Asset managers score well on market abuse

Actimize FMC Product Team, Financial Markets Compliance

Recently the Financial Conduct Authority (FCA) in the UK released a thematic review covering 19 asset management firms, including “long‑only” asset managers, hedge fund managers and an occupational pension scheme that made for interesting reading. The review generally reflected some positive aspects about the culture and readiness at most of the firms included in the report. But, the report suggests, there may have been some concepts that were overlooked or underserved as well.

The primary focus of the report was to provide a comprehensive outline of existing market abuse policies of all firms that were researched by onsite visits to 17 of the firms included in the document. The sample included both small and large firms, with global assets under management ranging from approximately £200m to more than £100bn.

Most financial institutions have come to understand that market abuse damages market integrity and undermines confidence in financial markets. At a firm level, association with market abuse causes reputational damage and can lead to substantial financial loss. With this premise in mind, the FCA review considered how firms address the policies and procedures that control the risks of insider dealing, improper disclosure and market manipulation, with a primary focus on equities and insider dealing.

After a careful review, the findings confirmed that all of the financial institutions reviewed had some level of market abuse policies and procedures and supporting technologies in place, but concluded that there is still more room for improvement. The survey included an evaluation of pre- and post-trade compliance surveillance and discussed the importance of putting stop-gap measures in place in the U.K., in much the same way as the US had done a few years ago with positive results.

Realizing no firm is in perfect condition – as illustrated by a good practice/poor practice overview included within the body of the survey – it conceded that no firm seemed to exhibit flagrant disregard for handling customers’ funds and executing fiduciary responsibility. However, while neither traditional asset managers nor hedge fund managers have traditionally been under the watchful eye of regulators regarding insider information as much as the broker dealer community has been, that scrutiny is rapidly changing on a global scale as this reporting demonstrates.

Unlike asset managers, most hedge fund managers are independent and not owned by banks (together with broker dealers); the asset managers are encouraging a more microscopic landscape by the regulators (witness the proposal that currencies should be traded on exchanges). Hedge funds have now come to the realization that compliance is a necessary cost of doing business, and also paramount when it comes to instilling confidence in their investors. Every instrument and every firm will ultimately be thoroughly regulated; and the lack of transparency is rapidly being reduced on a global basis and will continue to be the focus of change.

The current regulatory collaboration (FCA included) is aligning regulations across the globe – which is helping to reduce market manipulation and abuse, as well as increase the appreciation of the code of conduct that is required in all marketplaces. The fact that the FCA has released this study in advance of the examination process, or any formal legal proceedings with regards to insider dealing, is commendable. Clearly, the FCA wants to encourage a strong and healthy business climate, and not at the cost of an unleveled playing field that could potentially harm investors.

With regards to personal account dealings – all global regulators, including the FCA, are concerned about employees using insider information to trade within their own personal accounts and for their own benefit. Firms will need to establish policies and procedures that specifically address how they treat individual accounts of employees of the fund(s) in order to reduce conflict of interest and demonstrate that they do not tolerate insider dealing.

As a firm, we strongly believe in the establishment of fair and orderly markets on a global scale, and we are willing to assist firms as they automate and adapt new technologies to accomplish this with respect to compliance. We thought the FCA report was, overall, relatively good news and showed that a lot has been accomplished to support an orderly marketplace. Let’s keep up the good work and continue to make advances to make our environment even stronger.


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