The Financial Conduct Authority just can’t quite seem to be the nasty cop, even when it has every justification. It’s always fun to return to the topic of Suspicious Transaction and Order Reports, or Stors. And sure enough, the FCA has just published an update that lets us peer into its most recent thinking.
As usual it pulls its punches – at least in the language of its public comments – despite clearly finding aggravating examples of incompetence.
A quick reminder: Stors, which come under the UK’s Market Abuse Regulation (MAR), cover the areas of commodities, fixed income, equity and FX, and fall into two buckets: market manipulation and insider dealing. Since the system was introduced in the middle of 2016, almost all Stors have related to equity transactions.
The FCA has said in the past that firms could get much better at reporting Stors in areas other than equity, and particularly fixed income. It’s a point that FCA director of market oversight Julia Hoggett has made on more than one occasion.
So where does the FCA think we are at now? Its regular visits to firms are certainly still turning up some oddities.
Companies are too reliant on out-of-the-box settings for their alert systems rather than calibrating their parameters to suit their particular business, the FCA says. Equally, they are too happy to consider the standard lists of risk assessments in the regulation or in Mifid (the Market in Financial Instruments Directive) legislation as exhaustive, rather than a starting point.
On fixed income, the regulator suggests that one reason why reports might be lower than they should be is that employees are not being encouraged to consider enough factors when following up on alerts – not, for instance, looking at correlated products such as futures or similar instruments with other durations.
Some firms appear to consider that their own failures can be excused by a perception that some of their peers are failing in the same way
Sometimes it’s the chosen input that’s wrong. The FCA says some firms are using “price-driven surveillance” even on products where the primary indicator is yield.
“If firms do not use yield in either the derivation of alerts for these products or in their review, they may fail to carry out meaningful monitoring,” says the FCA.
It’s not all bad. The FCA notes that participants can struggle to spot gremlins because of a lack of transaction data, for instance in illiquid instruments. But it adds that it has seen firms counter this effectively through analysing other patterns, such as those in related instruments or spotting where trades have been booked only after a delay.
But meanwhile firms are also excusing their multiple failings in ever more idiotic ways – which the FCA describes as “questionable rationales”.
First, “some firms appear to consider that their own failures can be excused by a perception that some of their peers are failing in the same way”.
As the regulator notes, there are times when this might be just about excusable in the case of a true industry-wide difficulty. But its message to firms is that you don’t get a pass just because others are as bad as you. And just because the regulator hasn’t yet scolded a rival for something, that doesn’t mean it won’t come after you for the same thing.
Second, others are telling the regulator that their relevant employee hasn’t been in post for very long and so can’t be held responsible for all the shoddy work that went before. That also doesn’t cut it, says the FCA, which notes that its Stor visits are to assess a firm’s compliance, not that of an employee.
“We consider the time an employee has been in their role to be of limited relevance,” it says.
So that’s told ’em. Hopefully.