Published by the Stockbrockers Association of Australia in the Stockbrokers Monthly, December 2016.

Our vision is to contribute to the financial well-being of all Australians by allowing markets to fund the economy and economic growth. We do this by ensuring fair and efficient markets and promoting investor trust and confidence.

The 2015 Capability Review gave us the opportunity to assess the capabilities we need to achieve this vision. We have applied the review’s recommendations by strengthening our capabilities to detect, understand and respond to misconduct. And we are transforming our regulatory business by more effectively capturing, sharing and using our data, including data from third parties.

Our recently published Corporate Plan sets out our roadmap for the future. It highlights our strategy for strengthening our capabilities, responding to our long-term challenges and achieving our vision.

One of our challenges and priorities is promoting conduct that supports investor confidence.

Across our regulated population we continue to see poor culture, incentive structures and systems driving misconduct and resulting in poor investor outcomes. This has negative implications for the integrity of markets and the protection of investors.

What are we doing?

We are addressing this challenge by focusing on the culture of our gatekeepers. A positive culture – at industry and firm level – that drives good conduct is essential to investor trust and confidence, market integrity and growth.

In 2016, we conducted two surveys of firms’ appetite and approach to conduct risk. Conduct risk can be caused by deliberate actions, or by inadequacies in a gatekeeper’s practices, frameworks or staff.

Over the next year, we are integrating cultural indicators into our risk-based surveillances and using our findings to better understand how culture is driving conduct. Where we think there may be a problem, we will ask questions and dig deeper.

We are also developing our data analytics capabilities by enhancing our markets surveillance system (MAI) to better analyse trade data for patterns and relationships. For example, we are using individual trading patterns to better detect and respond to insider trading.

To uncover and disrupt problems early, we will:

• detect misconduct through surveillance, gatekeeper breach reports and reports from the public and whistleblowers
• understand our environment by continually scanning it using our technology systems, data management and analytics capabilities to gather insights
• respond by providing guidance and engaging with gatekeepers and industry to drive behavioural change – and taking enforcement and other regulatory action to hold gatekeepers to account.

What should you be doing?

Firm and industry-wide culture is complex, fluid and difficult to influence. It can’t simply be set from the top, it needs to be coordinated and involve staff and management at all levels.

As a regulated stakeholder, you need to make sure your conduct promotes investor trust and confidence. To help you with this, we’ve published our view of ‘what good looks like’ on our website.

‘What good looks like’ sets out our expectations of our gatekeepers, including the expectation to:

• act professionally and treat investors fairly
• have effective risk management and internal supervision, and
• ensure investors are fully compensated when losses result from poor conduct.

Our Market Supervision team recently came across a real-life example of ‘what good looks like’ following a timely suspicious activity report from one our gatekeepers.

Case study

Suspicions of insider trading activity were raised by one of our gatekeepers after three newly established trading accounts purchased a large volume of shares in an ASX-listed company, right before a takeover announcement.

All of the trading accounts had been opened within six days of each other; and all had registered addresses in close proximity to each other.

Prompt notification of the suspicious activity by the gatekeeper meant that we were able to identify a connection between the accounts and to a mutual third party who appeared to be working for a subsidiary of the bidding company.

The timely conduct of this gatekeeper meant that we were able to immediately refer the insider trading matter to our Market Integrity Enforcement team for formal investigation.

We believe that making sure investors have trust and confidence in our markets is a joint exercise between gatekeepers and regulators. While it can take a long time to build up investors’ trust and confidence, that trust and confidence can be lost very quickly when misconduct happens in our markets.

To make sure your conduct promotes the integrity of our markets and the protection of investors, we encourage you to review the culture of your organisation to ensure your organisation’s values translate into actual business practices.