Understanding Personal Account Dealing Policy and Compliance
What the FCA has to say about personal account dealing, and how StarCompliance can help.
Personal account dealing (PAD) doesn’t receive the same attention as professional trading, but market abuse is a serious concern. Employees engaging in improper personal trading break the law and risk damaging their firm’s reputation. The Financial Conduct Authority (FCA) has guidelines to prevent such abuses, ensuring all trading activities adhere to high standards. Non-compliance can lead to severe penalties and the erosion of client trust.
To address this, firms need automated systems to monitor and control personal trading. Comprehensive solutions for managing PAD provide tools for monitoring, reporting, and enforcing compliance policies. These platforms ensure transparency and compliance, protecting firms from risks and maintaining their market reputation.
What Is Personal Account Dealing?
When an employee of a regulated firm engages in personal account dealing (PAD), also known as personal trading, they conduct trades on their own behalf instead of their clients’. These trades are typically done for personal financial gain and occur outside the scope of the employee’s professional role.
PAD is not inherently prohibited, as it’s common for professionals such as investment bankers, portfolio managers, and personal trading managers to take an interest in their own financial portfolios. However, to prevent conflicts of interest or market abuse, employees must follow strict regulations. These rules are in place to ensure that personal trades do not exploit inside information, manipulate the market, or disadvantage clients or other investors. Firms are responsible for monitoring and enforcing these rules to uphold market integrity and maintain compliance with regulatory standards.
Why Does Personal Account Dealing Matter?
The UK’s Financial Conduct Authority (FCA) requires that investment firms establish appropriate and explicit rules regarding PAD that apply to what they deem “relevant persons”—this includes all employees, their family members, friends, and close contacts, as well as any other personal connections whose participation in a trade could potentially benefit the relevant person. Monitoring these transactions is crucial for maintaining trust, ensuring regulatory compliance, and protecting both the firm and its clients.
For investment firms, tracking personal account dealing is essential to prevent conflicts of interest, ensure market transparency, and mitigate the risk of insider trading. Employees often have access to sensitive information, such as market trends or upcoming deals, that could be used to make trades for personal benefit. Without proper oversight, firms risk exposure to regulatory violations and reputational damage. By monitoring PAD, companies can ensure that employees’ personal trades do not interfere with their professional responsibilities or harm clients.
Employees risk violating PAD regulations when they:
- Trade on their firm’s shares when company policy prohibits it
- Proceed with a trade despite a conflict of interest with an employer or client
- Trade against their own professional recommendations
- Execute a trade based on material nonpublic information (MNPI), also known as front running
- Fail to report suspicious transactions or other activities
Firms are required by the FCA and other regulatory bodies to have robust systems in place for detecting and managing potential conflicts of interest. This oversight ensures that employees are adhering to ethical standards and not placing their interests above those of clients or the firm itself.
Possible pitfalls of PAD include:
- Conflicts of interest with the company: Personal account dealing can lead to a direct conflict between the employee’s personal financial goals and the company’s objectives. For example, if an employee trades on the firm’s shares while company policy prohibits it, they could inadvertently harm the firm’s stock value or take actions that undermine the company’s strategic goals. This is why firms often impose blackout periods around key financial reporting dates to prevent employees from trading in ways that could harm the company.
- Conflicts of interest with a client: Employees may find themselves in situations where their personal trades conflict with the best interests of a client. For instance, an employee may proceed with a trade that could negatively affect a client’s investment position, or they may act in their own interest at the expense of a client’s portfolio. Firms must implement clear rules to ensure that employees prioritize clients’ needs over their personal gains.
- Insider trading: One of the most serious risks associated with PAD is insider trading—when an employee uses MNPI to make trades for their own benefit. This behavior, also known as front running, is illegal and can lead to severe penalties, including fines, prison sentences, and permanent damage to a firm’s reputation. Employees must refrain from executing trades based on confidential or proprietary information they obtain through their professional role, as this undermines market integrity and violates insider trading laws.
Monitoring and regulating PAD is not just about avoiding penalties—it’s about safeguarding the company’s integrity and ensuring that employees act in an ethical manner. Establishing a strong compliance culture, where employees understand the definitions, regulations, and risks involved in personal trading, is crucial for maintaining transparency and protecting the firm from audits, investigations, and regulatory scrutiny. Firms must design and enforce comprehensive policies regarding PAD to build trust with clients and regulators alike.
