The UK Financial Conduct Authority has issued a fine of £531,000 against Sigma Broking Limited, a privately owned brokerage firm, for failing to report accurately 56,000 contracts for difference (“CFD”) transactions between December 2014 and August 2016, and for other reporting and compliance failures.
The Final Notice provides that Sigma expanded its core business in 2014 to include contracts for difference and other high-risk complex financial products; in order to facilitate this expansion, the firm recruited new brokers, some of whom brought their portfolio of customers to Sigma. Despite this expansion and the increased risk of insider trading and other forms of market abuse, Sigma’s trade surveillance remained entirely manual, and the firm did not perform adequate risk assessment, and did not take additional measures to ensure compliance with regulatory standards. The fee-based compensation structure of brokers on the CFD desk created an incentive to focus on trading activity, and a disincentive to focus on compliance. Sigma’s board of directors failed to establish and oversee an effective compliance function, and the company’s compliance department operated without clear reporting lines. While Sigma did report the first leg of its CFDs to the FCA, it used a matched principal methodology that resulted in two trades being carried out for each single reported transaction. The FCA deemed the company’s failure to report the second half of these transactions as a contravention of SUP 17 of the FCA Handbook, which requires firms to send accurate and complete transaction reports to the FCA.
The FCA determined, additionally, that Sigma had contravened Section 15 of the Supervision Manual (“SUP”) of the FCA Handbook by failing to submit Suspicious Transaction and Order Reports to the Financial Conduct Authority when there were reasonable grounds to suspect market abuse. The FCA also found that Sigma had breached Principle 3 of the FCA’s Principles for Businesses by failing to implement adequate risk management systems and by failing to organize and control its affairs responsibly.
According to the FCA, Sigma’s various failings took place between April 2015 and August 2016. Toward the end of this period in July 2016, the Market Abuse Regulation came into force, and Sigma took no measures to introduce additional safeguards or to prepare to fulfil its obligations under Regulation (EU) No 596/2014 (“EU MAR”). Article 16(2) of the statute mandates measures for the detection and reporting of suspicious orders and transactions, whereas the FCA determined that Sigma had failed to make the required reports.
After considering both mitigating and aggravating factors (such as the FCA’s substantial and ongoing support to the brokerage industry regarding transaction reporting requirements), and applying a settlement discount of 10%, the FCA determined that a penalty of £531,600 should be imposed.
In large part, the FCA attributed Sigma’s failings to the conduct of its three-member board of directors. Several provisions of the Senior management arrangements, systems and controls (SYSC) were breached, according to the FCA, by Sigma’s failure to maintain clear and appropriate apportionment of responsibilities among its directors and senior managers, and to allocate the necessary authority and resources to the compliance function. Hence, in addition to the penalty imposed on Sigma, two of the company’s three directors, Simon Tyson, and Stephen John Tomlin were prohibited from performing senior management or influence functions, and were issued financial penalties of £67,900, £69,600, respectively. Sigma’s third director, Matthew Charles Kent, was fined £83,600.