UK FCA Market Watch 86 | Market abuse surveillance weaknesses at UK retail brokers

The UK Financial Conduct Authority (FCA) has published Market Watch 86, setting out its observations from supervisory visits to UK retail brokerage firms on the systems, controls and governance arrangements they use to identify and report potential market abuse. All of these firms used automated surveillance systems, but the FCA found material weaknesses in how their arrangements had been designed, implemented and operated in practice. Key findings include:

• Too high a threshold for reasonable suspicion: several firms set the bar of reasonable suspicion too high. The FCA reminds firms that they do not need proof of market abuse before they submit a suspicious transaction and order report.
• Poorly tailored alert calibration: several firms had not properly calibrated their alert models in line with the nature of their client base, the financial instruments traded, and relevant market abuse risks.
• Insufficient understanding of surveillance systems: some firms appeared to rely on system settings provided by third-party vendors, which increased the risk that weaknesses in surveillance arrangements would not be identified or challenged. Calibration testing was also often limited.
• Weak governance and oversight: some senior managers had limited understanding of key surveillance activities. In some firms where surveillance responsibilities were split across different functions, no single individual had oversight of end-to-end activities. The FCA also found examples of firms with limited or no formal quality assurance process.
• Market abuse risk assessments lacking granularity: some firms had not considered all relevant characteristics of their business model; for example, they did not differentiate between institutional and retail clients. Others wrongly assumed that having an alert in place was evidence of an effective control capable of mitigating risk.

All firms are advised by the FCA to consider these findings and check whether changes to their surveillance arrangements are required. The FCA will continue to monitor this area.

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