Market abuse
Background; the old and new regimes
The market abuse regime was introduced at the end of 2001 as a
means of bringing more people who trade on inside information to
justice. It sits alongside the criminal regime of insider dealing
but operates with the lower standard of proof required for civil
proceedings and potentially covers more transactions. Because it is
not a criminal offence, you cannot be imprisoned for market abuse,
but you can face unlimited fines and/or public censure.
The FSA has been keen to pursue the more blatant cases of abuse
of the financial markets and has brought a number of successful
actions against companies and individuals (see the Case notes: Examples of market abuse). However,
there is at least a perception that the general European record of
enforcement of market abuse provisions remains poor by American
standards. The chairman of the US Securities and Exchange
Commission was able to declare 2006 a “banner year for enforcement”
as he boasted that “the SEC went 10 – 0 in trial court wins this
year”. The FSA can only dream of such a record; in 2006, while the
SEC brought 574 enforcement actions, it managed only 109.
The European Commission has moved to improve compliance across
Europe with the 2003 Market Abuse Directive. This has led to the
introduction of a new market abuse regime in the UK, which took
effect on July 1, 2005. Many of the features of the new regime
correspond broadly to what went before, but it should not be
assumed that what was allowed under the previous regime is still
allowed now.
The new regime applies to more financial instruments and is
wider in territorial reach (see “scope”, below). It encompasses
both insider dealing and market manipulation and classes seven
types of behaviour as market abuse. It should be noted, however,
that both insider dealing and market manipulation remain criminal
offences.
Anyone may be liable for market abuse, not just those companies
and individuals regulated by the FSA. Liability can arise even when
the abuse was unintentional or committed indirectly – i.e. through
the act of encouraging “abusive” behaviour in another.
This article gives an outline of the market abuse regime.
You should consult a financial regulatory lawyer if you are in any
doubt about whether a behaviour is caught by the rules.
Scope of the market abuse regime
The market abuse regime covers:
- financial instruments (such as shares, warrants, futures,
contracts for differences, options and debt instruments) traded on
every regulated market in Europe (or for which an application for
admission to trading has been made). In the UK, the relevant
markets include the London Stock Exchange (both the full list and
AIM), PLUS (the old OFEX) and commodity derivative markets;
- all transactions relating to those instruments even if they are
carried out off-market.
In certain circumstances, behaviour in respect of other,
related, instruments or underlying commodities is also caught, even
if those instruments are not themselves traded on a regulated
market. Behaviour involving securities traded on a foreign
unregulated market may be caught if an option linked to them is
traded in London.
The seven behaviours
There are seven types of behaviour defined as forms of market
abuse.
Insider dealing – dealing or an attempt to
deal, by an insider, in an investment on the basis of inside
information in relation to the investment.
Improper disclosure of inside information –
disclosure by an insider of inside information to another person
otherwise than in the course of their employment, profession or
duties.
Misuse of information – behaviour that is
both:
(a) based on information not generally
available to those using the market but likely to be seen by
“regular users” as relevant when deciding the terms on which
transactions in investments should be made; and
(b) likely to be seen by regular users as
below reasonable or acceptable standards.
Manipulating transactions – participating in
transactions or orders to trade that give, or are likely to give, a
false or misleading impression as to the supply, demand, price or
value of a qualifying investment or related investment, or that
secure the price of such an investment at an abnormal or artificial
level.
Manipulating devices – participating in
transactions or orders to trade that employ fictitious devices or
any other form of deception or contrivance.
Disseminating information likely to give a false or
misleading impression – the act of spreading, or causing
the spread of, information about a qualifying or related investment
by a person who knew or could reasonably be expected to have known
that the information was false or misleading.
Market distortion – behaviour that is likely to
be seen by a regular user of the market as a failure to observe the
standard that could be reasonably expected in the circumstances and
that either:
(a) gives, or is likely to give, a regular
user of the market a false or misleading impression as to the
supply, demand, price or value of a qualifying or related
investment; or
(b) could be regarded by a regular user as
distorting, or being likely to distort, the market in that
investment.
The FSA’s Code of Market Conduct, which can be accessed via the
FSA website, sets out further
guidance on what is and what is not market abuse.
Safe harbours
There are some “safe harbours” from market abuse. Some actions
will not be caught if they comply with other rules – for example,
certain provisions of the Takeover Code and the Listing Rules.
(Note that there were changes regarding safe harbours with the
introduction of the new regime on July 1, 2005.)
Critical factors
When deciding whether or not to take enforcement action on
market abuse, the FSA says it will look at a number of factors.
These include:
- the nature and seriousness of the suspected behaviour;
- the conduct of the person concerned after the behaviour was
identified;
- the degree of sophistication of the users of the market in
question, the size and liquidity of the market, and the
susceptibility of the market to abuse;
- whether sufficient action has been taken by other regulatory
authorities;
- action taken by the FSA in previous similar cases;
- the impact, given the nature of the behaviour, that any
financial penalty or public statement may have on the financial
markets or on the interests of consumers;
- the likelihood that the same type of behaviour (whether on the
part of the person concerned or others) will happen again if no
action is taken;
- the disciplinary record and general compliance history of the
person who has committed the market abuse.
The FSA can impose unlimited fines on companies and individuals
found to have committed market abuse. Other sanctions include: a
public statement that a person has engaged in market abuse; a court
injunction to prevent any repeat; a requirement to give up any
profits made or to pay compensation to the victims of any abuse.
(The victims have no right of direct action against the abuser
under the market abuse legislation.)
In issuing fines, the FSA says it has three main objectives:
- to send a strong message to directors and senior management of
the firm that the behaviour in question is unacceptable;
- to attract publicity and so threaten the reputation of a
company in breach and its “brand value”;
- to provide a general deterrent to the market as a whole.
