Market Monitoring and The War On Insider Trading: UK Style

The SEC has reportedly been conducting inspections and taking surveys as part of its market surveillance efforts. U.K. regulators are taking a different approach, however: cold calls and new regulations requiring tape recordings and record keeping for electronic communications.

The Federal Services Authority (“FSA”) is initiating a new program of cold calling traders and investors as part of its efforts to gather evidence of potential market about and crimes. Traditionally, the FSA has given several weeks notice of possible interviews. Now, however, market participants are being cold called. The interviews are being conducted “under caution,” meaning that the conversations are admissible in court. The focus of the inquiries is recent trades and market transactions conducted by the person. The regulator hopes to uncover evidence it might otherwise not obtain with this new technique.

In another move to improve its market surveillance, the FSA is implementing new rules requiring firms to record all telephone conversations and electronic communications relating to client orders and the conclusion of transactions in the equity, bond, and derivative markets. Firms will be required to maintain the records for six months. Although the FSA originally suggested that the records be maintained for three years, after discussions with industry members and in view of the cost, the period was reduced.

These new policing techniques are part of an effort to more effectively monitor market activity and stem the rising tide of insider trading in U.K. markets. FSA research shows that about twenty-five percent of all takeover deals are preceded by suspicious trading. At the same time the FSA has had a difficult time gathering evidence and proving insider trading. The regulator expects these new techniques to improve its ability to detect and prove insider trading and other market abuses.

The FSA’s Press Release announcing the Policy is located here. Additional coverage regarding the policy can be viewed here.