March 5, 2024 by Clare Curtis

Organised Crime Groups Trading

The FCA (Financial Conduct Authority) has published their observations on the illegal and damaging trading by Organised Crime Groups (OCGs), alongside their advice as to how firms can mitigate the risks of being used to facilitate this behaviour.

It has been noted that a considerable proportion of OCGs trading occurs in products whose underlying securities are UK and Internationally listed equities.

The regulator stated that OCGs trading activities are primarily in Spread bets and Contracts for Difference (CFDs), and appeared to be characterised by, but not exclusive to, the following:

  • A pattern of trading directly prior to any merger and acquisition (M&A) announcement in the press or otherwise in the particular instrument.
  • Pro-Active recruitment of known sources of inside information.
  • Use of intermediaries who broker inside information.
  • The use of umbrella accounts at overseas broking firms through which the identities of account holders can be concealed.
  • The use of facilitators, including employees of an authorised firm, to open overseas accounts
  • Leaking false stories about M&As to major financial media outlets to influence price movements to which they will profit
  • Other types of serious crimes

What Firms Should Be Aware of And Look Out For

Executing firms should be incessantly vigilant to the fact that they could indeed be used to facilitate insider dealings by members of OCGs, whilst concurrently remembering, and being clear regarding their obligations to counter these risks and other areas of financial crime.

Trigger points could be instances such as:

  • Clients frequently generating suspicious transactions and order reports (STORs)
  • Clients frequently trading prior to an announcement of any M&A activity
  • Any occasions of a client opening positions in the immediate run-up to publication of speculation about M&A activities, and subsequently closing them very soon afterwards.
  • Several clients trading in the same security for the first time in quick succession.
  • Clients with any connections to other current, and/or former customers, whom the firm, has concerns or doubts about, or a trade has resulted in a STORs. Including trading in ways that are alike.

Advisory firms should be vigilant to members of staff who may have access to inside information being approached by members of an OCG.

What Firms Can Do To Defend Against OCGs

  • Interface with all clients to inform them that the firm employs a zero-tolerance approach to all and every form of market abuse, and that it communicates both ways with, and submits STORs to, the relevant authorities as a matter of course.
  • Inform clients that the firm will terminate any account it reserves any suspicions about, even to a very minor degree, and that it liaises with all other law enforcement agencies, where appropriate, immediately when necessary.
  • The firm will request any and all overseas companies that are on their client base, to submit documentary evidence of adequate surveillance operations and their zero-tolerance attitude towards any suspicious activity.
  • Firms must submit STORs to the FCA regarding any suspicious trades a client may place just prior to media reports of M&A activity, even if there has been no public confirmation of such.
  • Advisory firms must instruct all its staff of the risks of advertising references to having access to inside information on their social media profiles, this may well result in OCGs interest to approach the staff member with the aim of gaining information from them.

The FCA highlight they will not hesitate to employ the tools they have at their disposal where they notice any poor compliance within firms, including enforcement investigations.

Consumer Duty Firms Survey

In Spring 2023, the FCA commissioned market research company IPSOS, to survey 1230 authorised firms regarding their understanding and implementation of, the consumer duty (CD). This gave the regulator information as to how firms were managing CD before the Open Products deadline of 31/07/2023.

In Autumn of the same year, the FCA once again tasked IPSOS with conducting another survey of 634 different authorised firms to the initial survey. This was to examine how the regulators engagement with firms since the first survey had assisted them in preparation for the upcoming full implementation of the CD (closed products being the last), on 31/07/2024.

From the survey’s results, the FCA discovered several improvements from the Spring, most noteworthy being:

  • The proportion of firms reporting completion of necessary steps had significantly increased and 43% of firms surveyed were not experiencing any difficulties with implementing any aspects of the CD, so they reported.
  • Retail Finance Providers and Debt Advice firms report enough improvements to have led them closer in preparedness to other sectors since the results of Spring 2023. The FCA put this down to targeted engagement with these firms by themselves.
  • Relevant activities being conducted by firms had escalated, including having identified the target market for their products and services by 74%, up 30% from the previous survey, and those that had appointed either a single member of staff, a team, or committee to oversee CD implementation grew at 73% (note, no comparison given)
  • 74% of all firms surveyed say they have conducted a fair value assessment.
  • The most problematic requirement to implement was found to be Outcomes Monitoring. This stands at 41% with Payment Services firms, and 36% with Wealth Management firms.

The FCA view the survey results as positive, but still stress that the improvements must continue towards and beyond the full implementation deadline of 31/07/2024.

Once again, emphasis is not only that firms should ensure they are engaging in all the requisite procedures in order to embed the CD into their framework, but also to be in no doubt that they can evidence this, at the FCAs request, and also to ensure good consumer outcomes.

The regulator vows to continue to monitor firms’ progress throughout, and, if they notice any shortcomings, they will most definitely take an ‘assertive and active’ approach to addressing them, intervening as and when they deem it necessary.

FCA Enforcement Investigations

The FCA have announced that they are in the process of committing to improve the pace and transparency around enforcement cases. This is in order to enhance the deterrent impact of their enforcement actions.

They intend to focus on a streamlined portfolio of cases, so as to be able to act more rapidly where they feel it is more important and thus provide the greatest influence and impact on any violations of rules.

In addition, the regulator intends to close cases, where it is viewed that no outcome will be possible, at a speedier pace allowing them to focus attention on matters of a more important nature.

The FCA continued by saying they will publish updates on investigations where appropriate and be open about cases they will be closing. This is a move to being more transparent from the past, where investigation announcements were only forthcoming in very limited circumstances.

The regulator believes that being more communicative in this manner will improve public confidence in the Financial Markets, by displaying that they are alert and pro-active as quickly as possible and when necessary.

As well as increasing public confidence in the FCAs dealing with violations, they too believe that by ‘amplifying the deterrent impact’ of their work, this will assist in firms’ understanding to the types of serious failings that will lead to an investigation, helping them to ‘change their behaviour more quickly