There has been a 40% rise in reports by businesses of potential insider dealing to the Financial Conduct Authority (FCA), according to figures compiled by regulatory consultancy Bovil.
A total of 1,035 reports were made to the FCA this year, up from 739 the year before.
Businesses have to make reports of any suspicious transactions as part of their regulatory obligations.
The suspicious transaction reports that relate to “the misuse of information”, or insider dealing, have increased rapidly over the last five years, according to research by Bovil.
Bovill head of wealth management Mark Spiers said:
- “Financial services firms have responded to pressure from the FCA to improve their monitoring of suspicious transactions.
- “But despite the increase, potential insider dealing continues to be difficult to spot, so the number of suspicious transaction reports is likely to be just the tip of the iceberg.”
Monitoring trades for instances of potential insider dealing is so difficult that larger investment banks and brokers increasingly use expensive, sophisticated software which automates the process of identifying transactions that should potentially be reported, he said.
- “However, smaller firms often still rely on relationship managers or compliance officers to monitor transactions, meaning some suspicious trades may be missed.”
- “The rule is that if a trade looks suspicious, it should be reported. Not all suspicious trades turn out to be instances of insider dealing though.”
Bovill points out that insider dealers score their biggest gains when making trades relating to mergers and acquisitions activity, so the recent increase in that activity could be feeding the rise in the number of suspicious transaction reports.
Spiers said:
- “Insider dealing that precedes a regulatory takeover announcement is easier for financial services firms to spot. This kind of insider dealing is most likely to lead firms to report suspicious activity to the FCA.”
The FCA expects all firms to ensure they have systems in place to monitor any suspicious behaviour that has the potential to be insider dealing. If their IT systems, staff training or internal documentation are deemed to be inadequate then the firm in question could face a heavy fine.
- “Firms don’t need to be complicit in insider dealing to be hit with a fine by the FCA, they can face heavy fines merely for having weak or badly documented monitoring systems in place,” Spiers warned.
However he said small firms shouldn’t panic.
- “The FCA does not necessarily expect them to have state of the art software.
- “What the regulator does expect is that they have an appropriate documented process setting out what they are doing to spot suspicious behaviour.
- “This could entail robust staff education to make sure that they recognise aberrant behaviour that could be insider dealing. Their staff must also be informed on how to report anything suspicious.”
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