In something of a departure from the usual posts, I thought I’d try something different this week. So I’ve decided to set you a test.
Don’t worry, though. It’s just for fun. And I’m afraid there’s no prize for getting the answers right.
If you work in the asset management industry, this will be particularly relevant to you; especially if you’re in compliance. If you don’t work in this sector, why not try it anyway? There’s an important point for everyone at the end.
Before you take the test
I need to explain the context in which it’s been set. Last month, the FCA issued the findings from its themed review (FCA TR15/1) of how asset management firms control the risk of market abuse taking place. There were 19 firms in total selected to take part in the review, so the sample was relatively small. But both the issues that the FCA was looking out for and the results should be considered by all firms in the sector.
So why not start with the test?
If you’re ready, here we go. The test consists of 6 questions. The more questions you can answer yes, the better. Any questions answered no might lead you to think about how the controls within your firm might be viewed by the regulator. But however you answer, please pay particular attention to the last question. Arguably, it’s the most important one of all.
Question 1: Do your firm’s controls effectively manage the receipt and distribution of potentially inside information? (Yes/No)
If you answered yes, consider what the FCA thinks are good controls. The examples it quotes include firms where initial information soundings were received in a team independent of the fund managers. Also, one firm deliberately avoided meetings with companies that it was planning to invest in, during their closed reporting season.
If you answered no, then what was your thinking about where improvements could be made? Did you think that there were some areas where controls around the flow of information could be improved? The FCA quoted amongst others, an example of where some firms felt the responsibility lay with the companies, banks and other research providers to identify inside information.
Question 2: Does your firm effectively control access to inside information? (Yes/No)
This one is all about identifying those people who really need to know certain pieces of information, and making sure that they are the only people who receive it.
If you answered yes, do your controls line up with what the regulator found? For example, is the availability of information restricted solely to those who legitimately cross Chinese walls? Does information generally go no further than relevant people and compliance?
If you answered no, is there a concern about how many people have access to inside information? The FCA found one instance where traders had access to such information, not just that it existed.
Question 3: Does your firm have strong pre-trade controls to prevent market manipulation? (Yes/No)
If you answered yes here then this is probably no surprise, as the FCA found that most firms had dealing functions operating independently of the managers.
If you answered no, is there a concern around a lack of segregation between the trading and fund management functions? The FCA found some evidence of this, but it was the exception.
Question 4: Is your firm’s post trade surveillance robust enough to identify market abuse quickly? (Yes/No)
If you answered yes, then more than likely, your firm has a dedicated trade surveillance function using comprehensive statistical analysis and targeted sampling to identify any potential abuse.
If no, then is there a concern that the analysis of statistics is too rigid to pick up anomalies? Or are the checks just not done frequently enough? The FCA identified instances of both of these problems.
Question 5: Does your firm have a personal account dealing policy, together with appropriate trade monitoring? (Yes/No)
A yes answer here would need to be in respect of both parts of the question. There is a regulatory requirement for a personal account dealing policy, so the answer to the first part would most likely always be yes. For the second part, if you still answered yes, do you pre-approve trades and carry out post-trade monitoring? If so, then this is what the FCA considers to be good practice.
For a no answer, were there concerns about the restrictions placed on managers trading on their own account? The FCA found an example where a fund manager was only restricted from trading within an hour of a fund trade.
Question 6: Does your firm have adequate training to ensure continuing staff awareness of market abuse issues? (Yes/No)
Arguably, this is the big one. It’s easy to answer yes here, especially as the FCA found that virtually all firms in its sample had training programmes for both new starters and existing employees (refreshed annually in the latter case).
But before you answer, you need to look a bit more closely at what the FCA is saying about training. And there are some challenges here:
1. If your training is restricted to e-learning, is this really appropriate?
2. How effectively are you able to check that everyone is really reading the material closely?
3. Are you able to challenge the results of the e-learning if they don't look right?
4. Is your training refreshed regularly?
5. Does it take into account recent market and regulatory developments, particularly, where applicable, high profile enforcement actions?
1. Are the people devising and delivering the training effectively trained themselves?
2. Has external training support been utilised where it can deliver benefits?
3. Is the training of a suitable frequency given the nature of the firm and its investments?
The key point here is that for all firms’ training arrangements, it’s often beneficial to look behind what’s being provided to see if it can be improved in any way, and whether it continues to be fit for purpose.
But back to the quiz, if the answer to the last question was in fact no, then check out the opportunities available through Industry Events Online to make improvements.
By Martyn Oughton a Professional Member of the International Compliance Association (ICA). Martyn now writes a regular blog for Industry Events Online focusing on the importance of training in all aspects of compliance. Read Martyn's other publications at Martyn's Writers' Residence website.
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