Josh Ballard

The UK regulator has offered new guidance on how firms can ensure compliance in a distributed work environment while remaining vigilant against the risk of insider trading.

Delivering a speech as part of the City Financial Global Event, Julia Hoggett, Director, Market Oversight at the Financial Conduct Authority (FCA) said the recent boom in capital raising activity “has the potential to give rise to a great deal of inside information which must be appropriately handled.”

The Enhanced Potential for Insider Trading

While the risk of insider trading is nothing new, it represents a different challenge due to the unfamiliar circumstances that firms and their employees currently find themselves in.

“It is absolutely the case that this risk has always existed, but when the separation between work and home life is perhaps harder for some people to navigate, it may be all the more important and acute,” Hoggett continued.

Another factor to consider in relation to insider trading is the direct effect that the pandemic has had on a business, “…knowledge that an entire businesses’ operations would have to shut, or indeed could open again; knowledge of whether a company had utilized the furlough scheme or any of the pandemic lending schemes; information about the pace of cashflow burn – all issues that might either not have come up in the past, or not have been material, but which now are.”

Managing the Increasing Number Of Alerts

We’ve been hearing since March that increased market volatility has resulted in a surge in alert volumes across the board. While the FCA is sympathetic to the difficulty this has created for financial compliance teams, Hoggett made it clear that it is no excuse for firms to “submit poor quality Suspicious Transaction and Order Reports (STORs), simply because they have had more alerts.”

She added that, while STOR submissions had begun returning to normalized levels, if any firm has a significant backlog they should contact the STOR Supervision team to provide anticipated timeframes for clearance.

Updating Compliance Policies To Reflect Home Working

Another theme that Hoggett stressed was the need for unilateral surveillance and recording regardless of employee location. “Our expectation is that going forward, office and working from home arrangements should be equivalent – this is not a market for information that we wish to see be arbitraged.”

In addition, firms need to update their policies to reflect the new working environment with specific reference to the risk of using personal devices. “These policies should be demonstrable to us and to your audit teams. It should go without saying that policies should prevent the use of privately owned devices for relevant activities where recording is not possible.”

It’s one thing to simply have an updated policy, but firms need to ensure that it is reinforced and understood. This is harder at a time where compliance culture is cultivated remotely, so firms should consider how they communicate any policy changes to ensure they are widely adopted.

On The Whole, The Market Is Relatively Clean

One particularly interesting stat referred to by Hoggett is the new Potentially Anomalous Trading Ratio (PATR). In use since 2019, the metric provides a snapshot of how prevalent potentially non-compliant trading is in the UK market. 

The data shows that 0.8% of all relevant trading in 2019 required further review due to the PATR metric, with 6.7% of those flagged activities categorized as true positives worthy of further review. That indicates that roughly 0.05% of all trades are considered true positives and further scrutinized. 

But why wait for the FCA to uncover potentially harmful trades happening at your firm? Companies utilizing Behavox Compliance have reported 3x the number of escalations compared to legacy solutions and a 90% reduction in false positives. This helps them find bad actors quickly and accurately, protecting the integrity of their operations and preserving the trust of their clients – before it’s too late.