UK FCA Market Watch 83

The UK Financial Conduct Authority (FCA) has published Market Watch 83, sharing findings from a series of reviews on market abuse risks and related systems and controls at corporate finance firms that provide advisory and corporate broking services to small and mid-cap companies.

The FCA has observed the following in relation to market soundings:

• Disclosing Market Participants (DMPs) extending their market soundings to a relatively large number of Market Sounding Recipients (MSRs) without a process for considering the appropriateness or the number of MSRs contacted. The FCA highlights that a good practice was a simple governance process where a senior employee or relevant committee approved the initial proposed list of MSRs, as well as any additions to it. The FCA encourages firms to consider whether their policies and procedures help effectively manage the number of MSRs to control the flow of inside information.
• Where a gatekeeper arrangement was in a place, a specific risk of unlawful disclosure after the DMP has received consent from the gatekeeper to undertake the sounding. The FCA saw examples of DMPs sharing information with individuals at the MSR via email and the list of recipients on the email chain expanding without obvious control over who was added and whether they had been wall crossed by the gatekeeper. The FCA reminds firms that both DMPs and MSRs should consider and address the risk of unlawfully disclosing inside information by sharing market sounding information with individuals at the MSR that the gatekeeper has not wall crossed.
• Varying practices for identifying and agreeing the deal-specific information to share with the MSR. Best practice involved the DMP using an approved script for all market soundings. This helped minimise differences in information shared in soundings. Firms' policies and procedures should make sure the same level of information is shared with every MSR.
• One broker (Broker A) involving another broker (Broker B) to market sound its contacts, without the knowledge of the issuer. The FCA advises firms participating in this practice that it is important to assess, on a case-by-case basis, whether the market sounding falls within the scope of UK MAR Article 11(1). If not, firms must consider whether disclosures are lawful under UK MAR Article 10(1). Firms should also make sure they have clear policies and procedures in place to ensure compliance with UK MAR when acting as either Broker A or Broker B.

In addition, the FCA has also observed:

• When considering the control environment in smaller firms, these firms seemed to be more susceptible to organisational and cultural factors that can present specific compliance risks. The FCA expects small firms to identify and manage these risks. Firms should carefully consider whether they have arrangements, policies and procedures that are appropriate to their size to ensure regulatory compliance.
• Weaknesses in personal account dealing (PAD), including instances of staff trading without prior approval and inadequate compliance oversight. The FCA states that ongoing breaches of PAD policies are unacceptable, and that clear policies and procedures and a strong compliance culture are essential for maintaining market integrity by reducing conflicts of interest and helping to prevent market abuse.

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