EU Regulators Turn Tough on Market Surveillance Compliance

Until recently, there was a noticeable difference in the enforcement model used by the UK’s Financial Conduct Authority (FCA) and its peers on mainland Europe. The UK Regulator was like a stern schoolteacher: a stickler for the rules and unafraid to enforce compliance with them through severe punishments. Other regulators in Europe were, on the other hand, like many supply teachers: seemingly lacking true authority and with only a limited experience of practical enforcement.

Of course, even easy-going supply teachers will eventually reach their limits when it comes to bad behavior, and students can find themselves at the wrong end of a backlash – facing far harsher punishments than they might have expected. The same thing now appears to be happening in the regulatory space: regulators on the mainland have apparently had enough of financial sector firms that bend the rules and are cracking down on them with increasing severity.

This change of tack is in no small part down to the introduction and implementation of the Markets in Financial Instruments Directive II (MiFID II) and the Market Abuse Regulation (MAR). These two landmark EU regulations have had a significant, practical impact on regulators. Whereas previously disciplinary activity has tended to focus on areas like money laundering and retail regulations, regulators are now cracking down on administrative breaches such as failure to report suspicious transactions.

One such very recent case was pursued by one of the EU’s smallest regulators: the Commission de Surveillance du Secteur Financier (CSSF), the supervisory authority for Luxembourg. Following an on-site inspection, the regulator fined one inter-dealer broker €200,000 for administrative breaches under MAR (part of the fine related to non-notification of a suspicion that transactions ‘could constitute insider dealing, market manipulation or attempted insider trading or market manipulation’).

This case highlights an issue that many regulated firms face and are belatedly coming to understand: that it is not sufficient to just have an automated compliance monitoring system in place. Instead, any such system must be used effectively and in a manner consistent with regulatory expectations. One of these expectations is that firms must be able to calibrate their monitoring to their individual business models and practices, rather than simply apply standardized tests.

Simon Green, Head of Compliance at RIMES, commented: “It is likely that the coming year will see an increasing number of fines for insufficient market abuse and insider dealing controls, not least given the number of warnings to that effect already published in regulatory publications. To ensure compliance, it is vital that firms put in place the capabilities they need – and fast.

One rapid approach is to draw on managed RegTech services such as RIMES’ own RegFocus Market Surveillance system, which has been designed to provide financial sector firms with maximum flexibility with regard to how they calibrate their monitoring capability. Firms that wish to have a health check on their surveillance systems – in the knowledge that a harsher light may well be shone on them in the near future – should consider the benefits of benchmarking them against such managed services.”

For years, many firms across the EU have been left to their own devices by non-intrusive regulators. The uptick in enforcement activity by even smaller regulators have put firms on notice that this is about to change. Those that that have so far failed to implement adequate surveillance tools to monitor potential market manipulation and insider dealing must act fast. The supply teacher has gone home and the headteacher is coming to take class – firms had better ensure their homework is done.

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Financial Data Trends, October 9, 2019