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The UK Financial Conduct Authority (“FCA”) has reinforced its expectations on market conduct during the COVID-19 pandemic, recognising that the opportunities for market abuse are amplified in the current climate. All market participants, including issuers, advisers and anyone handling inside information, must continue to act in a manner that supports the integrity and orderly functioning of financial markets.
A failure to comply will likely lead to enforcement action being taken by the FCA, which has reiterated that it will continue to monitor and investigate firms.
This article provides practical guidance that market participants can take to ensure they meet the FCA’s expectations in the current environment concerning the use of inside information and mitigate the risks of market abuse.
On 27 May 2020, the FCA published issue 63 of its Market Watch Newsletter (the “Newsletter”). The Newsletter sets out the FCA’s expectations in relation to market conduct, including the identification, handling and disclosure of inside information, in the context of COVID-19.
Dechert’s March 2020 article on COVID-19 Coronavirus Business Impact: Regulatory Impact – Focus on Global Market Abuse Risks, reported that COVID-19 had increased firms’ exposure to market abuse risks in a number of ways, in particular due to (i) the increasingly frequent circulation of new inside information regarding firms’ financial outlooks, and (ii) the compliance risks posed by remote working. These trends have been echoed by the FCA in the Newsletter. The FCA anticipates that increased activity in the capital markets resulting from issuers raising funds in response to the pandemic will lead to increased interactions and flows of inside information between issuers, advisers and other market participants. This activity, combined with alternative working arrangements, creates additional market abuse risks.
We set out below the FCA’s expectations and some of the practical steps that market participants can take to mitigate the risks of any enforcement action.
Key risk areas and practical steps
Market participants should continue to assess market abuse risks and whether their procedures, systems and controls in place to address their obligations under the Market Abuse Regulation (“MAR”) remain adequate to mitigate any new risks. This includes in the context of new working arrangements. To mitigate such risks, the FCA is encouraging market participants to focus in particular on the following areas during the pandemic:1
Identification, handling and disclosure of inside information
The FCA expects issuers to ensure that inside information continues to be appropriately identified and handled by all persons involved in the information chain to prevent its misuse for insider dealing or commercial advantage. Issuers should also ensure that inside information is appropriately disclosed to avoid misleading investors.
Firms should consider taking the following steps:
The FCA expects market participants to maintain robust market surveillance and suspicious transaction and order reporting (STOR) in the context of changes in market conditions and alternative working arrangements.
Firms should review and update their risk assessments and surveillance systems in response to COVID-19, to ensure that they continue to detect any new and heightened market abuse risks, such as the unlawful disclosure and misuse of inside information concerning recapitalisations, as well as manipulative behaviour which may disrupt the recapitalisation and price formation process.
The FCA’s Business Plan for 2020/21 highlighted that whilst the FCA’s primary focus will be on mitigating the impact of COVID-19 on the markets and consumers, firms would still be expected to comply with their regulatory obligations, with enforcement action being taken where appropriate (see Dechert’s May 2020 article FCA Enforcement Risk: The Year Ahead). The FCA develops this position further in the Newsletter, providing guidance to market participants on how they can address some of the risks which arise as a consequence of COVID-19.
Firms will continue to be under scrutiny during the COVID-19 pandemic given the risks inherent in an expected increase in activity in the capital markets and as they adapt to new working conditions. However, by adhering to the guidance and practical steps set out above, firms will be better placed to avoid any enforcement action.
1) Additionally, the Newsletter suggests that firms should focus on meeting the transparency and short position covering requirements under the Short Selling Regulation, and identifying and managing conflicts of interest that may arise around capital raising events.
2) For example, information which may have a significant effect on a company’s share price could include: (i) details on the company’s future financial performance, such as access to finance and funding, including through government schemes, and changes to dividends or buy-back schemes; and (ii) the company’s ability to continue or resume business, including amendments to business, strategy and return to work plans.