In addition, due to the complicated transactions used by dealers, the crime is even-more difficult to detect.[16] There were also criticisms that the criminal sanctions were aimed only at individuals. Therefore, there has been suggestion that the civil regime of insider dealing regulation should be introduced as it would have the benefit of being applicable to issuers as well as individuals.[17] The prosecutions would only need to meet the lower standard of proof of balance of probabilities if civil sanctions for insider dealing were introduce. Unfortunately, civil redress is severely circumscribed as the opportunity for individuals such as shareholders, to enforce an action for breach of fiduciary duty has been relatively scarce.[18]
CJA 1993 had been criticised as for its failure to alter the manner in which insider dealing law operates or the means by which it is enforced under the previous law, as no new civil penalties are bring into force, no new investigative bodies are set up and no new regulatory authorities are establish.[19] The academician Rider criticises that ‘the criminal justice system standing alone, as it traditionally has in this area, is not sufficiently efficient or effective’[20] while Suter suggested that both the regulatory agency and private plaintiffs should be allowed to take action so as to facilitate the more effective regulation of the insider dealing infringement.[21]
CJA 1993 has also expanded the scope of liability for insider dealing in the earlier law by now requiring a link between the insider and the source of inside information.[22] It is suggested as by observation that price-sensitive information should be release as early as possible as an insider will only has the chance to deal with inside information if there are postponements in the issuing of such information. CJA 1993 is said to have failed to regulate insider dealing effectively in this part as the legislation does nothing to compel company for the rapid release of information on to the market so as to reduce the opportunity for insider dealing.[23]
Under insider dealing law, when the information is made public, it could no longer be regarded as inside information. S58 (3) CJA 1993 enables information to be treated as being made public even though it is only disclosed to a section of the public but not the whole public at large. This provision therefore provides opportunity for insiders to deal as soon as the information is made public rather than when the information has been fully absorbed. Insiders who are in possession of inside information are therefore given enough time to profit from the market, gaining an unfair advantage over other investors.[24]
In contrast, in the U.S. case of SEC v Texas Gulf Sulphur Company[25], the insiders deal with the inside information after the information was disclosed in a press conference. It was held that an insider should abstain from trading on information which ‘had not been effectively disclosed in a manner sufficient to ensure its availability to the investing public’.
Nevertheless, CJA 1993 is not without its advantages. The Act is beneficial as it does not require for a link between a primary insider and the company to which he derive his information from. It is provided that it is enough that the insider obtained the information by virtue of his employment, office, or profession. This amount to an important extension of the insider dealing law as it has now been prepared to convict individuals’ who have direct access to price-sensitive information even though their improper conduct cannot be said to have ‘connection’ with the company. [26]
The change subsequently affects the position of secondary insiders as wider liability has also now been imposed. Secondary insiders’ liability is well regulated as their liability is extended to cover not only information obtained from these insiders who have access to the information, but also from those who have connection with the company to which the information is derived from.[27]
The regulation of insider dealing infringement under FSMA 2000
Under CJA 1993, it was argued that no comprehensive regime for civil liability was available for those investors who had suffered a diminution in value of their shares as a result of those dealing on the basis of inside information. The promulgated FSMA was thus established in 2000 to complements the existing criminal offence of insider dealing under the CJA 1993. FSMA attempting to rectify the problem in CJA 1993 by introducing civil penalties and enforcement procedures so that a lower civil standard of proof, “on the balance of probabilities”, would apply than that required by criminal prosecutions in CJA1993, making it easier to gain a successful outcome.[28] The civil offence of insider dealing is defined in s118 (2) FSMA as being:
“where an insider deals, or attempts to deal, in a qualifying or related investment on the basis of inside information relating to the investment in question.”
It is said to be crucial that the behaviour of market abuse should be addressed in order to preserve the fairness of the regulatory markets.[29] The civil offence of insider dealing is therefore important as the impact of the market behaviour will be determine complementing CJA 1993’s failure to regulate the impact of the offender’s act upon the regulatory markets.[30]
Under FSMA, criminal sanctions will only be considered where “substantial profits have accrued or loss [has been] avoided as a result of the misconduct”. The insider will only be prosecuted under the criminal provisions if it can be shown that the insider possess an intention to abuse the market. This would mean that criminal prosecutions would only be used in extremely serious case while other instances would be deal under the civil provisions, effectively avoiding the higher burden of proving beyond reasonable doubt the offence.[31]
As mentioned earlier, criminal sanction under CJA 1993 may only attach to an individual. It was a major weakness of the legislation that it did not apply to corporations. The Market Abuse regime under FSMA filled up the loophole by making the offence of insider dealing applicable to most legal entities, including corporations and natural persons.[32]
In addition, the FSMA market abuse and insider dealing provisions also have wider scope as compared to the previous legislation in CJA1993 as it apply not only to authorised persons, but also unauthorised persons who be involved in certain prescribed markets. As well as this, the insider dealing provisions under CJA 1993 are directed to corporate securities and derivatives on such securities only. FSMA again provides an apparent proof that its insider dealing provisions cover a wider range of actions as its provisions apply also to markets in commodity derivatives and financial futures which are of the same level of significance as that of corporate securities.[33]
In general under the English law, an insider dealing infringements can only be punished if the dealing took place in the UK or when the insider engaged on the deal on a UK-regulated market or if the person dealing in the price-affected securities relies on a professional intermediary on a regulated UK market or is himself a professional intermediary. The coming into force of FSMA provides better regulation of insider dealing infringement as its provisions is extended to dealings occurred extraterritorial, making it an offence an insider dealing which takes place in a foreign jurisdiction but which might have an effect on UK markets. [34]
A number of cases have come up after the promulgation of the FSMA and the most prominent among them is Hutchings and Smith.[35] Mr. Smith was the secretary and finance director of a company, which was in talks concerning a possible takeover. Mr. Smith informed Mr. Hutchings that the company’s takeover bid had been accepted and the price of that bid. Mr. Hutchings knowing that he was in possession of inside and price sensitive information then bought the company’s shares. Following a public announcement, Mr. Hutchings made a profit of £5,000 when he subsequently sold the shares. Hutchings and Smith were fined £18,000 and £15,000 respectively for illegal trading in the shares.
