Ofgem fines Morgan Stanley for failure to record and retain electronic trading communications following traders' use of Whatsapp on personal phones

The UK's Office of Gas and Electricity Markets ("Ofgem") has fined Morgan Stanley & Co. International plc ("MS") over £5.4 million for failure to record and retain electronic trading communications between January 2018 and March 2020. Ofgem found that electronic communications regarding wholesale energy trading had been carried out by MS employees using the WhatsApp instant messaging service on privately owned mobile phone devices, and these had not been recorded by MS.

This is the first-ever UK fine under legal requirements to record and retain electronic communications relating to trading wholesale energy products. In exercising its enforcement functions, Ofgem acts on behalf of the UK’s Gas and Electricity Markets Authority.

Regulation (EU) No 1227/2011 on wholesale energy market integrity and transparency as retained in UK law ("REMIT") regulates wholesale energy markets. It defines and prohibits market abuse, including market manipulation, attempted market manipulation or insider trading in wholesale energy markets. It also requires timely public disclosure of inside information by market participants and obliges firms professionally arranging transactions to report suspicious transactions. Its provisions are in many ways similar to the UK on-shored Market Abuse Regulation but relate to wholesale energy products. "Wholesale energy products" means the following contracts and derivatives, irrespective of where and how they are traded:

(a) contracts for the supply of electricity or natural gas where delivery is in the UK or EU;

(b) derivatives relating to electricity or natural gas produced, traded or delivered in the UK or EU;

(c) contracts relating to the transportation of electricity or natural gas in in the UK or EU;

(d) derivatives relating to the transportation of electricity or natural gas in in the UK or EU.

The Electricity and Gas (Market Integrity and Transparency) (Enforcement etc.) Regulations 2013 (the "REMIT Regulations") impose further obligations, including Regulation 8 which requires those regulated under REMIT to record and retain “relevant communication”, meaning any telephone conversation or electronic communication made for the direct or indirect purpose of entering into any wholesale energy product transaction. The REMIT Regulations also provide Ofgem with the powers to sanction failure to comply with a number of requirements in REMIT and the REMIT Regulations, including any failure to comply with a requirement of Regulation 8.

The breach emerged following MS’s responses to information requests made using the information collection powers Ofgem has under the REMIT Regulations.

Ofgem found that MS had policies in place which prohibited the use of WhatsApp for trading communications, but failed to take sufficient reasonable steps to ensure compliance with its own policies and the requirements of the REMIT Regulations.

MS admitted the breaches between January 2018 and March 2020, and had taken steps to ensure the breaches did not happen again, including enhanced staff training and the strengthening of its internal systems and controls. The fine includes a 30% penalty discount for settlement.

Commentary

We have seen huge penalties imposed by US regulators against numerous financial institutions, the SEC alone having brought 30 enforcement actions and imposed fines of over US$1.5 billion. The CFTC has pursued many similar claims and imposed penalties of over US$1 billion. Please click here to read our article looking at the large penalties imposed in the US.

In October 2022, City AM reported that an FCA spokesperson had said the FCA were also "actively discussing personal device use with a range of UK authorised firms, not limited to those who may have been subjected to other regulatory enquiries". It is interesting that Ofgem have been the UK's "first mover". The big question may be what can we expect from the FCA in terms of whether they might have found evidence of similar breaches, and if so, who they might pursue, for what, and when?

These materials are for general information purposes only and are not intended to provide specific legal advice nor to be a comprehensive review of all developments in the law and practice, nor to cover all aspects of those referred to. Please take legal advice before applying anything contained in these materials to specific issues and transactions.

Author: David Capps