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The study looked at a range of HFMs in terms of size and securities managed. The FSA discovered an equally broad range approach to market abuse awareness.

Notably the FSA commented that it was disappointed by some of what it saw. It is not surprising that the FSA were disappointed given the apparent tardiness by some HFMs to address these risks.

Quality of compliance advice 

The study highlighted some general themes and controls which HFMs should consider to mitigate the risks of market abuse.

Of concern for the compliance industry was the opinion expressed by some HFMs about the quality of compliance consultants and the advice given.

The FSA felt that there was “some validity in these concerns but that advisers with the relevant sector experience are available”.

The concerns expressed about the quality of compliance advice should perhaps be contrasted with the impression given to the study by some HFMs that responsibility for compliance with anti-market abuse rests solely with the compliance function.

The FSA are firmly of the view that this is a cultural issue, with responsibility lying with senior management.

Evidence of low to no training 

All staff play an important role to counter the risks of market abuse, however, but such staff can only do this if they are properly trained.

Training was one area of significant concern for the study. The FSA remarked that it was “…particularly disappointed at the level and standard of training at some of the HFMs visited”.

While the FSA found what it described as “pockets of high-quality training”, at the other end of the spectrum was evidence of low to even no training at all and/or of mediocre quality.

It seems that with some HFMs urgent training is required and there has to be a greater dialogue between HFMs and their compliance consultants.

Another theme was the flow of inside information from target companies. Some HFMs reported that during face-to-face meetings with companies inside information would inadvertently be supplied.

During July 2007 the FSA reported on the leakage of inside information during public takeovers and its efforts to curb such leakage from both the regulated and unregulated sectors.

Proactive steps 

It seems that the FSA will also look to HFMs to manage situations where inside information is disclosed and to ensure that such information remains confidential.

Only HFMs with a culture of senior management taking proactive steps to address market abuse issues and appropriate staff training will be able to meet this requirement.

The study also suggested that HFMs consider systems and controls which require less human intervention for example automatic prompts when a security on a restricted or watch list is about to be traded.

The FSA would also encourage HFMs to move away from tick box monitoring, which it considers to be of little benefit, and move more towards risk assessment.

The FSA would like to see certain HFMs introduce remuneration structures with the emphasis on the firm’s performance rather than individual managers, the taping of telephone calls and robust and tested Personal Account dealing policies and procedures.

Inside information 

The results of the study may be the first shot across the bows of HFMs but there is nothing there which should take them by surprise.

The FSA’s focus on market abuse is well known in the city, for example in August 2006 the FSA fined HFMs, GLG Partners and former managing partner Philippe Jabre, £750,000 each for market abuse and breach of FSA principles.

Later that year Sean Pignatelli was fined £20,000 by the FSA for breaching Principles 2 and 3 of the FSA’s Statements of Principle for Approved Persons.

He failed to consider whether information he had received from an e-mail might have contained inside information - in fact it did not. He had, furthermore, used embellishments when he conveyed the information to his clients.

Although Pignatelli was a US equity salesman, four of the calls that he made were to HFMs clients who sold or short-sold the relevant stock following their conversations with him.

The FSA will be following up the study with more visits of HFMs in order to assess their anti-market abuse systems and controls.

Essential reading 

These studies are essential reading for senior management and compliance alike.

An analogy could perhaps be drawn between the FSA’s post ‘N2’ warnings to the banking sector on the adequacy of anti-money laundering systems and controls and subsequent enforcement action between 2002 and 2004 for breaches of the then Money Laundering Sourcebook.

For those FSA-regulated HFMs who fail to heed the warnings of this study the consequences could be swift and sharp enforcement action.

Richard Burger is a senior solicitor in the Regulatory Team at Mills & Reeve LLP. A former FSA Enforcement Lawyer he was the case lawyer in the FSA’s first published case of market abuse. This article was previously published in Compliance Monitor.

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Related links

• Mills & Reeve LLP