, in some cases, where poor disclosure can mislead the market and become market abuse.  Good disclosure by issuers is an important component in any market working well and so we are keen to ensure high standards are maintained.  For example, we took action against Tesco Ltd earlier this year for market abuse in which we imposed the first redress order under section 384 of the Financial Services and Markets Act.
Secondly, there have been significant legislative changes under the Market Abuse Regime (MAR) influencing investigation numbers. MAR has extended the scope of the reporting regime for firms in terms of markets, platforms and conduct. This means more participants reporting more data, especially around suspicious transactions and, significantly, the reporting obligation includes orders now as well (STORs).
Almost as soon as MAR commenced, in the middle of last year, we saw an equally significant increase in the number of STORs – in the order of a 77% increase on 2015/16.
Unsurprisingly, a richer and more varied market picture – a better view in other words – combined with the stimulus of suspicions provided by the market itself, has led to more cases being selected for investigation.
I should add that MIFID 2 will further enrich our view of the market as we will capture even more data. Currently we capture around 20 million transaction reports per day and we estimate this will increase under MIFID 2 to around 30-35 million transactions, in excess of 50 million orders per day or a total of over 1 trillion data points per year.  I will return to this notion of us gaining a better view of the market and how this is shaping our work in a moment.
The third factor in the increase in investigation numbers has more to do with our starting point for investigations.  Some background is needed to explain this.
Become vastly more efficient
I know there are some who think the increase in investigation work will lead to the need for additional resourcing by the FCA.  Instinctively, I don’t think this is right and pragmatically, in light of Brexit and other work on our plates, it is not remotely feasible!  The challenge then for us is to become vastly more efficient, strategic and focused, especially in conducting investigations more quickly and expediently.  And this is exactly what we have been doing.  From my own experience, I know this can be done.
The investigator’s mind, at the start of an investigation, should be a quiver of arrow-like questions rather than a disposition or view as to what the outcome needs to be.
Moving more quickly means detecting suspected serious misconduct as early as possible and this is where the new data we are collecting under MAR and will receive under MIFID 2 can shape our enforcement work for the better.  Let me now turn to that.
Enforcement of MIFID 2
We are very conscious of the obligations imposed by MIFID 2 on firms.  Our objective has been to help firms put in place the foundations for MIFID 2 and to be ready for day one on 3 January 2018. We have issued statements reminding firms not authorized for MIFID 2 activities or firms that need variations of permission that they needed to submit completed applications for authorisation or variations of permission by 3 July 2017 to be guaranteed their applications will be determined in time.  Many firms have managed to meet this deadline, a some have not.  Those firms really need to take action now.
Similarly, all legal entities and individuals acting in a business capacity who are clients of firms subject to MIFID 2 transaction reporting obligations and firms themselves must have a Legal Entity Identifier or LEI if they wish to carry out transactions from 3 January 2018.  Firms must ensure these clients have an LEI before effecting transactions covered by MIFID 2 on their behalf.
As always, we intend to act proportionately.  In this context, this means we will not take a strict liability approach especially given the size, complexity and magnitude of the changes that are required to be in place.  We are very aware of how much work many firms have been engaged in for a very long time now in re-tooling and preparing for next year.  This means we have no intention of taking enforcement action against firms for not meeting all requirements straight away where there is evidence they have taken sufficient steps to meet the new obligations by the start-date, 3 January 2018.
Many firms that have been working well to prepare for next year and they should feel assured and confident that they can continue to work with us to meet the starting line.  At the same time, we cannot create a floor for compliance below the required MIFID 2 standards and so our disposition is likely to be different where firms have made no real or genuine attempt to be ready or where key obligations are deliberately flouted.
Summary of the speech of Mark Steward, Executive Director of Enforcement and Market Oversight, at AFME European Compliance and Legal Conference 2017.
Source: https://www.fca.org.uk/