The FCA has issued several fines for transaction reporting failures to date. More recently, the FCA fined Infinox Capital Limited (Infinox) £99,200 ($123,000) for failing to submit over 46,000 transaction reports. This is the first enforcement action against a firm for a breach of transaction reporting requirements under the UK Markets in Financial Instruments Regulation (UK MiFIR).

Between October 1, 2022 and March 31, 2023, Infinox failed to submit transaction reports for single-stock contracts for difference (CFD) trades executed through one of its corporate brokerage accounts, which represents the majority of this business line.

The FCA is a data-led regulator and transaction reports are an integral part of its work to detect, investigate and prevent market abuse and reduce financial crime. Complete and accurate transaction reports play a critical role in FCA’s ability to monitor markets. Transaction reports are also used to conduct supervision and support the work of other regulatory authorities such as the Bank of England.

The implementation of MiFID across all EEA member states on November 1, 2007, introduced changes to the list of products in which transaction which had to be included in the reports. These rules were then replaced with the MiFID II and MiFIR transaction reporting regime from January 3, 2018, which was subsequently on shored into UK legislation post-Brexit.

Investment banks fined

Historically, several investment banks have been subject to hefty fines for transaction reporting failures under MiFID I. For example:

• Merrill Lynch International: fined £34.5m ($43m) in 2017 for failing to report £68.5m ($85.2m) exchange-traded derivative transactions;
• UBS AG: fined £27.6m ($33m) in 2019 for transaction reporting failures over a nine-year period;
• Goldman Sachs International: fined £34.3m ($43m) in 2019 for failing to provide accurate and timely reporting of over 220 million transactions.

Over the past years, the FCA has given substantial and ongoing guidance to the industry regarding transaction reporting requirements through its transaction reporting webpage, the Market Watch publications, the Transaction Reporting User Pack (under MiFID), the ESMA Transaction Reporting Guidelines and Q&A, the Transaction Reporting Forum and ad hoc industry events.

The FCA Market Watch publications look at market abuse risks, transaction reporting, suspicious transaction reporting and order reporting, and other market conduct issues. In addition to the actual MIFIR/MIFID II rules, Market Watch publications provide guidance and direction to help regulated firms and other non-regulated market users understand more about these areas and relevant practices to consider.

Many of these publications refer to the FCA’s observations from its supervision of the UK MIFID transaction reporting regime. It consistently refers to the data quality of transaction reporting. Whilst the FCA notes that there is a trend of improved data quality of transaction reports, the FCA still continues to identify incomplete and inaccurate transaction reports indicating the weaknesses in following areas, change management, reporting process and logic design, data governance, control framework, governance, oversight, and resourcing.

This Infinox fine is important. It is the first fine under MiFIR/MiFID II and it is also a first broker being fined, as opposed to investment banks as has been the case for MiFID I transaction reporting fines. It indicates that the FCA is broadening its review on firms across the market beyond investment banks and this is a timely reminder for all firms that they need to be vigilant on transaction reporting.

Infinox transaction reporting

Between October 2022 and March 2023, Infinox established and operated a new line of business in single-stock CFDs, which it executed through two corporate brokerage accounts. Infinox identified its failure to submit transaction reports after engaging a third party to review its compliance with transaction reporting obligations under MiFIR and the European Market Infrastructure Regulations.

The FCA then independently identified a potential discrepancy in the transaction data submitted by Infinox and later contacted Infinox. Infinox confirmed that it had failed to complete the appropriate MiFIR transaction reporting for its single-stock CFD business suspecting around 6,000 transaction reports. Not very long after the first discussion with the FCA, Infinox informed the FCA that it may have failed to submit up to 50,000 transaction reports. Infinox later provided back reporting.

Although Infinox identified its failure to submit these transaction reports following a third-party review, it did not proactively report the breach to the FCA. The FCA expects that it is notified of transaction reporting breaches in a timely manner and not only once prompted by the FCA.

Key takeaways

• Quality of transaction reporting: Firms are expected to submit accurate and timely transaction reports. There have been plenty of ongoing FCA feedback and commentaries on this topic. At Infinox, there were repeated errors and omissions.
• Systems and controls: There should be correct checks and balances to scrutinise internal systems and controls. Only a single individual at Infinox was responsible to manually identify which financial instruments were reportable. There were no other steps in place to scrutinise this process or any checks to ensure that correct trades had been identified. The breaches revealed weakness in Infinox’s systems and internal controls.
• Governance: There must be proper governance when a new business line is set up, and further oversight when a high-risk product is introduced. For example, single-stock CFDs are considered by the FCA as a high risk with regard to market abuse.
• Reporting and escalations: In the event of any breaches, notify the FCA promptly. When a third party identified gaps and breaches at Infinox, it was not proactively reported to the FCA. Article 26(1) MiFIR provides that: “Investment firms which execute transactions in financial instruments shall report complete and accurate details of such transactions to the competent authority as quickly as possible, and no later than the close of the following working day.”
• FCA message: Whilst the FCA regards the absolute value of the penalty as too small in relation to the breach to meet the FCA’s objective of credible deterrence, the regulator’s view is that it is important to send a clear message to Infinox and to the market that fulfilling transaction reporting obligations is essential.
• Fines and cooperation: The FCA has attributed a value of £2 ($2.49) for each of Infinox’s missing transactions. Firms should be aware that failures in meeting transaction reporting requirements could result a heavy fine and be extremely costly for firms. The FCA and Infinox reached a settlement agreement at an early stage and therefore a 30% discount applied to the penalty imposed. In an enforcement case, earlier settlement, and full cooperation with the FCA in investigations, could reduce the final penalty imposed.

Seung Earm, co-founder at Ibex Compliance, is a highly regarded compliance professional in the investment banking, insurance and asset management industries with over two decades of experience in major global investment banks including Goldman Sachs and BNP Paribas. 

Ibex Compliance provides financial and regulatory compliance consultancy covering various services, including investigations, policies & procedures, regulatory implementation, and remediation.