Financial Conduct Authority  

Tribunal upholds FCA fine for DFM

Tribunal upholds FCA fine for DFM

The Upper Tribunal has upheld a £409,300 fine imposed by the Financial Conduct Authority on a wealth and discretionary fund manager for failing to make sure market abuse could be detected and reported.

The FCA fined Linear Investments last September after it found failings in the manual oversight of trading conducted in the firm's Direct Market Access service in the time leading up to August 2015.

In November 2014, Linear became aware of the need to have its own post-trade surveillance system and took steps to source and implement an automated system but it was not until August 2015 that the company had effective systems in place to remedy the problem, the FCA alleged.

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Before that time Linear mistakenly believed that it could rely upon post-trade surveillance undertaken by the brokers through which it executed transactions, for detecting market abuse, it added.

While Linear agreed the findings and its liability, it disputed the penalty and appealed the amount to the Upper Tribunal.

In a decision published today the tribunal agreed the fine was fair.

It stated: "The decision notice [by the FCA] identifies as a level 4 or 5 factor that the breach revealed serious or systemic weaknesses in Linear’s procedures relating to a key part of its business.

"The tribunal fully agrees with this assessment. Linear’s core business involved obtaining access to the market on behalf of clients so that they could participate in the market. Market abuse is a serious matter.

"To advance the regulatory objective of preventing or detecting market abuse, Linear needed to have in place a proper system of surveillance of its execution business."

The tribunal stated the FCA and its predecessor the FSA had issued multiple reminders to Linear of the importance of an appropriate system.

"Linear failed to implement such a system from January 2013 to May 2015. In this period there were tens of thousands of trades per month. The limited manual oversight of transactions which took place was wholly inadequate," the tribunal stated.

It added: "Linear had no other system of its own. Instead of fulfilling its surveillance duty, it left it to others to monitor the transactions, in particular Linear’s broker."

It rejected Linear’s argument that its conduct was not as serious as the FCA contended, and that the penalty was "wholly disproportionate".

Mark Steward, executive director of enforcement and market oversight at the FCA, welcomed the decision.

He said: "Firms are expected to play their part in tackling market abuse by ensuring that they are able to identify and manage the market abuse risks to which they are exposed.

"The Upper Tribunal recognised that, despite the pain caused by the size of the penalty, given Linear’s financial resources and level of profits, Linear’s lack of effective monitoring measures was a serious matter and the FCA’s penalty was therefore appropriate."

This was the first decision by the Upper Tribunal under a process introduced for partly contested cases.