Maintaining the integrity and cleanliness of the financial markets remains a key FCA priority and, indeed, is a statutory legal obligation on the regulator. Against that, however, is the fact that FCA’s track record in taking enforcement action against insider dealing and other forms of abusive behaviour is relatively poor. Since 2017 it has only achieved three criminal convictions for insider dealing, whilst its record for imposing civil fines on firms and individuals for breaches of the Market Abuse Regulation (“MAR”) is also unimpressive.

Moreover, these investigations can be hugely resource intensive and expensive for the FCA, particularly if they rely on complex communications data and even smaller cases – which may on their face appear to be relatively simple – may still take many years to reach any form of conclusion. It is no surprise, therefore, that with the FCA investing heavily in data and focusing much more than ever before on the early detection of misconduct as part of its ongoing transformation programme, its Market Oversight Division appears to be substantially increasing its use of pre-investigation enquiry letters.

These letters – which can be sent to firms and individuals – often come out of the blue and will usually ask the recipient to explain their trading or other form of conduct. They may be sent, for instance, when an individual has traded shortly before a market announcement and ask various questions as to whether that individual has any connection to the relevant entity and why they decided to trade when they did. Similarly, they may be sent to a listed company whose share price has demonstrated unusual volatility, particularly following some form of media coverage or announcement, in order to determine whether there have been any leaks or other behaviours which could be impacting that and also to determine whether the company has a sufficient awareness of its obligations under MAR.

Although it could be argued that by sending out these letters, the FCA is asking market participants to do its job for it, in practice such letters are an important source of market intelligence that likely have the dual effect of: (i) deterring the recipients from doing anything untoward in the future; (ii) providing the FCA with the valuable data it needs to focus its lens on the most serious cases where there is perhaps some form of underlying liability.

Whilst it can be a shock to receive such a letter, particularly if you have never had any prior interaction with the FCA and simply made a legitimate and successful investment based on your own research, it is essential that you carefully consider the request. Whilst there is no legal obligation to reply to such letters, doing so may be in your best interest and a satisfactory and careful response may well result in the FCA closing down its enquiries quickly and without taking any further action. Conversely, an inappropriate or poorly considered response may increase the FCA’s concerns and could potentially lead to the opening of a formal enforcement investigation.  

Given that there is both criminal and civil liability for insider dealing and other forms of market misconduct, if you receive such a letter, it is essential that you do not ignore it and take appropriate legal advice to protect your position. At Kingsley Napley we have an established track record in helping clients close down these enquiries at the earliest stage. Call our team to find out more.

further information

If you have any questions, please contact James Alleyne in our Criminal team.

 

About the author

James Alleyne is Legal Director in the firm’s Financial Services Group. He advises clients on the full spectrum of financial services and FCA-related matters, including on authorisation applications, perimeter and supervisory issues, enforcement investigations and cases before the Regulatory Decisions Committee and Upper Tribunal.