Impact of Covid-19 on market abuse risks on businesses in the life sciences sector
Understandably, over the past year, the focus of companies in the life sciences sector has been on scientific, operational and logistics aspects of their businesses. However, in listed companies whose market value has increased exponentially, an important yet overlooked aspect may have been the treatment of price-sensitive information.
The Covid-19 pandemic has created new, and exacerbated existing, market abuse risks. Those risks are principally associated with economic turbulence, and the shift to working from home. They include:
- Increased volumes, and changes to the nature, of inside information. As listed companies in the life sciences sector have responded to the pandemic – most notably in the design, development and delivery of vaccines - the quantity of price sensitive information has increased significantly. The nature of inside information has changed, too: issues which may not have been material in the past now are;
- Security over inside information. Within a company, operational challenges may have resulted in the treatment of price sensitive information being less rigid than may have been the case in ‘normal’ times. A relaxation of such controls can give rise to questions over who has had access to that information and whether there is a proper record of those people;
- Working from home. The transition to remote working has created obvious security issues, not least the risk of inside information being inadvertently shared with members of households or flatmates, or simply not being controlled in as rigid a fashion as at a company’s premises. This is coupled with the reduced abilities of organisations to monitor communication channels and staff behaviour remotely;
- Incentives towards misconduct. Market volatility creates risks, but also potential rewards. By way of example: Genedrive plc, the diagnostics firm, saw its share price increase by over 2000% between February and May of last year. The possibility of such rewards – especially in the context of share dealing – may provide a strong incentive towards misconduct for insiders in possession of inside information;
- Transitional phase – the half in/half out problem. As restrictions eventually ease, the risks highlighted above will not fall away. Instead, they will evolve. Companies may, for example, need to consider how appropriate controls can be implemented to ensure the security of price sensitive information as staff begin returning to the office, whilst others continue working from home.
Companies should ensure that risk assessments are duly updated to reflect these risk factors, and, where necessary, mitigating steps should be taken. In the context of inside information, for example, it is essential that appropriate controls are implemented in relation to the handling and distribution of such information. The FCA acknowledges that often simple steps “can make the greatest difference”1 in this respect: regularly reviewing the composition of a permanent insiders list, for example, is a relatively straightforward task, but one with significant potential benefits.
The FCA’s overarching message in respect of compliance with market abuse obligations is clear: even in these exceptional times, “we expect all market participants, including issuers, advisors and anyone handling inside information to continue to act in a manner that supports the integrity and orderly functioning of financial markets”.2 It has placed particular emphasis on the fact that market abuse offences may be committed not just by those individuals working in the financial services industry: everyone must comply with the Market Abuse Regulation and the relevant criminal law.3
1 Speech by Julia Hoggett, Director, Market Oversight (12 October 2020).
2 FCA Market Watch 63, available here.
3Speech by Julia Hoggett, Director, Market Oversight (12 October 2020).