How To Comply With Personal Account Dealing Regulations
An effective compliance framework will help employees at all levels ensure integrity and transparency in all transactions, whether professional or personal. A strong PAD compliance infrastructure should include several key components to protect against conflicts of interest and market abuse:
- Automated controls for identifying conflicts of interest or market abuse risks: Firms should implement automated systems that can flag potential conflicts of interest or market abuse in real-time. These controls help identify when an employee’s personal trade may overlap with their professional responsibilities, pose a risk to client portfolios, or exploit MNPI. Automated alerts enable compliance teams to act swiftly and mitigate risks before they escalate into serious violations.
- Comprehensive, up-to-date employee training: Employees must be aware of their obligations under PAD regulations and how these rules impact their personal trading activities. Comprehensive training should cover how to identify conflicts of interest, what constitutes insider trading, and the firm’s process for reviewing PAD requests. This training should be updated regularly to reflect changes in regulation or company policy and should be mandatory for all relevant employees.
- Processes for assessing PAD requests or notifications: Firms need robust processes in place to evaluate employees’ PAD requests or notifications before any trades occur. This includes ensuring that compliance teams are equipped with the necessary tools to assess whether an employee’s trade poses a risk, and to review the trade in the context of current market conditions, potential conflicts, and relevant regulations. Clear and streamlined workflows for handling PAD requests help maintain transparency and reduce the risk of unauthorized trading.
- Airtight security measures: Securing sensitive information is crucial to prevent market abuse. Firms must ensure that employees’ personal trading data, as well as any other information related to PAD compliance, is protected from unauthorized access or tampering. This includes encryption, regular security audits, and strict protocols for data handling and reporting.
- Real-time reporting on potentially suspicious activity: Compliance teams should have the capability to conduct real-time monitoring and reporting on any potentially suspicious PAD activity. If a transaction raises concerns—such as an employee trading based on MNPI or engaging in front running—firms must be able to quickly review the trade, investigate the circumstances, and report any serious breaches to the FCA. This ensures regulatory authorities are kept informed and can take necessary action to protect market integrity.
- Leadership advocacy and senior manager accountability: Senior managers must lead by example, modeling strict compliance with PAD rules and serving as advocates for maintaining high ethical standards across the firm. When leadership actively supports and adheres to the firm’s PAD policies, it fosters a culture of transparency and accountability. Senior managers should also regularly communicate the importance of PAD compliance to employees and ensure they are equipped with the resources and support needed to meet their obligations.
- Regular assessments of employees’ understanding of compliance requirements: Firms should periodically assess whether employees fully understand their PAD compliance responsibilities. This can be achieved through regular tests, surveys, or performance evaluations. These assessments ensure employees remain up-to-date with the latest regulations and are able to recognize and report potential conflicts of interest or suspicious trades. Continuous monitoring of employees’ comprehension helps maintain the effectiveness of the overall compliance framework.
- Certification and attestation requirements: Many firms require employees to complete certifications and attestations that confirm their understanding of personal account dealing requirements. These certifications should be revisited periodically to ensure ongoing compliance and serve as a reminder of employees’ obligations. By regularly re-confirming their attestations, employees demonstrate their commitment to upholding the firm’s ethical standards and help maintain a united front against market abuse and conflicts of interest.
A well-rounded PAD compliance framework goes beyond policies—it requires continuous employee engagement, proactive monitoring, and a leadership team that champions transparency and compliance at all levels. By integrating these elements, firms can significantly reduce the risk of regulatory violations, maintain client trust, and ensure the integrity of both personal and professional transactions.
Challenges to Personal Account Dealing Compliance
In the course of conducting a personal trade, investment bankers and others run the risk of revealing confidential information that could jeopardize their company, their clients, or their livelihood. The potential to profit from inside information is tempting, and the risk is unfortunately inherent to the financial industry.
This is why it’s critical for employees to understand the boundaries and risks of personal account dealing noncompliance. The following is a non-comprehensive list of circumstances that could challenge a firm’s PAD compliance record:
- A lack of understanding or awareness of PAD regulations among employees
- An absence of employee certifications and attestations regarding PAD policies
- A lack of policies or appropriate employee training around PAD requirements
- Claiming ignorance as the basis for violating FCA regulations
- Employees failing to report suspicious activity or deliberately circumventing PAD requirements
The presence or occurrences of any of these factors can result in harsh penalties, including steep fines, criminal charges, dismissal from the industry, and irreparable reputational damage.
