Continuing challenges with the effectiveness of market abuse surveillance functions have led firms to reconsider where the function best fits within the three lines of defence, and how it interacts with other supervisory and monitoring functions.
There is no consensus view about whether the function is best located in the first or second line of defence, or somewhere in between. Currently, the majority of firms have placed responsibility for surveillance in the second line Compliance function, with required independence from the business being cited as the primary factor for this decision. Recently, however, an increasing number of firms are considering, or have begun, moving responsibility for surveillance into the first line of defence, or into line ‘1.5’. This has been driven by increased focus on first line risk management due to SM&CR and technology enhancements facilitating a move to more consolidated or 'holistic' surveillance approaches.
Firms are exploring the potential benefits of having surveillance closer to the business, allowing for better understanding of market interactions and more proactive monitoring. Talent acquisition and retention may be improved, along with the ability to source data required to undertake effective automated surveillance. But does this compromise the independence of the surveillance function? Will the established 'culture of control' be lost if the function no longer sits within Compliance?
Our latest article explores why opinion is shifting, the case for (and against) a first line surveillance function, and how this may be achieved in order to meet regulatory and firm monitoring requirements.