A London broker and discretionary fund manager (DFM) has been fined by the Financial Conduct Authority (FCA) for failing to put adequate risk management systems in place that would have prevented a surveillance breach that lasted over two years.
In a decision notice published on Thursday, the UK regulator said Linear Investments had “failed to take reasonable care to organise and control its affairs responsibly and effectively to ensure potential instances of market abuse could be detected and reported”.
It was slapped with a penalty totalling £409,300 ($537,038, €459,260).
Linear Investments is an authorised prime broker and hedge fund incubator with offices in London and Hamburg. It also provides managed portfolio and discretionary services.
Linear Investments’ surveillance breach
The breach took place between 14 January 2013 and 9 August 2015 during which time Linear had changed its business model and begun providing more trade execution services to clients.
Prior to this the firm had limited manual oversight of trading conducted through its Direct Market Access (DMA). It relied on post-trade surveillance undertaken by the brokers it dealt with.
However, when trading volumes increased this manual oversight no longer provided adequate monitoring, the regulator noted. On average, it made tens of thousands of trades per month during the period in question.
Linear did not realise it needed its own automated post-surveillance system until November 2014 but did not put effective systems in place to remedy the breach until nearly a year later in August 2015.
Firm contests FCA find
Linear is contesting the amount of the fine imposed by the regulator.
The case against it is the first to be completed under a new process, which allows businesses and firms under investigation to agree to certain elements and contest others.
While the London broker has accepted the facts set out in the FCA’s notice and liability for the two-and-a-half-year surveillance breach, it disputes the amount of the financial penalty.
The FCA determined Linear should pay £584,700 based off the seriousness of the breach. However, as Linear agreed to settle all issues of fact and liability at an early stage of the watchdog’s investigation, it qualified for a 30% discount, taking the fine down by £175,000.
The regulator could find no evidence that Linear benefited financially from the breach.
Linear has referred the issue to the Upper Tribunal who will determine the appropriate action for the FCA to take.
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