What The FCA Is Seeing
In 2019, the FCA carried out a study of personal account dealing activity at a handful of wholesale broker firms to assess the extent to which firms have incorporated recent changes in the market abuse regime. These changes can be found in the FCA’s Conduct Of Business Sourcebook, sections 11.17 and 11.17A, both of which were updated in March 2018. In general, these sections lay out the regulator’s overall rules regarding PAD for employees and tied agents (“relevant persons”). Together, these two Conduct Of Business Sourcebook sections are meant to help firms construct a “control framework” to help minimize the risk that personal trading might:
- Conflict with the interests of firm clients
- Result in market abuse, including front running client orders
- Create a conflict between employees’ personal interests and their regulatory obligations to report suspicious transactions or orders
What the study found, however, was not what the FCA was hoping for—quite the opposite of the neat and tidy infrastructure as laid out earlier in this piece. It found that “the way in which firms control and monitor PAD varied substantially in terms
of practice and standard.” Further, while “many firms require employees to sign regular attestations confirming compliance with PAD rules…this [was] not always accompanied by proper arrangements by the firm itself to monitor and control PAD.”
Finally, the FCA wrote:
“We are generally concerned that firms in this sector have not identified or managed the PAD risks or conflicts of interest specific to their business model adequately. This may stem from a culture which has not sufficiently identified the potential for harm to clients or market integrity caused by inappropriate PAD practices. The absence of pre-approval for PAD trades, the low number of identified breaches and the absence of STOR [Suspicious Transaction Order Report] submission within the sample of firms may indicate a lack of effective monitoring and management of risks.”
What The FCA Wants To See
“To achieve effective compliance,” writes the FCA in their Market Watch issue 62, “firms need to understand the PAD risks posed by their business models, design clear policies and processes around those risks and develop a culture where adherence to their rules is the norm. When breaches of PAD policies do occur, firms need to investigate them and, where appropriate, take disciplinary action.”
Any arrangements made by the firm to effect the above directives must be designed to ensure that:
- Each relevant person covered is aware of firm restrictions on personal transactions.
- The firm is promptly informed of any personal transaction entered into by a relevant person, either by notification of that transaction or by other procedures enabling the firm to identify such transactions.
- In the case of outsourcing arrangements, the service provider to which the activity is outsourced maintains a record of personal transactions entered into by any relevant person and provides that information to the firm promptly upon request.
- Regardless of whether the notification procedure is handled internally or externally, a record is kept of the personal transaction notified to the firm or identified by it, including any authorization or prohibition in connection with such a transaction.
How StarCompliance Can Help
As an instrument for ensuring that “each relevant person…is aware of the restrictions on personal transactions,” STAR Personal Trading offers workflows that lets compliance teams see certifications through from start to finish. Centralized, electronic storage means never having to rifle through a filing cabinet in search of a cert when it’s audit or investigation time.
But it’s pre-trade clearance that really addresses what the FCA seems to be asking for. With the STAR Platform, employees have an easy-to-access, easy-to-use application in which to enter their desired trade requests and—in most cases—get a fast ‘yes’ or ‘no’ answer as to whether or not they can proceed. This is possible because the STAR Platform allows financial firms to preset the precise kinds of investments their employees can and can’t trade in, down to the ticker.
Not having to wait on an answer means employees are less likely to bypass pre-clearance out of frustration or the fear of losing out on a good share price. Thus, with STAR, as long as employees use the system, the firm is without a doubt “informed promptly of any personal transaction entered into by a relevant person,” as the FCA requires. In addition, STAR’s audit and storage capabilities preserve “a record…of the personal transaction notified to the firm or identified by it, including any authorisation or prohibition in connection with such a transaction.”
The STAR Mobile app, which lets employees pre-clear trades from their mobile devices, means an even greater likelihood—due to sheer convenience—that information on employee trades will make it into a secure location that’s easy for compliance to monitor.
Personal account dealing may have recently come under the intense glare of the FCA regulatory spotlight, but with STAR Personal Trading and its comprehensive employee conflicts of interest monitoring capabilities, you can at least know that there really is an app for that.
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