Unit 8 - Financial Crime 1 (18 of 80)

Question 1

How does the FCA believe good culture and behaviour can be observed in a firm?(2)

Answer 1

• set and implemented by senior management, and
• reinforced by effective corporate governance and the role of the board

Question 2

Why is effective governence important?

Answer 2

enables the board to share a clear understanding of the firm’s risk appetite and to establish a robust control framework to manage that risk effectively across the business

Question 3

What is the Financial Crime Guide for?

Answer 3

provides guidance to firms on the steps they can take to reduce their financial crime risk

Question 4

What 3 behaviours constitute market abuse?

Answer 4

• based on information that is not generally available and would impact price
• likely to give a false or misleading impression of the supply, demand or value
• likely to distort the market

Question 5

What is the extended scope of UK MAR vs EU MAR?

Answer 5

UK MAR applies to “OTC transactions” where the underlying financial instrument could impact the price of a financial instrument that is itself traded on, admitted to trade on, or for which a request has been made to trade on a Regulated Market, MTF or OTF

Question 6

How is market manipulation defined?

Answer 6

• entering into a transaction, placing an order which gives a misleading signal of price/demand/price
• entering into a transaction, placing an order which affects the price of one or several financial instruments or a related spot commodity contract which employs a fictitious device or any other form of deception or contrivance
• disseminating information through the media, including rumours
• transmitting false or misleading informatio/inputs in relation to a benchmark
• acting in collaboration, to secure a dominant position over the supply of or demand for a financial instrument.
• Buying or selling of financial instruments, at the opening or closing of the market, which has or is likely to have the effect of misleading investors
• The placing of orders to a trading venue, including the cancellation and/or modification, by any available means of trading, including by electronic means, such as algorithmic and high-frequency trading strategies having the effects referred to above or by:
• Using electronic media to voice an opinion about a financial instrument (while having a position in that financial instrument) and profiting from the impact of the price of that instrument

Question 7

What do firms need to do to combat market manipulation?

Answer 7

‘establish and maintain effective arrangements, systems and procedures to detect and report suspicious orders and transactions to the FCA

Question 8

What are “Safe Harbours” with regard to market manipulation?

Answer 8

> transactions that are carried on in the pursuit of monetary, exchange rate or public debt management policy by agencies of the UK or EU member states

> buy-back programs

> stabilisation programs

Question 9

What is a “market sounding”

Answer 9

Identifying investor appetite for a new issue

Question 10

What are the rules for investment recommendations? (12)

Answer 10

1. facts are clearly distinguished from interpretations, estimates, opinions
2. all substantially material sources of information are clearly indicated
3. all projections, forecasts and price targets are clearly and prominently labelled
4. the date and time when the production of the recommendation is completed
5. a summary of any basis of valuation or methodology and the underlying assumptions used to either evaluate a financial instrument
6. the meaning of any recommendation made, such as the recommendations to ‘buy’, ‘sell’ or ‘hold’ and the length of time of the investment to which the recommendation relates
7. a reference to the planned frequency of updates to the recommendation
8. an indication of the relevant date and time for any price of financial instruments mentioned in the recommendation
9. where a recommendation differs from any of their previous recommendations concerning the same financial instrument or issue that has been disseminated during the preceding 12-month period, the change(s) and the date of that previous recommendation are indicated, and
10. a list of all recommendations of any financial instrument or issuer that were disseminated during the preceding 12-month period

Question 11

What are the disclose rules for conflicts of interest regarding investment recommendations? (7)

Answer 11

The investment recommendation therefore must contain:

• if they own a net long or short position exceeding the threshold of 0.5% of the total issued share capital
• if holdings exceeding 5% of its total issued share capital are held by the issuer
• if the person producing the recommendation or any other person belonging to the same group with that person:
• is a market maker or liquidity provider
• has been lead manager or co-lead manager over the previous 12 months o
• is party to an agreement with the issuer relating to the provision of services of investment firms (
• is party to an agreement with the issuer relating to the production of the recommendation, a statement to that effect.

Question 12

What is the primary legislation for market abuse?

Answer 12

the Criminal Justice Act (CJA) 1993

Question 13

How is insider dealing defined?

Answer 13

the deliberate exploitation of information by dealing in financial instruments, having obtained this information by virtue of some privileged relationship or position.

Question 14

In which 3 ways can the offence of insider trading be committed?

Answer 14

• dealing in the security
• encouraging another to do so, and
• disclosing inside information to another.

Question 15

Does information need to be published for it to be classed as non-insider?

