A £1m fine for broker shows potential shortcomings with group-wide controls and surveillance, says expert

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A £1m fine for broker shows potential shortcomings with group-wide controls and surveillance, says expert

A fine served on an online broker shows that financial firms should not rely solely on group-wide controls and surveillance systems to pick up on suspicious transactions, an expert has said.30 Jan 2018

Late last week, the Financial Conduct Authority (FCA) announced that it had fined London-based Interactive Brokers (UK) Limited (IBUK) £1,049,412 for "poor market abuse controls and failure to report suspicious client transactions".

In its 'final notice' (33 page / 227KB PDF) issued to the firm, the FCA identified weaknesses in the group-wide measures that IBUK had relied on. Those "post-trade surveillance systems ... operated on a global basis, across multiple jurisdictions, for all group entities", the regulator said.

"Although IBUK was entitled to use the group systems, IBUK failed to take adequate steps to satisfy itself that potential market abuse by its clients was effectively captured by the post-trade surveillance reports, which were not tailored in any way for the specific business of IBUK," the FCA said.

IBUK's failings included a lack of adequate oversight over the way an affiliate company carried out post-trade surveillance and of the way in which it monitored the quality of those reviews, according to the FCA. The firm "also failed to ensure that members of the team had adequate guidance or effective training", it said.

As a result of the failings, IBUK was "unable to identify some potentially suspicious transactions by its clients that ought to have been identifiable, had it been in compliance with its regulatory obligations", the FCA said. This led to the firm failing to report three suspicious transactions involving clients that concerned potential inside trading in trades involving contracts for difference, it said.

Contentious regulatory expert Jonathan Cavill of Pinsent Masons, the law firm behind Out-Law.com, said the case highlights the continued focus of the FCA on ensuring that firms have appropriate systems and controls in place to properly identify and prevent financial crime.

"The FCA has an overarching strategic objective to ensure that the relevant financial markets function well," Cavill said. "To support this, the FCA has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers. This case demonstrates the FCA seeking to satisfy both the strategic objective and the three operational objectives."

"Here, IBUK did not have appropriate post-trade systems and controls to identify suspicious trades, which could therefore allow for or encourage financial crime.Crucially, there was an over-reliance on group systems and controls by the firm in question, rather than the firm having its own bespoke systems and controls relevant to its specific UK business," he said

Cavill said there were also similarities between this case and a 2016 case in which the FCA also took enforcement action, although not in the group risk management context. In that case, the FCA fined WH Ireland £1.2 million for weaknesses in its market abuse controls across a broad range of areas.

"WH Ireland was an important decision by the FCA as the regulator arrived at its decision despite the fact that there was no evidence of actual harm – in that case: market abuse," Cavill said.

"Although the level of financial penalty is similar in both cases, IBUK has, in contrast, escaped a ban on taking on new clients – as was the case for W H Ireland, when the FCA restricted its corporate broking business from taking on new clients for a limited period. The penalty nevertheless captures the severity of the FCA’s attitude to poor market abuse controls and failings to report suspicious transactions. Systemic weaknesses in internal procedures and lack of adequate training also manifest in the FCA’s decision," he said.

Cavill said the FCA's enforcement action against IBUK serves as an important reminder that proper systems and controls to identify, manage and reduce the risk of financial crime should remain a priority for all regulated businesses.

"Firms should continue to fine tune their anti-crime systems and controls and not just focus on anti-money laundering processes, Furthermore, it is important that firms which utilise systems and controls at group level to meet UK regulatory requirements, also ensure that they have appropriate business specific systems and controls," he said.

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