Regulatory Roundup: FCA Biz Plan, FX Fines, Takeover Code, Misconduct, Spoofing and More

May 2018

Honk Kong - Takeover Code

What’s New: The Hong Kong Regulator (SFC) has publicly criticized a major securities and futures firm (in Hong Kong) for breaches of the Takeover Code. The firm, acting as an advisor to the offeree company, issued and distributed research reports which breached Rule 8.1 of the Takeover Code. Despite the offeree company being added to the firm’s Watch/Restricted List, the firm’s credit desk issued five credit commentaries and three weekly wraps about the offeree to its institutional investor clients.

How NICE Actimize can Help: NICE Actimize’s Control Room product’s restricted list model would have alerted to a compliance breach when the firm distributed a research report on the offeree. The model can track and alert on restrictions using a variety of criteria, including firm name and type of restriction (for example, research).

Additionally, the NICE Actimize’s eComms Supervision solution would have identified emails, chats and Instant Messages that included the name of the offeree. These actions and subsequent remediation would be viewed favorably by the SFC and likely deterred both the public reprimand and reputational damage the firm incurred.

Hong Kong - Failure to Supervise and Suitability

What’s New: The SFC reprimanded and fined a major bank a total of $39.3 million for regulatory breaches, including failures to ensure that investment products sold to customers were suitable. The SFC specifically noted the bank failed to ensure compliance with regulatory requirements pertaining to the sale of investment products, resulting in transactions where investment product risk classification exceeded their clients’ risk profiles.

How NICE Actimize can Help: NICE Actimize’s Sales Practices and Suitability solution helps compliance analysts ensure that investment advisor recommendations align with the client needs based on their client’s investment goals, knowledge of investing, and individual financial situation. NICE Actimze’s Sales Practices and Suitability solution can detect sales practice irregularities across multiple asset classes with analytical models covering: Suitability of a Trade, Suitability of Portfolio Concentration Risk and Suitability of a Variable Annuity Contract. Had the above-mentioned firm been using NICE Actimize’s Sales Practices and Suitability solution, it could have potentially avoided a $39.3M fine.

Singapore - MAS

What’s New: The MAS (Monetary Authority of Singapore) in conjunction with Commercial Affairs Department (CAD) of the Singapore Police Force recently investigated Mok Piak Liang (Mok) for market misconduct. The case went to court and the defendant was found guilty of false trading under Section 197(1)(b) of the Securities and Futures Act (SFA) and sentenced to 4 months in prison.

During the investigation, it was found that between September and November 2014 Mok had manipulated the closing price of Wilton Resources Corporation Ltd on 13 separate trading days.

How NICE Actimize can Help: The "Marking the Close" models used in NICE Actimize’s on-premises and cloud-based Markets Surveillance solutions would have detected the first instance of Mok Piak Liang’s market misconduct – preventing 13 additional instances of market manipulation that not only cost clients’ money, but also ultimately damaged the firm’s reputation.

Australia - Public Hearings

What’s New: The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established on 14 December 2017. The second round of public hearings, focusing on financial advice, were heard from 16th April to 26th April.

During these proceeding, the commission heard how 90% of financial planners had failed to comply with the best interests of their clients. Senior Counsel Rowena Orr testified to various examples of this behavior, including falsifying documents, miss-selling financial products and charging fees for services that never eventuated.

One witness even described how poor financial advice had cost him his home.

How NICE Actimize can Help: NICE Actimize’s Sales Practices and Suitability solution helps firms ensure their investment recommendations are suitable, while also detecting prohibited sales practices such as churning, trading options in accounts not approved for options, and not providing clients with the commission discounts they’ve earned. Had these firms used the NICE Actimize’s Sales Practices and Suitability solution, they may have averted hundreds of millions in penalties as well as damage to their reputations, and saved countless clients.

