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Firms under pressure from the FSA to report suspicious transactions need to consider the issue of loss liability
A recent Freedom of Information Act (FIA) request has shown an increasing number of suspicious transaction reports (STRs) being submitted to the Financial Services Authority (FSA), despite a decrease in corporate activity since the financial crisis.
It has been widely reported that the FSA has been giving some broking firms unwelcome regulatory attention in relation to the relatively small number of STRs they have made. All FSA-regulated firms are feeling the effect of the regulator’s latest mantra of “intrusive supervision”. Firms should, however, exercise caution if under pressure by the FSA to up the number of STRs.
It has been a requirement of the Market Abuse Directive since July 2005 that firms seeing suspicious transactions must report these to the FSA, so that these and other transactions can be reviewed for evidence of market abuse. The FSA has recently emphasised its reliance on firms to not only make STRs, but also to ensure that transaction reporting is carried out correctly.
The FSA’s ZEN surveillance and monitoring IT system relies on full and accurate reports of firms’ own and client trading. The old defences of IT system issues and incompatibility with the complex trade reporting regimes are now no excuse.
The increase in the number of STAs made since the beginning of 2012 seems to coincide with the efforts of Patrick Spens, a former prop trader at Citigroup and now the head of FSA’s market monitoring unit, to beef up the FSA’s capabilities in this area. The regulator felt that some firms were not scrutinising clients’ activity in the markets or worse still, turning a blind eye to suspicious transactions and not reporting them.
What constitutes “suspicion” has been the subject of legal debate for many years and the law in this area is extremely complex.
Following the judgment in a recent case, HSBC v Shah, which involved the reporting of analogous suspicious activity reports (SARs) in the field of anti-money laundering, firms should not make STRs without a reasonable basis for suspecting market abuse in each case. Should a firm submit an STR and the client suffers losses - for example if trades were suspended causing loss or the costs of a lengthy FSA investigation resulted - and there was no reasonable basis for making the STR, then firms could be liable for those losses through civil proceedings brought by an aggrieved client in the courts.
Should firms end up in litigation in relation to an STR made without a reasonable basis, then reliance on the little guidance in FSA’s Market Watch 33 will not be a defence to liability for losses from the subject. The FSA has suggested that firms do not take an “overly legalistic approach”.
The FSA’s push to increase the number of STRs will no doubt end in enforcement action against certain firms where STR systems, controls and training are felt by the FSA to be inadequate. Watch this space.