European Parliament committee backs criminal sanctions for market abuse

The Economic and Monetary Affairs Committee (ECON) has "unanimously backed" the new Regulation and Directive on market abuse, which would also create common EU definitions of offences such as insider dealing, unlawful disclosure of information and market manipulation. The proposed legislation would also explicitly prohibit the actual or attempted manipulation of benchmarks such as the London Interbank Offered Rate (LIBOR) and its euro equivalent, EURIBOR.

"We welcome today's vote in favour of the Commission's proposal, which confirms that Europe is willing to take all measures necessary to counter insider dealing and market abuse in its financial markets," Justice Commissioner Viviane Reding and Internal Market Commissioner Michel Barnier said in a statement. "We now look forward to a swift adoption of this important proposal by Parliament and Council. We need to safeguard the integrity of our markets and protect the money of our citizens."

The draft legislation is intended to prevent investors who trade on insider information or spread false reports from avoiding sanctions by taking advantage of differences in the law in this area between the different EU member states. The original draft was put forward by the Commission in September 2011 and amended to deal explicitly with benchmarks in July 2012 after a number of member states began investigations in relation to possible manipulation of the rates against some banks.

The final proposals are notable as the first time that the European Commission has used new powers under the Lisbon Treaty to compel member states to introduce criminal sanctions in order to enforce an EU policy. The draft Directive would require member states to ensure criminal sanctions apply to the criminal offences of insider dealing and market manipulation. They would also be required to impose criminal sanctions for inciting, aiding and abetting market abuse and any attempts to commit such offences.

The draft includes a common set of minimum criminal sanctions which member states would have to introduce, including fines and imprisonment. These include a maximum sentence of at least four years for insider dealing or market manipulation, and of at least two years for unlawful disclosure of information. Legal persons, such as companies, would also be held liable for market abuses.

In September, the Commission put forward plans that would subject benchmarks to "prior authorisation and ongoing supervision" by both national and European regulators for the first time. However, it has not proposed that the European Securities and Markets Authority (ESMA) take over regulatory oversight of LIBOR and other "critical" benchmarks. Benchmarks have historically not been subject to direct regulatory oversight, but the manipulation of LIBOR, EURIBOR and the Japanese TIBOR rates have led to the introduction of a number of national and international initiatives.