The FCA has issued its latest market watch update. It carried out a series of reviews of corporate finance firms that provide advisory and corporate broking services to small and mid-cap companies. The reviews focused on firms' systems and controls for handling inside information about their corporate clients. The update sets out the learnings from the reviews.
The FCA says that its supervision of corporate finance firms identified a heightened risk of market abuse in firms that routinely possess inside information about their corporate clients. Its report covers the following areas:
- Managing the number of Market Sounding Recipients (MSRs). 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.
- Risk of unlawfully disclosing inside information during a market sounding. Firms 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 (the specific process that must be followed before an individual receives inside information).
- Sharing a standard set of deal-specific information. Firms' policies and procedures should make sure the same level of information is shared with every MSR.
- Multiple brokers market sounding for a transaction. It is important for firms participating in this practice to assess, on a case-by-case basis, whether disclosures are lawful. They should make sure they have clear policies and procedures in place to ensure compliance.
The FCA says that smaller firms seemed to be more susceptible to organisational and cultural factors that can present specific compliance risks. It expects small firms to identify and manage these risks, which were:
- Overfamiliarity between compliance teams and the business presented a risk of inadequate challenge from compliance teams.
- Some small-sized firms relied on unwritten and informal policies and procedures that they mistakenly considered proportionate to their size. This led to inconsistencies and potentially non-compliant conduct.
- Staff sharing a small office space presented a heightened risk of weak information barriers.
However, the FCA also saw good practice:
- Having well-documented policies and procedures that were readily available to staff, with sufficient detail allowing a clear understanding of responsibilities and required steps. Firms also required staff to attest to their understanding of the policies.
- Another example of good practice was having structures in place, including oversight of compliance by the Board, an internal committee, or an external compliance consultant. This seemed to help ensure independence of the compliance function and key decisions.
The FCA also considered personal account dealing (PAD). It said that it saw:
- Staff trading before receiving approval.
- Compliance teams not undertaking sufficient checks before granting approval.
- Staff not complying with the firm's holding period.
- Compliance teams not following up on PAD breaches.
It also saw firms failing to consider the inherent risks and potential conflicts of interest arising from their smaller size or business model when designing PAD policies and procedures. The FCA emphasises that ongoing breaches of PAD policies are unacceptable. These policies and procedures are essential for maintaining market integrity by reducing conflicts of interest and helping to prevent market abuse. It says that firms must implement adequate arrangements to manage these risks, and it says that the right tone from the top is crucial for embedding a culture of compliance.
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