FCA slaps £1m fine on Interactive Brokers UK

The Financial Conduct Authority has fined Interactive Brokers UK more than £1m for poor market abuse controls and for failing to report suspicious client transactions.

The City-based online broker is part of US firm Interactive Brokers Group, and trades in a range of financial instruments, including contracts for difference (CFDs).

During the period in question, from February 2014 to February 2015, Interactive Brokers UK had delegated its post-trade monitoring to a team based at another company within the wider group in the US.

The FCA found that the British arm had “failed to adequately input into the design and calibration of the post-trade monitoring systems, or test their operation, to ensure that potential market abuse by its clients would be captured”.

The FCA continued: “It failed to provide effective oversight of the US team’s conduct of the reviews of the reports, and it failed to ensure that the staff conducting the reviews were adequately trained.”

Interactive Brokers UK also failed to notify the FCA of any suspicious transaction reports in relation to insider dealing during the period; the regulator found three occasions when the firm failed to report suspicious trading by its clients.

As a result, the FCA has fined the firm £1,049,412 for “serious and systemic weaknesses within Interactive Brokers UK’s procedures”. The fine would have been above £2m were it not for an appeal by the company.

The announcement comes two weeks after the FCA said several brokers providing CFDs to retail investors were causing it "serious concern". The FCA wrote to 19 firms and said many were not meeting FCA rules and expectations in providing and distributing CFDs, indicating a “serious risk of harm” for consumers.

Mark Steward, director of enforcement and market oversight at the FCA, said: “Firms not only have a key responsibility to report suspicious conduct in our capital markets, they also have an obligation to ensure their trading systems are not used for the purpose of financial crime.

“Interactive Brokers UK’s systems were inadequate and ineffective; they fell below the appropriate stands and exposed counterparties and the markets to risks they did not bargain for.”

The US firm was warned by the FCA in July that it was conducting an inquiry into the firm's UK policies and procedures relating to suspicious transaction reporting and after its UK arm "fully cooperated with the inquiry, but respectfully disagreed with the FCA’s proposed findings", the FCA's regulatory decisions committee heard an appeal from the firm.

However the committee concluded that IB UK should have, but did not, file STRs regarding trading by two IB UK customers and also reviewed the seriousness of the breaches and recognized that the penalty proposed by the FCA was disproportionate to the breaches and reduced it by 50%.

IB UK has elected not to further appeal this lower fine.

"Since the period of the breaches, IB UK has implemented significant improvements to its systems and controls for detecting and reporting potential insider dealing. The RDC recognised that the increased number of STRs reported by IB UK was likely due to these improvements," said the parent company in a statement later in Thursday.