For a long time, the implementation of market abuse was at the bottom of the priority list within many financial institutions. The majority of financial institutions were focusing their scarce resources on other key compliance topics such as AML, MiFID II and GDPR as they were considered to pose a greater compliance risk. The technical nature of the subject matter may also have played a role in this.
In recent years, the attention of the European and Belgian supervisory authorities has been shifting more and more towards the prevention and detection of market abuse. Last year, the Belgian supervisory authority, FSMA, distributed a letter to the financial institutions under its supervision. It emphasized the importance of the detection and declaration of suspicious orders and transactions under the Market Abuse Regulation (‘MAR’). It also highlighted the need to formulate good practices with regard to the internal control environment.
In December 2019, ESMA reported Belgium as the European country responsible for the majority of administrative sanctions imposed with respect to insider trading in 20181 Together with the other market abuse violations, this accounted for a total amount of 587.145 EUR in administrative or criminal sanctions.2. Similarly, in December 2020, ESMA reported that Belgium had imposed administrative or criminal sanctions for a total of EUR 1.507.103 in 2019. The increased amount of penalties is in line with the overall increase of financial penalties that national competent authorities have been imposing since 2019, as observed and reported by ESMA.3
The heightened scrutiny by the national supervisory authorities goes hand in hand with various recent developments that make it necessary to put MAR at the top of your priority list:
1. First and foremost, there is the upcoming MAR review by the European Commission. Following the 2019 consultation round on MAR to which it received 97 responses, ESMA published its MAR review report in September 2020.4 The ESMA MAR Review provided additional guidance in relation to the definition of inside information and scenarios of delayed disclosure, the usefulness of insider lists, the appropriateness of certain obligations in relation to managers’ transactions, advice on the possibility of setting up a cross-market order book surveillance, and so on. ESMA’s recommendations will in turn feed into the European Commission’s review of the MAR. There is no exact date yet on when the new MAR shall be published and enter into force. However, the outcome of the MAR review will undoubtedly bring about important changes to the market abuse landscape and will require financial institutions to thoroughly review their current practices.
- The phenomenon of meme stocks, whereby retail investors join forces through social media to encourage massive purchases of stocks that have been shorted by e.g. hedge funds, resulting in so-called short squeezes, has been covered extensively by the media throughout 2020 and 2021 and prompted ESMA to issue a communication on the topic, pointing out the associated market abuse risks5.
- Within the asset management industry, for example, data analytics and the use of alternative data sources are becoming more prevalent. In those cases, investment decisions are no longer based merely on traditional due diligence but include data purchased from external third-party data providers (e.g. information on credit-card spending, traffic flows and geolocation are used to support the traditional predictive forward rent forecasts for real estate investment companies).6 The rise of data-driven asset management raises questions, in particular in relation to (potential) insider trading, due to the non-public nature of such data.
2. On top of that, changes in client behavior and the impact of digitalization and big data on the manner in which financial institutions organize certain activities also bring about new challenges related to detection and prevention of market abuse.
3. Finally, the COVID-19 pandemic has not left the market abuse landscape unscathed and has brought about its own challenges. Julia Hoggett7, Director of Market Oversight with the UK financial regulator (the Financial Conduct Authority or the “FCA”) provided a great summary of the myriad of consequences to the market abuse environment which arose in response to the COVID-19 pandemic. As the markets remained open, institutions maintained the possibility to raise capital in times when it was needed the most. Primary market activity however, went hand in hand with a rise in inside information. With work from home arrangements being set up to deal with the pandemic, financial institutions had to reinvent their control landscape to tailor their controls to the new working environment. This includes questions on how to deal with inside information whilst working from home but also ways to redefine what constitutes inside information. Beside a change in work environment warranting new controls, the market has also shown an increase in volatility and trading activity in general. This has led to a surge in alerts on suspicious transactions thus requiring financial institutions to find new ways to deal with the increased volume of alerts without ̶ of course ̶ neglecting the increase in risk. Finally, working from home also posed challenges to perform the usual monitoring of the increased volume of transactions. Institutions were forced to reinvent surveillance tools and their accessibility (e.g. the use of privately owned laptops, oversight by compliance advisory teams, etc.). Whilst most of the financial institutions are currently transitioning to a more hybrid working model, some of the changes implemented will be here to stay.
