COVID-19 has fundamentally changed the ways in which investment firms and issuers of securities operate. Initially, the main focus for firms was on setting up effective remote working for all their staff – no easy task – coupled with assessing the financial and operational implications of COVID-19 to their businesses. As firms have adapted to this new way of working, regulatory expectations on firms have also shifted.
Firms are in uncharted waters and, with so many of their staff now working remotely, it is inevitable that their market conduct risk profile has fundamentally changed. At the same time, there has been increased market volatility and little relaxing of regulatory requirements from the FCA. Issuers and their advisers are faced with difficult decisions about market disclosure and buy-backs. We have also seen an increased focus from the FCA on conduct, culture and market abuse. We look at the practical ways firms can manage increased risks and compliance challenges below:
- Many issuers will need to seek additional capital, leading to an increase in primary market activity. Disclosing market participants should follow the market sounding procedures in the Market Abuse Regulation (MAR) to ensure they come within the safe harbour. This will include, for instance, retaining recordings of communications made via video-conferencing apps.
- More widely, issuers and their advisers will need to focus on appropriately identifying inside information (AKA material non-public information) and ensuring it is handled correctly. Many issuers' businesses have been severely affected by the pandemic and lockdown. Disclosing this is unnecessary if the issuer considers the market has accurately priced it in but, if the real position is worse (or better) than market expectations, an announcement will be required.
- Issuers may be able to delay publication of inside information where immediate disclosure is likely to prejudice the issuers’ legitimate interests, but only if confidentiality can be assured and the non-disclosure is unlikely to mislead the public. The FCA follows the European Securities and Markets Authority's (ESMA) view that, where the issuer has made previous statements or given signals that have created market expectations, delaying the disclosure of information that is materially different from those statements or signals would be likely to mislead the public. Given that the information would, by definition, be likely to affect significantly the price of the issuer's instruments, this substantially reduces the scope for delaying disclosure.
- Some issuers may wish to make open market repurchases of their debt instruments. This is generally permitted, provided that the issuer is not in possession of unreleased inside information. Care should be taken where the size of the repurchase may materially affect the liquidity in the bonds.
- As firms' risks have altered, so too should their risk assessments and monitoring. Firms should undertake an assessment of their particular market abuse risks in a remote working environment. In particular, firms should consider whether the systems and controls in place continue to mitigate effectively the identified risks. Where monitoring is not possible (or not possible at the desired level), then consider whether this could be addressed in the future or whether an outsourced solution may (temporarily) assist. It is important every decision is well documented.
- Firms should consider if their insider lists are up to date and may wish to reconfirm that those individuals on insider lists are aware of their regulatory, and legal, duties in respect of unlawful disclosure and insider dealing. This risk is heightened in a remote working environment and it may be appropriate to provide specific training and set out clear expectations of staff as to how to manage these risks.
- Firms should consider the potential for increased personal account (PA) dealing risk with employees working remotely. Firms need to ensure staff are reminded of the PA dealing policy, that appropriate PA dealing controls are in place and they are fit for purpose even in a remote environment. With staff working from home, there is increased opportunity for misconduct to go unchecked. With the first line of defence diminished, the role of good culture comes to the fore. Firms should therefore place an even greater emphasis on culture and actively take steps to reinforce standards of good conduct. Firms will need to ask themselves if they have sufficient oversight of what staff are doing. If not, consideration should be given to what else could be done to address this and what remedial steps could be taken in the future.
- Firms should also ensure their market surveillance and suspicious transaction and order reporting (STORs) are robust. The FCA is clear that firms cannot submit poor quality STORs because of an increase in alerts. Firms must ensure their approach to STORs is tailored to the risks to which they are exposed.