Things have been quiet of late in respect of transaction reporting failings by firms since City Index (see Regulatory Roundup 25). However the silence was broken by the publication of details of two Final Notices in respect of such failures (albeit that one of the Final Notices was published in August). These bring the total of FSA fines imposed for transaction reporting failures to nine in the last 3 years or so.
James Sharp and Company, a Bury based stockbroker, failed to report any of the approximately 71,000 transactions it executed between 5 November 2007 and 8 February 2011. The problem arose from the firm’s mistaken belief that CREST would automatically report their transactions to the FSA. As CREST is an Approved Reporting Mechanism (ARM), a firm is relieved of its reporting obligation if the transaction is instead reported by an ARM (SUP 17.2.3). However SUP 17.2.4G advises that the FSA would expect that any firm seeking to rely on this waiver take reasonable steps to verify that such reports will be made (and then lists 3 specific areas on which a firm should satisfy itself).
The Final Notice goes on to say that the firm did not have any documented procedures in place in relation to transaction reporting and failed to provide any relevant training to staff and therefore breached Principle 3 (‘Management and controls’) in addition to SUP 17.1.4. A penalty of £49,000 was imposed on the firm.
Plus500UK Limited ran an online trading platform in respect of CFDs in a range of products. Financial instruments which have an underlying equity that is traded on a prescribed or regulated market (which will include EEA listings) will need to be reported under SUP 17. The Final Notice informs us that of the 1,332,000 reportable transactions executed between 29 June 2010 and 5 November 2011, the firm failed to report 189,000 of them whilst the balance of 1,143,000 transactions were not reported accurately. Issues identified in the latter included inverting the buy/sell indicator; applying multiple identifiers for a single client; and reporting transactions in GMT rather than BST (other firms fined for transaction reporting failures have also had BST/GMT issues in the past such as Barclays and Credit Suisse – see Regulatory Roundup 12). Principal Cross trades, which must be reported in a single transaction report, also caused problems; the firm reported details of the transacting client and counterparty in the wrong fields for every Principal Cross trade. The firm was fined £205,128.
The unusual amount of the Plus500UK fine arises from it being the first regulated firm to be fined in respect of transaction reporting failures under the new FSA penalties policy. Although the failings by James Sharp and Company straddled the old and the new regime, in the view of the FSA “the gravamen of the breaches” occurred before the new regime came in and therefore the old penalty regime was applied. On the other hand, Plus500UK’s fine was firstly based upon £1 for every transaction reporting failure i.e. £1,332,000 being deemed an appropriate indicator of the harm, or potential harm, caused (Step 1). The FSA then applied a ‘level 3’ percentage of 20% to arrive at £266,400 (Step 2). The figure was then increased by 10% to take account of ‘aggravating factors’ to bring us to £293,040 (Step 3 – nearly there). Fortunately for the firm, Step 4 – which allows the FSA to add a deterrence factor – was not applied. Thereafter applying the usual 30% early settlement discount brings us to the reported fine of £205,128.
In the light of these actions, firms subject to transaction reporting obligations may wish to ensure that both their procedures and processes are appropriately reviewed to provide reassurance that they will continue to be in compliance with SUP 17. The Transaction Reporting User Pack (TRUP) provides useful guidance.