Goodbody failed to put in place an effective trade surveillance framework to monitor, detect and report suspicious orders and transactions in relation to market abuse from July 2016 to January 2022, CBI said.
The Central Bank of Ireland fined Goodbody Stockbrokers Unlimited Company €1.2m ($1.3m) pursuant to the Market Abuse Regulations (596/2014/EU) (MAR), for a breach of its obligations under Article 16(2) of MAR. This article requires firms that professionally arrange or execute transactions to establish and maintain effective “arrangements, systems and procedures to detect and report suspicious orders and transactions”.
Goodbody is authorized as a investment firm and is regulated under Reg 5(2) of MiFID II. Its business includes market making for a broad range of Irish and UK-listed instruments, dealing in government bonds, investment banking services, wealth management and asset management.
2020 Thematic Review
CBI assessed Goodbody as part of the Market Abuse Thematic Review in 2020. The focus of this review was MAR compliance and assessing the effectiveness of trade surveillance arrangements, systems and procedures to identify potential market abuse and report suspicions of market abuse to the central bank.
The findings identified multiple suspected deficiencies in Goodbody’s compliance with Article 16(2) of MAR.
1. Risk identification
Goodbody failed to identify critical market abuse risks to which it was potentially exposed as a result of its business model and activities. From July 2016 until May 2020, a period of almost four years, Goodbody’s approach to the identification of market abuse risk was not adequately formalized or written down.
When Goodbody did undertake its first formalized market abuse risk assessment, in or around the same time as the commencement of the 2020 Thematic Review, it failed to identify or address key market abuse behaviors to which it was potentially exposed and which were specifically applicable to its business model.
2. Risk monitoring
CBI identified significant gaps in Goodbody’s control environment for market abuse monitoring.
- Failure to calibrate the alert parameters and thresholds appropriately within its automated trade surveillance system in order to detect potential instances of market abuse.
- Decisions to amend parameters for insider dealing alerts were taken without being substantiated by any rationale or quantitative metrics.
- Inappropriate calibration of the trade surveillance system undermined the effectiveness of monitoring and risked the firm being unable to effectively detect potential instances of market abuse and report suspicious activity.
- Failure to apply control testing to ensure the design and operational effectiveness of its trade surveillance.
- Failure to manually monitor certain market abuse risks, which fell outside the automated trade surveillance system and which Goodbody deemed to be material risks.
3. Governance arrangements
CBI identified a number of failings with regard to Goodbody’s governance framework.
- Failure to ensure a “four-eye” approval process was in place in relation to parameter changes on its automated trade surveillance system.
- Failure to document a governance structure in respect of both the automated and manual monitoring of market abuse behavior.
- Trade surveillance information was not regularly provided as management information to Goodbody’s Compliance Committee or other senior management.
4. Third line of defense
The three lines of defense model is an important component in ensuring an organization establishes and maintains effective arrangements, systems and procedures for the detection and reporting of suspicious orders and transactions. Goodbody failed to ensure a clear boundary between the lines of defense at all times.
Seana Cunningham, director of enforcement and anti money laundering at the Central Bank of Ireland said: “This outcome stresses the importance of effective arrangements, systems and procedures, such as trade surveillance frameworks, within firms that professionally arrange or execute transactions. Effective trade surveillance facilitates the submission of high-quality Suspicious Transaction Order Reports (STORs) by firms to the Central Bank, which assist in the detection and combatting of market abuse.
“The Central Bank expects the board and senior management of regulated entities to take full ownership of the governance of market conduct risk.”
GRIP comment
This case highlights the importance the regulator places on firms’ abilities to monitor, detect and report suspected market abuse. It also provides lessons learned on how not to run a surveillance framework, with the CBI setting out guidance and its expectations to ensure the integrity of financial markets.
So does this case signify the beginning of further enforcement actions for market abuse surveillance failings by the CBI?
Gavin Stewart, independent commentator on financial regulation, said: “Most enforcement press releases, as well as announcing the penalties being levied, are partly designed to signal the regulator’s priorities, and this looks to be no exception. In this instance, it seems intended to flag that the CBI will take firm action against serious breaches of MAR. But we shouldn’t over interpret as we don’t yet know, for example, whether this is a single egregious case or the start of a concerted push in CBI enforcement. Also unclear is the capacity of CBI supervisors to actively follow up on the messages around the importance of effective detection and reporting of suspected market abuse. UK supervisors have historically struggled to do this, with such messages often squeezed out by the pressure of other priorities and events.”
Rob Mason, Global Relay’s director of regulatory intelligence and former regulator, said that potentially we “could expect more cases”. He notes that the CBI found “close to a full set of failures which may also be the case for other participants, so this sends a clear message from the regulator regarding market abuse surveillance.”
Alex Viall, Chief Strategy Officer at Global Relay, said: “I would suggest this is the first of a number and is a clarion call to all the firms that ran to the CBI as a regulator post-Brexit.”