UK - FCA Biz Plan

What’s New: The FCA published its business plan for 2018/2019 on 9 April 2018. The annual business plan highlights specific areas of interest the FCA is prioritizing for the coming year. Key Areas include Cybersecurity, AML, Governance and Culture, Brexit, Market Integrity, Investment Management and Retail Investments.

The plan points to the some key developments that firms will need to pay attention to:

• FCA Focus – The FCA will focus their supervision monitoring on fixed income, commodity and non-standard derivatives market.
• Investment Management – Key areas of focus include poor quality and value for money of products (Suitability) and extending the Senior Managers & Certification Regime (SM&CR) to Investment Managers.
• Retail Investments – The FCA wants to improve standards and focus on specific "suitability" areas, including high risk investment and pension transfers. The FCA plans to review the impact of financial advice policies, Retail Distribution Review (RDR) and Financial Advice Market Review (FAMR) IN 2019.
• Cryptocurrencies – The FCA plans to publish a "Review of Cryptocurrencies" report in conjunction with the BoE and HMT.

How NICE Actimize can Help: NICE Actimize’s Holistic Trade Compliance platform enables firms to address all of the above-mentioned enforcement areas the FCA is focused on. NICE Actimize’s solutions have been accurately detecting fixed income and foreign exchange manipulation for more than a decade – and we have an unrivalled track record of success.

Additionally, our proven swaps models are trusted by the leading dealers. The accuracy of our insider dealing models (which base alerts on price movement and news sentiment) is unmatched. Both investment management and sell side firms use our models and behavioral analytics as a first line of defense against insider trading.

NICE Actimize’s Behavioral Analytics help prevent insider trading by monitoring the behavior of individuals that handle material non-public Information.

The models and reports in NICE Actimize’s Sales Practices and Suitability product help compliance analysts ensure that the investment advice provided by the firm’s investment advisors is suitable and appropriate for clients.

United States - Even when Criminal Spoofing is Not Proven, Firms are Still Fined

What’s New: Only two criminal spoofing cases were ever taken to trial. The first resulted in a conviction and 3 years in prison. The second, United States v. Andre Flotron, recently returned a "not guilty" verdict. But that didn’t matter, because in both cases, the firms employing the respective defendants were fined by regulators. The bank that employed Flotron, and the other institution involved in alleged spoofing, received fines of a combined $46.6 million.

How NICE Actimize can Help: NICE Actimize’s Markets Surveillance spoofing model would have detected Andre Flotron’s spoofing activity, saving his firm millions in fines. Our suite of automated trading models are designed to detect the most sophisticated types of market manipulation, including layering, quote stuffing, fictitious orders, momentum ignition, excessive cancels and spoofing.

United States - Major NY Investment Bank Fined for FX Violations

What’s New: A major NY investment bank has agreed to pay over $110m to the Federal Reserve and the New York State Department of Financial Services, settling allegations that its FX traders engaged in improper conduct.

How NICE Actimize can Help: The investment bank may have been able to avoid the $100m fine had it used NICE Actimize’s Communications Surveillance and Trade Reconstruction solution to monitor its FX traders. NICE Actimize’s Communications Surveillance solution would have addressed a major deficiency that was cited by the Federal Reserve by monitoring and pinpointing suspicious communications in chat rooms, instant messages and emails. Additionally, NICE Actimize’s Trade Reconstruction solution would have enabled the bank to identify the trades based on the manipulated prices by correlating all of the e-communications, phone calls, orders, executions and quotes related to specific trades.

Forex continues to Dominate Recent Regulatory Actions

Update: In last month’s Regulatory Roundup we highlighted a $100 million DoJ fine against a major US bank for FX abusive practices.

Recently Mark Johnson, the trader in question, was found guilty in federal court and fined $300,000. Furthermore, he has been sentenced to 2 years in prison, and was taken immediately away after the verdict was rendered. According to sentencing guidelines, Johnson could have faced up to 9 years, but the judge gave Johnson a shorter sentence due to his strong family ties, his work with children, and the fact that as a U.K. national his incarceration would ultimately separate him from his family.