Answer 15

No it just needs to be available to someone who exercises diligence or expertise in finding it

Question 16

Which securities are included in insider dealing rules? (11)

Answer 16

1. Transferable securities.
2. Money-market instruments.
3. Units in collective investment undertakings.
4. Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, emission allowances,, financial indices or financial measures
5. Options, futures, swaps, forwards and any other derivative contracts relating to commodities that must be settled in cash
6. Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled
7. Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in paragraph 6
8. Derivative instruments for the transfer of credit risk.
9. Financial contracts for differences.
10. Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates or inflation rates or other official economic statistics
11. Emission allowances

Question 17

Can a company be found guilty of committing insider dealing?

Answer 17

No. These offences can only be committed by an individual (and, of course, only then by someone holding inside information as an insider); a company cannot commit the offence.

However, by arranging for a company to deal, an individual could commit the offence of encouraging it to do so.

Question 18

Which 3 offences are related to misleading statements/impressions?

Answer 18

• making misleading statements (Section 89)
• creating false or misleading impressions (Section 90), and
• making misleading statements in relation to benchmarks (Section 91).

Question 19

What are the 3 defences against misleading statements?

Answer 19

1) the person reasonably believed that their act/conduct would not create a false or misleading impression

2) actions, statements or forecasts that might be made in conformity with the “price stabilisation” rules of the FCA.

3) the actions, statements or forecasts were made in conformity with the control of information rules of the FCA I.e. behind chinese walls

Question 20

What are the penalties for misleading statements?

Answer 20

• On summary conviction, a fine not exceeding the statutory amount or a jail sentence < 12 months, or both.
• On inducement conviction a jail sentence < ten years or a fine, or both (after November 2021).
• Before November 2021 a jail sentence < seven years.

Question 21

When should a STOR report be submitted to the FCA?

Answer 21

in a timely manner, once a full investigation has been undertaken to assess whether an event is considered to be ‘suspicious’ and required to be reported.

Question 22

What info should be in a STOR?

Answer 22

• Identification of the person/capacity of the STOR submitter and when dealing on own account or executing orders on behalf of third parties, description of the order or transaction, including:

        * the type of order and the type of trading,
        * price and volume.
        * Reasons for which the order or transaction 
           is suspected to constitute insider dealing, 
           market manipulation 
        * Means of identifying any person involved in the order  
           or transaction 
        * Any other information and supporting documents

Question 23

What are the penalties for market abuse?

Answer 23

Maximum 10 years jail - under criminal conviction

Question 24

What 3 principles does the FCA use to determine the amount of fine?

Answer 24

1. Disgorgement – a firm or individual should not benefit from any breach
2. Discipline – a firm or individual should be penalised for wrongdoing, and
3. Deterrence – any penalty imposed should deter the firm and others, from committing further or similar breaches.

Question 25

How is the fine for Market Abuse calculated?

Answer 25

1 – removal of any financial benefit

2 – the determination of a figure which reflects the seriousness of the breach, between 0% to 40% of income.

3 – an adjustment to take account of any aggravating and mitigating circumstances

4 – an upwards adjustment to ensure that the penalty has an appropriate deterrent effect

5 – if applicable, a settlement discount will be applied.

Question 26

What is an Insider List?

Answer 26

a list of all persons who have access to inside information

(including directly and indirectly e.g. advisers, accountants or credit rating agencies)

Question 27

What are the 4 defences to insider dealing?

Answer 27

1) No advantage was expected

2) The defendant believed the information had been widely disclosed

3) They would have dealt anyway – e.g. financial difficulties

4) They did not expect any person to deal because of the disclosure

SPECIAL DEFENCE FOR MARKET MAKERS WHEN STABILISING

Question 28

What is the threshold amount to which insider transaction do not need to be disclosed?

Answer 28

EUR5,000

Question 29

What are the timing rules regarding insider disclosures?

Answer 29

> Disclosure to FCA within three business days of the the transaction date.

> Once made, two business days to notify the market.

 ***THESE PERIOD RUN CONCURRENTLY***

Question 30

When is insider dealing notification NOT required?

Answer 30

• collective investments where exposure to the issuer’s shares <20% of total assets
• Portfolios where the exposure < 20% of the portfolio’s assets,
• is a unit/share in a collective investment undertaking or provides exposure to a portfolio of assets and fund cinstituents not know

Question 31

What are the rules with regard to the Closed Period?

Answer 31

a prohibition on PDMRs conducting any transactions on their own account or for the account of a third party during a ‘closed period’ of “30 calendar days” before the announcement of an interim financial report or year-end report