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10 Ways to Prevent Insider Trading

Posted by

Lynne Callister

on 30 Sep 2020

10 Ways to Prevent Insider Trading

The Financial Conduct Authority (FCA) has voiced concerns about insider trading given the rise in traders working from home. We have a few tips to help you reduce the risks.

Whilst the number of cases in the UK seem to be small, it's worth bearing in mind that the custodial sentences are not. The FCA still treats market abuse very seriously.

What is insider trading?

According to section 52(2)(b) of the Criminal Justice Act 1993 an individual who has information as an insider is guilty of insider dealing if they disclose this information, otherwise than in the proper performance of the functions of their employment, office or profession, to another person. Article 10 (1) of the Market Abuse Regulation (MAR) reinforces that such disclosure is unlawful.

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But what is inside information?

The MAR defines inside information as information of a precise nature which:

  • has not been made public
  • directly or indirectly relates to one or more issuers, or to one or more financial instruments and
  • if it were made public, would be likely to have a significant effect on the prices of those financial instruments, or on the price of related derivative financial instruments.

Recent UK insider trading convictions

Fabiana Abdel-Malek was employed as a senior compliance officer (yikes!) by UBS in London. She used her position to pass inside information to family friend Walid Choucair, an experienced day trader, using pay-as-you-go mobile phones. He made a profit of approximately £1.4 million from the trading. They were sentenced to 3 years imprisonment each in 2019.

In May 2016, former Deutsche Bank Managing Director, Martyn Dodgson, and accountant Andrew Hind, were sentenced to 4½ and 3½ years in prison respectively for insider dealing. The court heard how the pair passed inside information to other accomplices who traded on their behalf, netting over £6.9 million from 2006-2010.

Other accomplices, Graeme Shelley, Paul Milsom and Julian Rifat pleaded guilty at earlier dates. Traders Milsom and Rifat were given sentences of 2 years and of 19 months respectively with a £100,000 fine respectively, while Shelley was handed a two-year suspended sentence.

Tips to protect your firm from insider trading:

  1. Conduct due diligence on potential and existing employees and contacts - It's essential that you know who you are dealing with.
  2. Take extra care at trade or social events - Especially where you may be in close contact with other financial firms. Be sure to remove yourself immediately from any conversations which stray into sensitive topics or conversations which are off limits.
  3. Be clear about what is sensitive non-public information and what isn't - Make sure you know what you are and aren't legitimately allowed to share with others to prevent unlawful disclosure.
  4. Never disclose non-public information to outsiders - This includes, but is not limited to, details about takeovers, mergers, earnings, profit warnings, litigation, or security offerings.
  5. Don't make recommendations or induce others to deal while in possession of inside information - This is an offence under MAR.
  6. Be vigilant to informal work and social contacts - Overlapping work relationships where someone socialises with former colleagues in other financial firms create added risks for improper information sharing.
  7. Act responsibly and with integrity - Report any concerns you have about insider trading, unlawful disclosure or market manipulation promptly to your manager or Legal/Compliance.
  8. At recruitment, probe and document the work history of candidates - This evidence will be invaluable if suspicious activity is discovered later (for example, if a trader trades stock of a company owned by a business school acquaintance).
  9. Watch out for trades which fall outside the normal buy pattern - This might indicate suspicious activity.
  10. Organise blackout periods - Especially where traders are barred from purchasing securities at certain times, such as earnings announcements.

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Want to learn more about Financial Crime?

To help you fully understand this topic we have created a financial crime glossary and we regularly report key learnings from recent cases leading to FCA fines.

We have 50+ free compliance training aids plus you can keep up to date with news and best practices through our Financial Crime blogs. Or, if you're looking for a compliance training solution, why not visit our Compliance Essentials Course Library.

If you've any further questions or concerns about Financial Crime, please get in touch.

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