How do the authorities maintain market integrity in the UK?

Investing in stock markets worldwide has never been easier, with the introduction of the Internet facilitating the development of electronic trading. However, when it comes to market integrity, this is a topic which many of us automatically take for granted. Without a degree of market integrity, there would be no confidence and trading numbers would be nowhere near current levels.

 

Regulatory framework

 

The UK has a robust and ever-changing regulatory framework which is flexible to the changing investment environment. The two central regulatory bodies in the UK are the:-

 

· Financial Conduct Authority (FCA)

· Prudential Regulatory Authority (PRA)

 

While the PRA is part of the Bank of England, the FCA is a fully independent body working at arms' length from the UK government. These bodies work together, and in conjunction with the UK government, but the idea is there should be no political interference.

 

Supporting financial regulations

 

The principal financial regulations in the UK are known as:-

 

· UK Market Abuse Regulation (UK MAR)

· Financial Services and Markets Act (FSMA)

 

These acts place significant regulatory responsibilities on financial services industry participants and are supported by high-tech trade surveillance systems. These systems are used to detect:-

 

· Insider trading

· Market manipulation

 

The use of cutting-edge trade surveillance systems allows for real-time monitoring of trades and, using machine learning and AI, the targeting of suspicious activity. To put this into perspective, in 2017, with the introduction of new regulations, the FCA was forecasting an increase in daily trade reporting from 20 million to between 30 and 35 million. This equates to 1 trillion data points a year!

 

Transparent reporting

 

This brings us to the topic of transparent reporting and the disclosure of financial information by listed companies. All relevant information should be announced in a timely and accurate manner and adhere with:-

 

· The Transparency Directive

· The Disclosure Guidance and Transparency Rules

 

This ensures that all parties operating in the stock market have the same information to hand when making an investment decision.

 

Trading practices and infrastructure

 

As we touched on above, market integrity directly influences investor confidence and, ultimately, the success of individual markets. As well as ensuring fair access to markets, preventing disorderly trading and maintaining the highest standards of market conduct, there are other factors to consider, such as:-

 

Investor protection

 

Whether looking at asset protection, best execution policies or risk disclosure requirements, these are ways investor protection has been enhanced in recent times.

 

Market data integrity

 

As trust is the fundamental cornerstone of any investment market, market data integrity is critical. This includes issues such as accuracy, reliability and the timely dissemination of market data to ensure that any investment decisions are based on reliable data.

 

Cybersecurity

 

The issue of cyber security is never far from the headlines, with some significant "hacks" announced in recent years. This is now an integral part of the regulatory responsibilities of financial services industry participants, ensuring confidentiality, integrity and the security of electronic trading systems and data. Information is invaluable!

 

International cooperation

 

While sometimes the media headlines suggest otherwise, there is a high degree of cooperation between international regulators. The ease with which we can deal in overseas markets today has encouraged and defined the need for collaboration. So, while the likes of the UK and EU appear to be at loggerheads, behind the scenes, they are determined to protect market integrity and cross-border trading.

 

Whistleblower protections

 

Unfortunately, there is still something of a stigma attached to the term “whistleblowers" when, in reality, they are an integral part of long-term market integrity. The ability to confidentially report suspicious activity/trading has helped to expose some of the most severe crimes in the history of financial services.

 

Summary

 

We know that market integrity is critical to the success of domestic markets and the global investment sector. However, it is only when we look at this topic in detail that we appreciate the challenges regulators/market participants face in maintaining trust and confidence.

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