Over the last year, the FCA has been handing out fines at an unprecedented rate in an attempt to clamp down on insider trading. In May 2016, following an eight year investigation costing £14 million (one the FCA’s longest running and most complex insider trading cases in history), a judge at Southwark Crown Court found two defendants – a senior investment banker and a Chartered Accountant – guilty of insider dealing between November 2006 and March 2010 – known as ‘Operation Tabernula’. This case, and other high-profile Libor and FX scandals, demonstrates the growing problem authorities, and firms, face in tackling insider trading, which is becoming more and more sophisticated.
Why are authorities and firms facing such difficulties in tackling insider trading?
The rapid increase in the interconnectedness and sophistication of global markets and trading strategies, including AI and algorithmic trading, has led to a huge increase in the volume of information that firms and authorities have to monitor – meaning markets are now more than ever susceptible to manipulation. Investigators, and compliance officers, are having to monitor and wade through masses of information to find trading irregularities and stop insider trading activity before it becomes too late.
‘Operation Tabernula’ is a perfect example of this. The investigation was painstaking and involved forensic accountants, lawyers, markets experts, intelligence analyst and digital forensic specialists analysing a vast amount of trading, financial and communications data to unravel the conspiracy – taking 8 years.
The regulator’s response
In response, the UK and EU have introduced new regulatory regimes, such as the Senior Managers Regime (SMR), EU Market Abuse Regulation (MAR) and MiFID II, which are aimed at changing the mentality of the industry and introducing a culture of compliance, and avoiding the next big scandal. However, the regimes are aimed at different problems within the sector:
- The SMR came into force on 7 March 2016, with the aim of embedding a culture of “personal accountability” within the banking sector. The regime requires either senior management, or key risk takers, to take personal responsibility for the decisions they make, and is part of the FCA’s strategy of shifting responsibility away from them to firms.
- MiFID II (due to come into force in January 2018) and MAR (came into force on 3rd July 2016) are aimed at tacking misconduct and restoring confidence in the markets. Both regimes capture a wider range of markets and instruments and include specific provisions to address the proliferation of technology-driven trading practices.
It is the regulators hope that these new regimes will increase market transparency, supervision of employees and in still a new culture of “personal responsibility” and turn the tide against the rise of insider trading cases.
Dealing with the new level regulatory burden
Technology will be key in enabling compliance officers to meet the new regulatory burden that has been put on their shoulders, and prevent the next big scandal from happening on their doorstep.
Across the world, regulators are using ever more sophisticated and automated technology and data centric solutions to conduct investigations into insider trading. The SEC alone uses over twenty different technology data solutions to conduct their investigations and examinations. At the same time, regulators are requiring firms to monitor their vast trading activities and demonstrate, on short notice, that they are exerting the right standards of care and meeting the new regulatory requirements.
Firms need to have in place, or start to invest in, sophisticated data-centric compliance solutions that will arm compliance officers with the tools they need to monitor trading flows for questionable activities, and also the activities of their staff. By having these tools in place, compliance officers will be able to derive actionable insights on what’s happening within their firms, and prove to regulators that they are complying with regulatory requirements and, on demand, provide reports on trading activities.
It continues to be our mission at ComplySci to provide financial firms with the best data-centric compliance tools and technology that enable compliance officers to protect their firms from the next big scandal and create a culture of compliance.