(i) The role of FSA in combating insider dealing
FSMA also delegated broad powers to the Financial Services Authority (“FSA”) to combat insider dealing[36] and FSA is now responsible for enforcing insider dealing regulations under both Acts.[37] In relation to civil sanction, FSA itself has the power to impose penalties for civil market abuse.[38] For instance, FSA can impose unlimited fines on those who infringe the provisions on insider dealing. [39] FSA will also be able to make an application to the court to serve an injunction to restrain a person from engaging in market abuse or to request at the same time to effect restitution to recover profits made from insider dealing. [40]
FSA has also produced statistics so that it could assess the level of what it terms “abnormal pre-announcement price movements” and therefore be able to detect illegal dealings effectively and proceed with suitable action. The FSA has used these statistics to examine its effectiveness in carrying out anti-market abuse work.[41]
There is sufficient regulation of insider dealing infringements as FSA is made obligatory by the FSMA to publish a code of conduct so as to determine which behaviour will be regarded as infringing the provisions under insider dealing. It is provided that only those who comply with the Code can be regarded as complying with FSMA. The code must list out factors which FSA thinks that it should be considered when determining whether or not the behaviour amounts to market abuse.[42]
(ii) Criticism of FSMA regulation of insider dealing infringements
Notwithstanding the effective regulation of insider dealing under FSMA, commentators have indicated that despite the statutory definition, inside information is not an easy concept to define. It has been criticised that FSMA instead of paying attention on confidential information available to directors, employees, and adviser in a company, it should rather pay attention on especially sensitive information which has significant effect on the share prices. [43]
Under FSMA, it is provided that FSA will consider criminal enforcement where “the misconduct has resulted in significant distortion or disruption to the market and/or has significantly damaged market confidence”.[44] However, no direction is given with regards to what may amount to having such “significant” effect.[45] Computerised systems have also been used to detect insider dealing under FSMA. However, as it would only pick up on price movements of a particular amount, and this would result in prudent small-time insider dealer being ignored by the system.[46]
It is also provided that FSA must make sure that persons governed by the insider dealing provisions under the Act should obey with it.[47] FSMA expects firms to act up to high standards and will only allow them to fulfil a key role unless they are “fit and proper” with honesty, integrity and a good reputation.[48] However, there are no clearly stated rules by which companies must follow and even though there might be provision setting up by the companies to regulate the practice of insider trading, it is unlikely that companies would have drawn attention to the FSA of any suspected insider trading to their disadvantage.[49]
In addition, FSA can only supervise authorised firms and this therefore means that any insider dealing or market abuse by a non-authorised individual would be well hidden from the FSA. The complexity of the task meant that unless an especially large amount of manpower is being allocated to manual supervision, only a small amount of dealings would have been reviewed.[50] The supervision of companies carried out by FSA has also been criticised as comparatively informal as it is in fact unlikely that many instances of insider dealing will be discovered under the supervision alone.[51]
FSA may also detect insider dealing from the whistleblower of a possible market abuse. There have been guidelines for companies to arrange for whistleblowing to occur internally. However, this could maintain a distance between the FSA and the potential whistleblower as it could make them think that the matter is not particularly important. In addition, there is also a risk of too few suspected cases being “reported” because instead of the case being reported through a whistleblower, the case was first being reported by the whistleblower to the company's internal supervision department, and then only the supervision department decides whether to report the case to the FSA.[52]
FSA is also given the power to investigate and to request for information.[53] Investigators would be appointed when there are “circumstances suggesting” that there has been market abuse. Where a person has refused to produce the relevant information, the court will be notify of this and can inquire into the case.[54] However, this standard has been criticised as “not in keeping with the spirit of the legislation”,[55] and has been regarded as a “low subjective hurdle the FSA has to meet before launching what could prove reputationally damaging investigations for those subjected to them”.[56]
Furthermore, it has been criticised that as the procedure for criminal prosecutions under FSMA will be the same as that under the CJA 1993, this would eventually lead to the same problems. It was argued that the most obvious one would be the difficulties associated with the higher criminal standard of proof. Some has also argued that the number of civil fines levied for market abuse and insider dealing and criminal prosecutions is still relatively small due to the expensive enforcement action and intensive resource.[57]
Conclusion
Criminal prosecutions of insider dealing have been widely criticised for its “damaging” effects on the regulation of insider dealing under CJA 1993.[58] The introduction of civil sanctions under FSMA thus acted as a gap filing legislation as it is now less troublesome to regulate insider dealing and the standard of proof is also lowered.[59]
The delegation of broad powers including strong investigative power to the FSA indicates that the detection and enforcement of insider dealing offence will now be carried out more effectively. FSA is also allowed to act as a prosecutor concerning any offence under Part V of the CJA 1993.[60]
If the FSA decides that it is appropriate to apply for regulatory sanctions, the FSA will inform the Regulatory Decisions Committee (“RDC”) which will then make decision on whether to take no further action, or to continue with the proceedings. RDC is set up so that decision-maker in regulatory cases is to be separated from the investigator.[61]
[1] S Mayson, D French and C Ryan, Company Law, 25th edn, Oxford University Press, USA, 2008, p. 340.
