While Financial Services battle with the new challenges of employees trading from their kitchen tables, the risk of insider trading has increased substantially. Or has it?
While the regulators are understanding of the current situation, there has been stark warnings and no sign of a softer touch during COVID-19. We look at whether material non-public information is more or less at risk to being leaked under lockdown.
The Regulator is certainly anxious about the risk of Insider Trading
Concern has been raised about the effective management and supervision of risks with respect to material non-public information (MNPI).
Both the UK and US Regulator have warned of heightened Insider Trading risk due to COVID-19. The Securities and Exchange Commission (SEC) issued a statement on March 23, in which they cautioned that “material nonpublic information may hold an even greater value than under normal circumstances”, while the Financial Conduct Authority (FCA) in their latest CEO letter urged firms to be particularly alert to possible breaches under the Market Abuse Regulation.
But is this actually the case?
Risky times = risky behaviour (or not)
Increased market volatility and a crisis atmosphere have been known to harbor risky activity. However, whether the pandemic might lead to riskier behavior from insiders has yet to be seen.
Remote working has increased many risks from across the business related with business continuity, IT security and financial investment. Although, where the penalties for trading in inside information face hefty fines and often jailtime, more often than not, the risks out way the returns.
The reasons for an increase in insider trading
As a rule, only certain people in firms are charged with the responsibility of holding MNPI. Under the current circumstances, people may have more access to confidential information and some of those people may be less accustomed to hearing and properly handling MNPI.
Another risk is shared working spaces such as flats shared by young traders or the family home where multiple people are working remotely. In such circumstances, it would be very difficult to prevent outside parties overhearing private conversations.
Considering additional training to employees who are not normally exposed to MNPI on how to manage it appropriately is something which a lot of firms have already done. Including, regular reminders about why it is important to keep information confidential (and not trading while in possession of it). May have been given corporate mobile devices that should be recorded. If you don’t then you run the risk that they use non recorded channels e.g. home landline.
The reasons against
The fear-factor for one.
After the wave of regulatory change that swept through Financial Services in the last few years and the Senior Managers Regime coming into full force across regulated firms, people are scared to make a step wrong while working from home.
As the sector adapt to the ‘new normal’, the Regulator has a close eye on any suspicious activity in the markets and firms, and individuals, may risk becoming martyrs if they step out of line during COVID-19.
We may find that we might not see as much insider trading as we first thought…
Supervision and control still need attention
In any case, firms should be thinking about how to improve their controls around sensitive information. Have Chinese walls been compromised – how can surveillance models be adjusted in a way that doesn’t compromise the existing compliance measures?
As an example employees may have been given corporate mobile devices that should be recorded. If this hasn’t happened then you run the risk of employees using non-recorded channels such as a landline phone. providing the necessary resources; communication channels, office equipment, VPN access etc is simply part of good business practice now and is an effective way to help mitigate cases opportune or accidental breeches.
There is no such thing as a foolproof system. Even in normal circumstances, traders may just leave the floor to call their preferred broker from a private line. However, ensuring you are effectively monitoring the channels your employees are using to trade on will shine light on those radio silences that were previous giving Compliance a restless night’s sleep.
For more information on how VoxSmart can help capture and monitor your phone, mobile and electronic communications, get in touch for a demo.