On 18 October 2019, the Financial Conduct Authority (FCA) has published Market Watch issue 62. This issue covers personal account dealing.
Personal account dealing
Personal account dealing (PAD) is where employees of an authorised firm trade for themselves rather than for clients. The FCA requires firms to establish appropriate rules governing PAD undertaken by relevant persons (including employees and tied agents) (COBS 11.7 and 11.7A). To achieve effective compliance, firms need to understand the PAD risks posed by their business models, design clear policies and processes around those risks, and develop a culture where adherence to their rules is the norm. When breaches of PAD policies do occur, firms need to investigate them and, where appropriate, take disciplinary action.
The FCA is concerned how often it is seeing apparent breaches of PAD policies and the issues which have come to light as a result, including:
- employees in front-office roles not appearing to understand their firm’s PAD policy despite having signed attestations that they have read, understand and will comply with those policies
- firms and employees considering that ignorance of PAD policies provides reasonable mitigation for PAD in breach of that policy
- employees—including front office, compliance
and surveillance—deliberately not declaring external accounts to their employer and/or circumventing requirements. This includes operating undeclared accounts in the names of relatives where trades are executed without any input from the named account holders
Examples of employees trading in breach of the relevant policies include:
- trading in products, such as spread bets on the firm’s own shares, when the firm’s policy specifically prohibits this
- dealing in conflict with their professional decisions/recommendations. For example, research analysts trading against their own recommendations, or fund managers buying a security they have advised their fund to sell
- following client orders—if client orders subsequently appear suspicious, both employees copying those orders and the firm may be compromised when considering escalating concerns
- front-running of client orders
Activity of this kind raises questions about whether the policies in place at firms are meeting the objectives of the PAD rules and wider regulatory obligations including whether:
- firms are managing conflicts appropriately
- firms are managing the risk of market abuse being undertaken by their staff appropriately
- firms have the appropriate processes for managing client confidential information
- firms adequately manage their obligations to identify and report suspicious transactions and orders
- individuals with responsibility for overseeing PAD systems and controls are complying with their obligations
A firm should consider the following when designing its PAD policy:where PAD creates conflict of interest or market abuse risk within its business model-
- how such risks can be adequately mitigated. This should include identifying if PAD of any sort, by front office and compliance staff in particular, presents risks that it cannot adequately mitigate within its business model
- given the easy access that employees have to a range of markets for PAD, including CFD and spread betting markets which are open round the clock, what effective monitoring and control of PAD it could do
- how it ensures that employees are aware of their obligations
- the appropriate degree to which it should rely on employees acting with integrity and following internal procedures and what level of post-trade monitoring of PAD activity is necessary to ensure employees comply with policies
- what appropriate processes should be in place for assessing PAD requests and/or notifications submitted by employees so the firm can operate appropriate control
- how such post-trade monitoring feeds into identification of potential suspicious activity which the firm can review and, if necessary, report to the FCA
- whether senior managers are leading by example when engaging in PAD and act as advocates of strict compliance with the firm’s PAD rules
