The regulator has published the findings from its thematic review of how asset managers control their risk of wrongdoing, with a focus on six key areas.
Covering 19 groups of varying sizes, the review covered: managing the risk of inside information; controlling access to inside information and disclosure; pre-trade controls to avoid insider dealing; post-trade surveillance; personal account dealing policies; and training.
The paper, published today (18 February) revealed that firms needed to review their practices when inside information is unintentionally received from a conversation about a proposed 'wall crossing', when that wall crossing is not taken up. For example: "If enough detail is given for the fund manager to deduce the company and nature of the event."
In terms of company-specific research, while all firms had measures in place to avoid the receipt of unnecessary inside information, it was typically informal and inconsistently applied.
"If firms receive inside information but it is not identified as such, there is a significant risk that this information is acted on in breach of market abuse rules," the paper said.
Regarding disclosure, the review found all except one firm used a restricted list to document the receipt of inside information – a 'need to know' policy monitored by a list of privileged names.
On pre-trade activity, all except three firms had segregated dealing functions and most had a reporting line that was independent of the fund managers – seen as a good control to reduce the likelihood of trading errors.
All except two of the firms reviewed used system-based pre-trade controls to prevent restricted trades – those of securities of companies where inside information may have been accessed.
The FCA deeded good practice as having a trading function that was situated in a separate, secure area, reducing the risk of other fund managers being privy to large trades being placed by their colleagues.
Post-trade, all firms had a surveillance programme in place but only two firms’ systems were considered effective in identifying market abuse.
While a requirement to have in place a personal account dealing policy, three firms did not effectively manage the risk of a fund manager trading ahead of a fund.
With regard to training, the FCA said a combination of face-to-face and well-audited online support was preferred.
The thematic review primarily relates to equity fund managers and is separate to the Fair and Effective Markets Review, which is a joint review by the FCA, HM Treasury and Bank of England and focuses on the bond, currency and commodity markets.