British authorities have searched five homes and arrested eight people in connection with insider-dealing investigations since March 2020, pointing to a lull in regulatory action at a time when widespread home working has raised market abuse risks.
The data disclosed by the Financial Conduct Authority (FCA) to Reuters comes amid pressure on the watchdog to improve its broader enforcement record, after facing criticism over its handling of the collapse of several funds.
The shift to remote working since the COVID-19 pandemic has raised regulatory fears that bankers could cheat markets by taking advantage of laxer systems and controls away from the watchful gaze of bosses and compliance teams.
Five lawyers specialising in white collar crime interviewed by Reuters said the number of insider dealing arrests and searches disclosed was modest, particularly when compared to the mass arrests of insider dealing rings in probes codenamed Operation Tabernula and Saturn launched by the FCA and its predecessor, the Financial Services Authority, over a decade ago.
“Home working clearly gives rise to new and different conduct risks,” said Sarah Hitchins, a partner in Allen & Overy’s litigations and investigations team.
“Given what a priority market abuse and insider trading is for the FCA, you would have thought there might have been more” action, Hitchins added, while conceding the pandemic may have made the watchdog’s job harder.
Reuters obtained the information through a Freedom of Information (FOI) request and subsequent enquiries to the FCA.
FCA data shows a fall in cases during the pandemic. The watchdog’s latest annual report said it had 72 open insider dealing cases as of 31 March 2022, compared to 71 the prior year. It had 88 open insider dealing cases as of March 2020, before the pandemic gripped Britain.
Stamping out market abuse such as insider dealing – trading a company’s publicly-quoted securities with access to confidential, market-moving information – is a key enforcement area for the FCA.
Asked about its record on market abuse, a spokesperson for the watchdog said: “The FCA is vigilant in detecting abusive practices where they occur, and we take robust action to protect market participants from harm caused by such abuse.”
In response to a question about the dip in enforcement activity, the FCA said it did not have targets for arrests or convictions, that its work to combat market abuse was data driven and that insider dealing was just one part of that work.
Widespread home working has thrown up new challenges for market watchdogs. Regulators globally are concerned about illicit discussion of confidential, market-moving matters on personal phones and platforms like WhatsApp – in an industry where communications are routinely recorded to deter market abuse.
The FCA said it was actively discussing personal device use with a range of UK-authorised firms, but declined to divulge further details.
“The use of instant messaging tools by staff on personal devices certainly poses significant challenges,” said James Alleyne, legal counsel at Kingsley Napley. “We would certainly expect to see much more activity in this area.”
Bloomberg reported on Monday that the FCA had submitted information requests to major banks about staff use of texting and apps such as WhatsApp, but had not yet launched a full-blown investigation.
The FCA warned in October 2021 that it might drop in on banks’ remote-working staff to check they were playing by the rules.
However, the watchdog told Reuters it had made no such visits in connection with its work on market abuses without police present since March 2020.
Three of the lawyers Reuters consulted said home visits without police were always going to prove tricky.
“This raises numerous issues, particularly under human rights laws,” said Alleyne, citing the right to privacy under the European Convention of Human Rights – which still applies in Britain after Brexit.
In a response to Reuters, the FCA noted that home visits were unlikely to be considered proportionate in routine scenarios if firms had appropriate systems and controls in place.
But the watchdog said it has conducted an unspecified number of supervisory visits to companies’ offices where record keeping was raised – and said compliance was also tested through other supervisory work, without giving details.
US regulators’ investigations of messaging tools are further advanced. The Securities and Exchange Commission and Commodity Futures Trading Commission said last month they had fined 16 finance firms – including Barclays and Goldman Sachs – a combined $1.8 billion in civil probes that uncovered clandestine discussions between staff on deals and trades using personal devices and messaging platforms such as WhatsApp.
The US probes found the behaviour had become more acute since the pandemic.
The British watchdog has issued a string of smaller fines against individuals and firms for breaches of market abuse rules and a 531,000 pounds ($593,000) penalty on Sigma Broking Ltd this month for failures in reporting between 2014-16, which it said left potential market abuse undetected.
The FCA said the insider dealing arrests and searches disclosed to Reuters related to suspect activity both before and after March 2020, when Britain first imposed COVID-19 lockdowns.
The watchdog added they were unrelated to four insider dealing prosecutions it had commenced since March 2020.
Over the past five years the FCA has secured just two convictions for insider trading, a Times newspaper investigation found in June, compared to 20 between 2012 and 2016. The FCA declined to comment on the data in the Times story.
In the disclosure to Reuters, the FCA said its officers and police searched six premises in total – five residential addresses and one office – as part of its insider dealing probes during the period of nearly two-and-a-half years through August 2022.
Reuters was unable to verify the names of the individuals arrested, the firms they worked for, or whether the arrests were linked. The regulator said the investigations were ongoing.Iain Withers, Sinead Cruise and Kirstin Ridley, "UK insider dealing probes dipped since Covid-19," Business recorder. 2022-10-16.
Keywords: Economics , Financial conduct , Trading Commission , Human rights. WhatsApp , Sarah Hitchins , Sigma Broking , FCA , FOI , UK