Newsletter on market conduct and transaction reporting issues
October 2024
About this edition
In this issue, we make some observations about what firms can do to ensure compliance with SYSC 6.1.1R when dealing for overseas clients who operate aggregated accounts that provide no visibility of the ultimate beneficial owners (UBOs).
SYSC 6.1.1R requirements
SYSC 6.1.1R requires firms to establish, implement and maintain policies and procedures sufficient to ensure compliance with the firms’ obligations under the regulatory system. This includes countering the risk that firms might be used to further financial crime.
The Financial Crime Guide (FCG)[1] also provides guidance on the steps a firm can take to reduce the risk that it may be used to further financial crime.
Trading for anonymised ultimate beneficial owners (UBOs)
FCA authorised firms often accept instructions to execute trades from 'aggregated' accounts administered by both FCA authorised and overseas firms. This offers legitimate advantages to both parties, for example, simplified administration.
However, we have seen an increase in potential market abuse in leveraged equity products from aggregated accounts administered by firms based overseas; specifically, in countries where the regulatory approach to preventing market abuse may not be equivalent to that supervised by the FCA.
The identities of the UBOs of these trades are often withheld from the FCA authorised firms executing their trades. In some cases, individual UBOs within these accounts instruct trades on their own behalf, rather than accept investment advice from the administrator. In this article, we refer to accounts, where the identities of UBOs who determine their own investments are unknown to FCA authorised firms, as 'obfuscated overseas aggregated accounts' (OOAAs).
Working with overseas regulators we can identify the UBOs of particular trades. By doing so, we have identified FCA authorised firms unknowingly transacting trades for individual UBOs, through OOAAs, who have had their own trading accounts at those FCA authorised firms terminated owing to suspected market abuse.
Example: 'Client C' has an account with FCA authorised firm ‘X Ltd’. In a short period, Client C trades very suspiciously on several occasions, ahead of news events. X Ltd submits Suspicious Transaction and Order Reports (STORs) on each of these occasions, then concludes that Client C exceeds its risk tolerance for financial crime through market abuse and terminates the relationship. Client C then opens a trading account with overseas broker 'O Group'. When Client C submits trades, O Group anonymises them and executes them with FCA authorised firms, including X Ltd. X Ltd is unaware that it is executing trades for Client C, whose relationship it has previously terminated.
Several of these UBOs have some characteristics of organised criminal groups, described in Market Watch 77[2].
In these circumstances, UK firms which have previously terminated named accounts of these individual UBOs can unknowingly continue to execute trades for them through OOAAs.
In line with our expectations and Article 16 of the Market Abuse Regulation (UK MAR), we receive STORs from FCA authorised firms for trades executed by OOAAs. However, we recognise that where authorised firms are not able to identify the UBOs of the trades described in the STORs, they may not be able to reliably detect patterns of repeated suspicious trading, which should normally lead to enhanced monitoring and account termination.
Why this is important
We are committed to maintaining and enhancing market integrity. Clients who circumvent measures to detect and prevent their suspicious trading threaten that integrity. However, when the administrators of aggregated accounts are based overseas, our ability to intervene is limited.
What firms can do
Firms may want to take extra precautions when onboarding and trading with OOAAs. This includes modifying risk frameworks and thresholds for offboarding.
In addition, authorised firms may wish to:
- Inform OOAAs that they operate a zero-tolerance approach to market abuse, have an open relationship with their regulators, submit STORs for every suspicious trade, liaise with other law enforcement agencies and overseas regulators as appropriate, and do not hesitate to end relationships, including corporate relationships, if trading falls outside risk tolerance.
- Require OOAAs (both prospective and existing), which execute for anonymised UBOs, to provide information about their systems and controls to prevent market abuse. This might include:
- A description of market abuse surveillance arrangements, risk tolerance and risk framework, including thresholds within that framework for taking steps to manage risks, such as terminating accounts.
- The nature of underlying clients (eg individuals, retail, professional, High Net Worth, corporate).
- The number of clients deemed high risk, and how these are identified.
- Confirming whether OOAAs will provide the identities of relevant UBOs, if the FCA authorised firm is concerned about particular trades.
- Where the identities of individual UBOs are masked, ask OOAAs to differentiate between trades for those UBOs by assigning each with a sub-account with a unique identifier code. This would allow firms to determine whether suspicious trades are on behalf of specific UBOs. In line with common practice, firms could then require the administrator not to route through them further trades from those identified sub-accounts which fall outside their risk tolerance.
- Apply robust measures to end entire OOAA relationships where appropriate.
We remind firms of the requirement under SYSC 6.1.1R, as set out above. If we identify poor compliance with our Handbook provisions, we will not hesitate to intervene.