Market Watch 83: Advisors and Brokers’ Procedures for Managing Confidential Information

The Financial Conduct Authority (FCA) has recently published its latest market watch update, which focuses on reviews conducted on corporate finance firms providing advisory and corporate broking services to small and mid-cap companies. These reviews centered on evaluating the firms’ systems and controls regarding handling inside information related to their corporate clients. The update outlines key observations and findings gleaned from these reviews, highlighting crucial areas for improvement and better compliance practices.

One of the main concerns highlighted by the FCA is the heightened risk of market abuse within firms regularly dealing with inside information about their corporate clients. The report delves into specific areas of interest, beginning with the management of Market Sounding Recipients (MSRs). Firms are urged to assess whether their existing policies and procedures effectively regulate the number of MSRs to control the dissemination of inside information and mitigate potential risks.

Another key area of focus is the risk of unlawfully disclosing inside information during a market sounding. Firms are reminded to address and mitigate this risk by ensuring that market sounding information is shared only with individuals who have completed the gatekeeper’s wall-crossing process, thus preventing any unauthorized disclosures.

Moreover, the update emphasizes the importance of sharing a standard set of deal-specific information with all MSRs to maintain transparency and consistency in communications. For firms engaging multiple brokers in market sounding for a transaction, the FCA advises conducting a case-by-case assessment to ensure compliance and adherence to relevant policies and procedures.

In its review, the FCA noted that smaller firms were more susceptible to specific compliance risks arising from organizational and cultural factors. Common risks included overfamiliarity between compliance teams and the business, reliance on informal policies and procedures, and inadequate information barriers due to shared office space among staff. The FCA expects small firms to proactively identify and mitigate these risks to enhance their compliance framework.

On a positive note, the FCA also highlighted instances of good practice observed during its reviews. These included well-documented policies and procedures accessible to staff, fostering a clear understanding of roles and responsibilities. Additionally, firms that implemented oversight structures such as boards, internal committees, or external compliance consultants demonstrated a commitment to maintaining compliance and ensuring independence within the organization.

The FCA also touched upon personal account dealing (PAD) practices, noting various compliance lapses such as staff trading before approval, insufficient checks during approval processes, non-compliance with holding period regulations, and inadequate follow-up on PAD breaches. The regulator underscored the importance of robust PAD policies and procedures to minimize conflicts of interest and prevent market abuse.

In conclusion, the FCA reiterated the significance of ongoing compliance efforts and the essential role of organizational culture in fostering a compliant environment. The regulator emphasized the need for firms to implement effective risk management strategies and uphold a culture of compliance starting from leadership positions. By adhering to best practices and addressing identified areas of improvement, firms can enhance their compliance framework and mitigate the risk of market abuse.