On 25 January 2018, the FCA fined Interactive Brokers (UK) Limited (“IBUK“) just over £1 million for “serious and systemic weaknesses” arising out of poor market abuse controls and failing to report suspicious client transactions during February 2014 to February 2015 (“Relevant Period“).
IBUK arranged and executed online transactions in certain instruments, including CFDs, futures and index options, for both retail and institutional investors. IBUK outsourced its post-trade surveillance to a team based at another company within the Interactive group in the USA. It was in respect of this business model that the FCA said that IBUK had failed to comply with the rulebook.
The FCA said that IBUK did not adequately input into the design and calibration of the post-trade surveillance systems, or test their operation, to ensure the systems would capture potential market abuse. The regulator added that IBUK also failed to provide “effective oversight” over the manner in which the US team reviewed the surveillance reports. In particular, the FCA found that IBUK carried out no quality assurance or monitoring of the review of the reports and failed to ensure that the US team was sufficiently trained to undertake its role properly.
The FCA concluded that these failings made IBUK prone to failing to submit suspicious transaction reports (“STRs“), a risk that was ultimately borne out in practice. The FCA found that during the Relevant Period, there were three instances of suspicious trading by IBUK’s clients relating to insider dealing in respect of contracts for difference. In each case, IBUK executed highly profitable transactions for its clients around the time of the announcement of price sensitive information. However, there were no related STRs submitted by IBUK, despite having reasonable grounds to suspect that the transactions constituted market abuse in the form of insider dealing.
Mark Steward, Director of Enforcement and Market Oversight at the FCA, commented that IBUK’s systems were “inadequate and ineffective…, fell below the appropriate standards and exposed counterparties and the market to risks they did not bargain for.”
The FCA continues to live up to its promise to clamp down on systems and controls that could facilitate market abuse. Readers will recall that the FCA characterised the tackling of market abuse as a high regulatory priority in the 2017/18 Business Plan And as predicted in our earlier blog, Look Back in Anger: FCA Enforcement 2017, 2018 is set to be a year of more FCA fines arising out of the significant increase in FCA investigations in 2017. Our prediction is for more FCA investigations and enforcement activity around market abuse concerns as the year moves on.