FCA issues its first transaction reporting fine under MiFID II
The FCA has issued its first enforcement notice for a breach of transaction reporting requirements since MiFID II went live in 2018. A UK-based broker was fined just under £100,000 by the FCA for failing to submit more than 46,000 single-stock contracts for difference (CFD) transaction reports between October 2022 and March 2023.
Why was the firm fined?
Firms take note – what is interesting about this fine is that even though the broker had identified its failure to submit the transaction reports following a third-party review, it did not proactively report the breach to the FCA. It was the regulator that independently identified the discrepancy in transaction data.
The expectation from the FCA is that as soon as firms identify issues with their reporting, they need to let the FCA know via an error and omissions notification. This then demonstrates to the regulator that they have the right systems and controls in place.
The value of the fine
The high-risk nature of single-stock CFDs with regards to potential market abuse, and the firm’s failure to quickly bring the breach to the FCA’s attention, meant that it was initially fined more than £141,000. The broker received a 30% discount on the penalty for early resolution. The FCA initially allocated a value of £2.00 for each of the broker’s missing transaction reports (a step up from the £1.50 amount in the previous final notice from 2019). However because the FCA deemed that the broker had not acted deliberately or recklessly and there was no or little loss or risk of loss to consumers, investors or other market users this was further reduced as per the existing framework.
Subsequently under step 4 of their determination the FCA concluded that the “absolute value of the penalty is too small in relation to the breach to meet the Authority’s objective of credible deterrence” and hence multiplied the amount by seven, to avoid “firms being tempted to see any fines imposed because of transaction reporting breaches as a cost of doing business.” This is clearly an area of FCA focus. Firms should review their current processes and governance and take note of the regulator’s less conciliatory stance.
What is the background to the fine?
The general temperature of regulatory scrutiny around transaction reporting has been rising recently, and via Market Watch 81 the FCA was clear in its expectations of firms that they needed to improve their transaction reporting controls and review weaknesses in their processes.
What did the final notice say?
The FCA highlighted weaknesses in the firm’s change management processes and potentially a lack of subject matter expertise within the brokerage when it established and operated a new line of business in single-stock CFDs. The FCA notes, “it was the responsibility of a single individual…to manually identify which financial instruments were reportable when new business was commenced”. It also noted that the firm “did not put in place any steps to scrutinise this process or any checks to ensure that the correct trades had been identified as reportable”. This points to a lack of effective reconciliation, which is expected under Article 15, RTS 22 of MiFIR.
And while a third party review identified that the broker had not reported the transaction data, as mentioned earlier in this blog, the broker did not proactively contact the FCA regarding the breach. The final notice reiterated that the regulator expects to be notified quickly and not just once prompted.
What does the fine mean for firms?
This fine should stand as a warning for firms and a stark reminder to act now and review current processes and governance around transaction reporting. It is important to note the change in temperature from the regulator. The FCA is paying close attention to the transaction reports firms are submitting (and not submitting) and expects firms’ systems and controls to be robust where they do identify breaches.
Our ReportShield™ quality assurance solutions are designed to give firms peace of mind in meeting regulatory expectations on MiFID II transaction reporting. Available on our easy-to-use dashboard, our solutions are unique in testing every single record at source so that all errors including under and over reporting are detected. Through our experienced team of regulatory experts, we can also advise firms on communication with the FCA and other regulators, and provide training on the reporting requirements. Please contact us for a discussion about your reporting challenges.
