Spotlight on insider trading
10 May 2010:
If you follow the financial sector in any way, you must be aware of a rash of recent raids, arrests, court cases and regulatory rulings, particularly by the UK Financial Services Authority (FSA), that have put the spotlight back on insider trading. So is this increased regulatory spotlight an indication of a sudden growth in insider trading (or “market abuse” as it is known in compliance circles) perhaps caused by falling equity markets last year tempting more people into illegal ways of generating returns? Alternatively, could it be that the greater complexity of modern trading and a wider variety of ways of passing information, mean that there is more scope for this type of activity, or could it be that regulators see this as a way of increasing their profile at a time when they are under increased pressure to show positive results?
There are many opinions, so to shed further objective light on this area, we recently conducted a survey. This found that the market views insider trading as a systemic risk that is largely immune to tougher regulation, and should be tackled by significant changes in culture, people and technology.
So what should financial institutions do? Well, whilst the market may not get the freedom in the form of self-regulation in this area – the UK FSA and other regulators have made that clear, as mentioned above – the more significant changes and improvements that institutions make, especially in the key areas of people, culture and technology, the more likely they are to be able to take a proactive approach before a regulator would need to become involved. Hence an organisation should see its first line of defence as being its policies, procedures, management structures and training – to address the people and cultural aspects. These need to be supported by comprehensive and effective systems for both prevention and detection. By taking this area seriously, firms can reduce their exposure to this systemic risk and hence are more likely to stay out of the regulatory spotlight.
Click HERE to view the summary of the survey mentioned in the article. (PDF)
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