On 27 May 2020, the FCA published its latest Market Watch bulletin (“Market Watch 63”). Market Watch 63 focuses on the FCA’s expectations in relation to market conduct in the context of Coronavirus.
Market Watch 63 makes clear that, while the FCA has been willing to temporarily relax certain rules as a result of Coronavirus (e.g. in relation to reporting deadlines), market participants remain expected to comply fully with their market conduct obligations. Further, Market Watch 63 puts firms, and the responsible individuals at firms, on notice that they need to make sure that the systems and controls that are in place to ensure compliance with market conduct obligations take into account any changes in circumstances caused by Coronavirus (e.g. alternative working arrangements). This is especially important considering that an increase in primary market activity is expected as issuers seek to raise funds.
This note sets out some practical steps that market participants can take to minimise the risk that they fail to comply with their market conduct obligations. It particularly focuses on areas which have become higher risk as a result of Coronavirus.
Any market participant found not to have complied with its market conduct obligations can expect the FCA to take a hardline approach and to make full use of its criminal and regulatory powers. Market conduct was already a priority area for the FCA prior to Coronavirus and Market Watch 63 has now put market participants on notice about what is expected. Market participants will therefore want to be able to demonstrate that they have given active consideration to the issues raised by Market Watch 63 and taken appropriate action.
Key issues raised by the FCA and practical steps that can be taken
Identification and handling of inside information
The increase in primary market activity combined with market participants moving to alternative sites or working from home means that there will be both an increase in the flow of inside information and a change in the way that those information flows operate.
Firms need to help ensure that employees are working in safe and secure environments when carrying out sensitive transactions. Working from home could lead to inside information being disclosed inadvertently (e.g by leaving a laptop open, sharing a printer or others in the household overhearing a telephone call). These practicalities are hard to implement and monitor and the security of the information will rely mostly on the sense and care of the people who have access to the information. Notwithstanding this, firms should be giving guidance to individuals and taking all the steps that they can to minimise the risk that inside information is mis-handled
Market participants will want to consider:
- Reviewing the availability or the application of controls for restricting access to inside information on secure IT systems and how access to inside information can be remotely supervised.
- Implementing/revising policies about what documentation can be stored at home and how it should be stored, managed and disposed of.
- Ensuring that, to the extent appropriate, front office staff are still taking two-week block leave.
Appropriate disclosure of inside information
Market participants will need to take account of Coronavirus and related circumstances when considering what constitutes inside information. As well as noting that issuers should carefully monitor whether any new information is materially different from previous forecasts, the FCA has provided the following as examples of information that could have a significant effect on a company’s share price:
- Detail on future financial performance, such as access to finance and funding. This includes through government schemes, significant changes in cash flow patterns, force majeure or termination rights in material contracts or financial arrangements, and changes to dividends or buy-back schemes.
- A firm’s ability to continue or resume business resumption plans, arrangements for staff returning to work, and supply chains.
As can be seen from the above, the principle of what constitutes inside information remains the same but circumstances relating to Coronavirus create novel scenarios which need to be thought through.
Further practical steps that firms can take to help ensure that inside information is not inappropriately disclosed include:
- Making sure that individuals are aware of when they are on insider lists and that the reason that an individual has been provided with inside information is recorded.
- Refreshing training for individuals on their legal and regulatory obligations, including handling and disclosing inside information, market soundings and personal account dealing (see Market Watch 62 for further details of the FCA’s current concerns in relation to personal account dealing).
- Disclosing inside information as soon as possible, subject to the provisions on delayed disclosure.
- When delaying disclosure of inside information, making sure that holding announcements are prepared in case there is an actual or likely breach. This is particularly important at present given market uncertainties and changed working arrangements.
Meeting the transparency and short position covering requirements under the Short Selling Regulation
Consistent with its 17 March 2020 statement, the FCA has not banned the short selling of UK shares but has emphasised the importance of firms meeting their obligations under the Short Selling Regulation. This includes ESMSA’s recent reduction of the threshold for notifying net short position from 0.2% of issued share capital to 0.1%. Firms should make sure that they closely monitor any changes in this rule as the regulatory response to Coronavirus’ impact on markets continues to develop.
Identifying and managing conflicts of interest
In Market Watch 63, the FCA restates that it has heard reports of a small number of banks failing to treat their corporate clients fairly when negotiating new or existing debt facilities. The FCA refers to its 28 April 2020 Dear CEO Letter in which it raised the issue of banks exerting pressure on corporate clients to secure roles on equity mandates that they would not otherwise be appointed to. The FCA makes clear that it will take action if these claims are substantiated.
Both banks and other firms should heed the sentiment of the FCA’s warning. Unfairly using financial difficulties created or exacerbated by Coronavirus to the detriment of a client will be seen as a breach of the Principles. Firms will need to take this into account when making judgement calls about how to interact with clients and ensuring that they are being treated fairly.
Market Watch 63 means that market participants are unambiguously on notice that the FCA will not accept Coronavirus as an excuse for market conduct failings. In fact, in some circumstances Coronavirus will be seen as an aggravating factor. While some of the issues raised by Coronavirus can be navigated relatively simply by the implementation of practical steps, others will require finer judgements to be made and a detailed analysis of the specific circumstances to be undertaken
Market participants need to make sure that they are giving active consideration – and evidencing that consideration – to how they are ensuring compliance with market conduct issues arising from Coronavirus.
The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.