- within Wealth Management, Environment and Consumer Protection topic(s)
The UK FCA has fined a capital markets adviser to an energy company GBP100,281 – and banned him from working in financial services – for insider dealing. The action illustrates the comparatively low threshold for what may constitute inside information, the relevance of individuals' professional experience to culpability, and the need for firms to engage in supervisory and enforcement risk mitigation especially where conduct is difficult to detect and prevent.
What happened?
Neil Sedgwick Dwane was Capital Markets Adviser in the Investor Relations Team of ITM Power Plc (ITM), an AIM-listed energy storage and clean fuel company.
The company encountered manufacturing issues and increased aftersales warranty costs. Internal discussions concluded that an unscheduled Regulatory News Service (RNS) announcement was needed, and the company issued a Trading Update on 27 October 2022.
The FCA found that on 26 October 2022, Mr Dwane – in possession of inside information in 25 and 26 October 2022 drafts of the Trading Update – sold all of his and a close family member's ITM shares. The day after the Trading Update he purchased a larger volume of ITM shares at a substantially lower price, profiting by GBP26,575. He failed to seek permission from the firm before dealing.
The FCA constructed a timeline of events from his work and personal email, messaging and conferencing services, mapping his two tranches of share sales to relevant communications; for example, the first tranche took place two minutes and 20 seconds after a call between Mr Dwane and a senior ITM manager.
A low threshold for inside information
Over Mr Dwane's denial that he possessed inside information at the relevant times, the FCA found the following constituted sufficient inside information:
- At the time of his first share sale, he knew a Teams call entitled "Warranty RNS" was about to be held that might lead to an announcement in the near future concerning warranty provisions.
- At the time of his second share sale, he knew that a draft RNS had been prepared that might lead to an announcement in the near future concerning warranty and/or manufacturing issues, thereby enabling him to anticipate a likely significant effect on ITM's share price.
Importantly, the FCA did not consider that it needed to find that he saw the draft RNS or had substantial information about it.
Relevant experience
The FCA found that Mr Dwane had substantial relevant experience, with significant time spent as an Approved Person and multiple often senior roles in financial services including as a portfolio manager, Chief Investment Officer and Global Strategist. Further, he declared his awareness of the company's relevant internal policies, repeatedly received potentially price-sensitive information in his role and repeatedly failed to obtain clearance for share transactions. From this the FCA concluded that his conduct was deliberate and dishonest.
In view of these factors and also his position of trust (the company involved him in RNS discussions to help gauge market reaction) the FCA assessed his breaches as seriousness level 4, though did not uplift the penalty for aggravating factors (noting his prior clean record) or deterrence.
Key lessons
- The action illustrates the comparatively low threshold for what may constitute inside information – here, the mere awareness of the existence of a Teams meeting entitled "Warranty RNS" was enough. To mitigate risk, firms should tightly confine participation in such discussions to "need-to-know" individuals.
- The action also illustrates the greater exposure of experienced and trusted individuals to findings of intention and dishonesty and the need for senior individuals to be scrupulous in their share dealing compliance to mitigate enforcement risk.
- Mr Dwane largely worked remotely, was in a trusted position, confirmed his awareness of relevant firm policies, yet did not disclose his trading. In such circumstances it is particularly challenging for firms to detect and prevent relevant trading outright. Firms can, however, mitigate supervisory and enforcement risks e.g. through due diligence on prospective employees and regular training and self-declarations of compliance – with a specific focus on integrating remote, part-time and ad hoc advisors into the firm's governance and supervision. To support the defensibility of their own compliance processes, firms should also keep detailed records of discussions, decisions and drafts around sensitive announcements.
- The FCA will obtain and analyse communications on unofficial channels (here WhatsApp). To anticipate likely FCA reaction, firms in the initial stages of fact-finding should carefully consider whether and how to obtain these communications – mindful always to balance the risks of tipping-off, evidence destruction, and relevant employment and data protection law obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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