Uptick in enforcement action in 2024? – Multiple arrests and strong rhetoric from UK Enforcement Agencies

FCA arrests and insider dealing focus

FCA arrests

The FCA has announced that on the 1 February 2024 more than 38 FCA and NCA officers were involved in an operation to arrest three London-based individuals on suspicion of insider dealing, conspiracy to insider deal and money laundering linked to organised crime. All three were interviewed under caution by the FCA with two being released under investigation, and one individual being released on unconditional bail. On 13 February 2024, a fourth suspect was interviewed under caution and remains under investigation.

The announcement of the arrests was released in conjunction with a statement from Steve Smart, the joint executive director for delivering enforcement and market oversight for the FCA, and a February 2024 Market Watch publication focussed on insider dealing. The statement from Mr. Smart emphasised the FCA’s current focus on insider dealing, noting that the FCA was “committed to combatting organised criminal networks involved in this threat.” Reference was also made to “sophisticated monitoring systems” and “specialist teams” within the FCA that are being used to “disrupt the threat.” These forceful observations from Mr. Smart which accompanied the announcement of the arrests are indicative of the FCA’s priority focus in this area.

Market Watch update 

In Market Watch 77 (published on 14 February 2024), the FCA shared its observations on insider trading by organised crime groups (“OCGs”), and how firms can be at risk of being used to facilitate trading by such groups. The FCA noted that suspicious trading by members of OCGs forms a “significant component” of the overall amount of suspicious trading that the FCA observes.

The FCA set out a number of characteristics that they consider to be indicative of this type of activity, expressly referencing equity spread bets and CFDs. This in itself is telling – the potential advantage of using these types of financial instrument is of course leverage – which can enable insider dealers to put up less cash than would be needed to buy the shares themselves, and increase their profit from the dealing.

The characteristics the FCA identify include:

• a pattern of trading before merger and acquisition (“M&A”) announcements, and before press speculation about M&A; 
• pro-active recruitment of sources of inside information;
• the use of intermediaries who broker inside information;
• using umbrella accounts at overseas broking firms, which do not display equivalent standards of safeguards to UK firms, and through which the identities of the account holders may be masked;
• the use of facilitators, including employees of authorised firms, to open accounts with such overseas firms;
• feeding stories about mergers and acquisitions, both true and false, to major financial media outlets, to benefit from the ensuing price movements (in the case of false information – this will not involve inside information but rather market manipulation such as "pump and dump" strategies); and
• links with other types of serious crime.

The FCA also identified a number of scenarios that might raise suspicions in relation to insider dealing, which are helpful reference points for firms to consider when reviewing their processes and trades:

• clients who are regularly generating Suspicious Transaction and Order Reports (STORs); 
• clients who frequently trade before announcements of M&A activity;
• clients opening positions shortly before, and closing those positions immediately after, publication of speculation about M&A in the media, without waiting until any relevant issuer has commented on the speculation; 
• several clients trading in the same security for the first time; and
• clients with any connection to other current or former clients about whom the firm has concerns, or whose trade has resulted in STORs. This might include trading in similar ways.

Measures to mitigate risk

The combination of forceful rhetoric and action on insider dealing by the FCA ought to give firms plenty of pause for thought. The FCA emphasised in its Market Watch publication that there are steps that regulated firms ought to consider to mitigate the risks of being used to trade by an OCG.

If a firm is an executing firm, it may be prudent to consider the following measures:

• communicating to all clients, both existing and prospective, that the firm has a zero-tolerance approach to market abuse, has an open relationship with its regulator, submits STORs to the FCA, terminates accounts based on very low thresholds of suspicion, and liaises with other law enforcement agencies as appropriate;
• requesting all overseas broking firms that are clients to submit documentary evidence of adequate surveillance arrangements and a zero-tolerance approach to market abuse; and
• regarding trades placed before media reports of M&A activity as potentially suspicious, and submitting STORs where appropriate, even if no public confirmation of the matter described in the media reports is made.

