The decision by the U.K.’s financial regulator to fine a small trading platform around ten percent of its annual profits under previously unenforced rules has wider ramifications for the sector.
Experts say the recent sanction under the 2018 U.K. Markets in Financial Instruments Regulation (MiFIR) shows that the Financial Conduct Authority (FCA) is monitoring firms’ trading activities and will take tough action if necessary. Furthermore, firms should not presume that a lack of case law indicates that the regulator is not watching.
“It would be remiss of firms to assume that the FCA is reluctant to use its enforcement powers” for serious failings, “irrespective of the size of the firm,” said Gurpreet Chahal, senior director in the financial services practice of consultancy firm FTI Consulting.
On Jan. 29, the U.K. Financial Conduct Authority (FCA) announced that it had handed Infinox Capital a 99,200 pound fine (U.S. $123,000) for failing to submit 46,053 transaction reports between October 2022 and March 2023.
Infinox was aware that it had not submitted these transaction reports following a third-party review but chose not to report the breach to the FCA. However, the regulator uncovered the discrepancy when it examined transaction data that the firm did report.
It is the first time the regulator has chosen to fine a firm under MiFIR, despite the legislation being in place for seven years. This has led to some experts questioning why the FCA has chosen to focus on this area of business now, and whether sanctioning a small firm represents an “easy win” that sends a message to the rest of the sector where larger players can get a sense that they too could face hefty fines for noncompliance.
Up until now, other firms have been fined under the Markets in Financial Instruments Directive (MiFID II)–which also came into effect in 2018–with some high-profile cases coming to bear within a year of the rule’s compliance date. In 2019, the FCA fined two large banks about £62 million (then-U.S. $82 million) total for failing to report transaction data under MiFID rules. Goldman Sachs and UBS were both penaltized for failing to provide accurate and timely reporting data relating to 220.2 million transaction reports and 136 million transactions, respectively.
MiFID II and MiFIR are underpinned by the same objective: to strengthen transparency and risk awareness in securities markets and enhance investor protection. In practice, MiFID II addresses broader investor protection and business conduct, while MiFIR focuses more on the technical aspects of reporting and transparency. For instance, when it comes to transaction reporting, MiFID II requires firms to keep detailed records of their services and activities, which must be made available to national regulators upon request. MiFIR, however, takes this further by mandating real-time transaction reporting to regulators.
Infinox was fined under MiFiR because it failed to report transactions in real-time, whereas UBS and Goldman Sachs were fined under MiFID II because while they reported the transactions in real-time, they failed to keep proper records.
While the fine may appear relatively small, it is high in proportion to Infinox’s annual profits–around ten percent, in fact. Experts say the sanction demonstrates that non-disclosure will not be overlooked–even by small firms with small compliance functions.
Furthermore, the steps the firm will need to take to remedy the associated control failures will prove an expensive exercise. “The requirement to back-report 26 weeks of missing transactions adds significant cost and operational strain,” said Katharine Leaman, advisery board member at compliance trainer Skillcast.
“The enforcement clearly signals that the FCA has better luck penalizing smaller firms than bigger ones for this type of infringement. For some time now, we have been seeing increased regulatory interest and willingness to sanction smaller firms across the board. Larger firms may have significant resources and infrastructure to both prevent breaches, and where there are breaches, to remediate suitably and engage with the FCA appropriately.”
– James Kaufmann, Corporate Commercial Partner, Hill Dickinson
Parham Kouchikali, financial services disputes partner at law firm Taylor Wessing, said the fine is interesting because it shows the FCA is focused on reporting compliance around high-risk products, like in this case, single-stock contract-for-difference derivatives–a line of business the FCA believes is particularly open to market abuse.
It also reinforces the regulator’s focus on data to carry out its market surveillance obligations and detect and investigate cases of market abuse, which he said “is going to be of increasing importance with the development of new AI systems.”
According to James Kaufmann, corporate commercial partner at law firm Hill Dickinson, the case shows that the FCA “is taking the view that there has been a fundamental failure of systems, controls and culture, more than the failure to file itself, and that this element is inexcusable.”
He added that smaller firms are at a disadvantage. “The enforcement clearly signals that the FCA has better luck penalizing smaller firms than bigger ones for this type of infringement. For some time now, we have been seeing increased regulatory interest and willingness to sanction smaller firms across the board. Larger firms may have significant resources and infrastructure to both prevent breaches, and where there are breaches, to remediate suitably and engage with the FCA appropriately.”
Phil Flood, global business development director–regulatory and STP services at software vendor Gresham Tech, believes the FCA’s first MiFIR transaction reporting fine signals a potential shift towards stronger enforcement.
While past regulatory focus has been on improvement and remediation, he said, an FCA discussion paper released in November, highlights that over 1,300 transaction reporting breaches were reported by over 400 firms in 2023. This suggests that “the scale of non-compliance remains high, and the regulator may now be pivoting from encouraging improvement and a focus on data quality, to issuing financial penalties for failures,” he said.
Not everyone agrees the penalty is as significant as the FCA would like it to be. Ian Hargreaves, partner at law firm Quillon Law, said the fine will act as a “reminder” rather than a “deterrent.”
“The FCA tends to pick on themes and run with them for a period of time and then move on to another theme or subject matter,” he said, adding that the agency “clearly felt it was important to raise this issue at this time,” especially since changes to both U.K. and EU transaction reporting requirements are expected later this year.
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