If a Firm is an advisory firm, the FCA emphasises the risks of staff being recruited by OCGs as sources of inside information. Potential mitigating steps are suggested by the FCA:

• advising staff who work in M&A advisory business, whose names do not regularly appear in regulatory announcements (presumably named contacts on RNS announcements), of the risks of including references to their having access to inside information in their social media profiles. It is likely that OCGs’ recruitment of information sources is targeted at junior members of staff; and
• considering whether it is appropriate to reference the names of staff engaged in M&A advisory in the firm’s own social media profiles, beyond its principal senior contacts – presumably the FCA mean that they should not do so.

Whilst implementation of the various recommended steps is likely a positive step towards mitigating risk, the FCA was keen to emphasise their lack of tolerance for poor compliance in this area. The Market Watch alert states that the FCA will not hesitate to use additional tools in conjunction with any enforcement procedures, such as s.166 reports, voluntary requirements, and own-initiative variation of permission to ensure compliance and to mitigate market risk.

Serious Fraud Office – New director keen to incentivise whistle-blowers

The SFO is making bold statements of intent in the New Year. In his first public speech since taking the post in September 2023, ex-Assistant Police Commissioner and Chief Constable Nick Ephgrave QPM was clear about his intention to bring reform to the SFO. The SFO's Director acknowledged that it was a "challenging time" for the agency, but was resolute that his position as a 'law enforcer' and not as a lawyer was an advantage in his mission to bring about change.

The Director set out a number of key initiatives that he was seeking to explore as part of his mandate. Commitments under his leadership included cases being faster, the introduction of a new, rigorous and intrusive review process on active cases, and “technology assisted review”; a form of machine-learning to assist the SFO’s disclosure obligations and try to provide a speedier review process. Under his leadership, he says the SFO will be bolder, more pragmatic, and more proactive. But the two suggestions which have garnered the most interest from commentators are in relation to the treatment of whistle-blowers and assisting offenders.

Ephgrave stated that he thinks the SFO should be paying whistle-blowers. Ephgrave pointed to the United States to support his initiative, noting that 86% of settlements and judgments recovered by the US Department of Justice were based on whistle-blower information. The Director set out how he considered that this incentivisation of whistle-blowers could allow the SFO the opportunity to obtain "smoking gun" evidence, which he believes would radically reduce the time taken to build a case, therefore seemingly increasing efficiency at the agency.

Similarly, Ephgrave suggests that the SFO does not effectively utilise potential resources presented by assisting offenders to progress investigations. The Director suggested that the use of the Serious Organise Crime and Police Act is not 'culturally' supported in the UK. Ephgrave noted the 'enormous benefits' of utilising information from assisting offenders, not just to the SFO in progressing an investigation more quickly, but to the defendant themselves in achieving a reduction in sentence.

Whatever the reception might be in respect of to the new Director's plans, it is clear that Ephgrave means business. The Director's speech was closed with a renewed commitment to making the SFO an effective enforcement agency, with aspirations to make the agency a "collaboration partner of choice, both in this country and abroad".

What does this mean for firms?

Firms should take note of not only the forceful rhetoric coming out of these two UK enforcement agencies, but also the increase in enforcement action. Increased collaboration between enforcement agencies such as the NCA and the FCA has led to arrests within a few weeks of the start of 2024. Firms should be alive to any risks in relation to insider dealing and be aware of the FCA’s powers of intervention that could accompany or precede enforcement action, in the form of s.166 reports, voluntary requirements, and own-initiative variation of permission. It is always wise to review policies and procedures, but particular thought might be given to ensuring that any policies and procedures (including order and transaction surveillance) relating to the prevention of insider dealing remain effective and up to date. Careful attention to the suggested steps set out by the FCA in its Market Watch publication is also likely to be a prudent course of action.

The strong comments coming out of the SFO indicates a clear will for an increase in prosecution of serious fraud. Firms should endeavour to ensure that there are robust compliance structures in place across the business, but also that if matters arise, internal investigations are conducted with careful thought and accompanied by detailed legal advice. Should the worst occur, an orderly and complete audit trail will assist greatly when responding to any potential enforcement action.

Authors: David Capps, Annabel Goulding