[2] B Hannigan, Insider Dealing, 1st edn, Kluwer Law Publishers, London, 1988, p. 46.
[3] B Rider and M Ashe, Insider Crime: The New Law, Jordans Ltd, Bristol, 1993, pp. 5–6.
[4] M White, ‘The implications for securities regulation of new insider dealing provisions in the Criminal Justice Act 1993’, Company Lawyer, vol.16, 1995, pp. 163-171.
[5] [1902] 2 Ch 401
[6] B Rider, Insider Trading, Jordans & Sons Ltd, Bristol, 1983, p. 283.
[7] A Albelooshi, The Regulation of Insider Dealing: An Applied and Comparative Legal Study towards Reform in the UAE, University of Exeter, Exeter, 2008, p.161.
[8] B Rider, ‘The Control of Insider Dealing – smoke and mirrors!’, Journal of Financial Crime, vol.7, no.3, 2000, p. 232.
[9] White, loc. cit.
[10] Albelooshi, op. cit., p. 163.
[11] Albelooshi, op. cit., p. 162.
[12] White, loc. cit.
[13] Albelooshi, op. cit., p. 162.
[14] High Court of Justiciary, Edinburgh, March 1993.
[15] Unreported case
[16] White, loc. cit.
[17] A Alock, ‘Insider Dealing - How Did We Get Here?’, Company Lawyer, vol.15, no.67, 1994, pp.67-68.
[18] M Stallworthy, ‘ The United Kingdom’s new regime for the Control of Insider Dealing’, International Company and Commercial Law Review, vol. 4, no.12, 1993, p.448.
[19] White, loc. cit.
[20] B Rider, Insider Dealing- A Crime of Our Times, in D. Kingsford Smith (ed.), Current Developments in Banking and Finance, London, 1989, p.78.
[21] J Suter, The regulation of insider dealing in Britain, Butterworth, London, 1989, p. 379.
[22] Albelooshi, op. cit., p. 161.
[23] White, loc. cit.
[24] White, loc. cit.
[25] 401 F.2d 833 (2d Cir. 1968)
[26] ibid.
[27] ibid.
[28] s 118 FSMA 2000.
[29] Albelooshi, op. cit., p. 165.
[30] K Alexander, Insider Dealing and Market Abuse: The Financial Services and Market Act 2000, ESRC Centre for Business Research, Cambridge University, 2001, p.3.
[31] FSA Handbook on Enforcement, ENF 15.7.2(5)
[32] Alexander, op. cit., p.8.
[33] Albelooshi, op. cit., p. 168.
[34] Alexander, op. cit., p.20.
[35] FSA Enforcement action, February 28, 2005
[36] S 118 FSMA 2000.
[37] M Filby, ‘The enforcement of insider dealing under the Financial Services and Markets Act 2000’, Company Lawyer, vol. 24, no. 41, 2003, p.334.
[38] A Haynes, ‘Market Abuse’, Compliance Officer Bulletin, vol.75, 2010, p.3.
[39] s 384, FSMA 2000.
[40] s 381, FSMA 2000.
[41] Haynes, loc. cit.
[42] B Rider, ‘The Control of Insider Dealing – smoke and mirrors!’, Journal of Financial Crime, vol.7, no.3, 2000, p. 246.
[43] Alexander, op. cit., p.14.
[44] ENF 15.7.2(4)
[45] Filby, op cit., p.338.
[46] Filby, op cit., p.336.
[47] s 6 and sch 1, FSMA 2000.
[48] TJM, ‘Should Insider Dealing and Market Abuse Remain?’,
[49] V Sharma, ‘Prohibition on Insider Trading: A Toothless Law’, Law School Research Paper No. 996, 2009, p.43.
[50] Filby, op. cit., p.335.
[51] Filby, op. cit., p.334.
[52] Filby, op. cit, p. 337.
[53] Filby, op. cit., p. 338.
[54] C Band, ‘Trustee and Insider Dealing: Part 2’, Private Client Business, vol. 6, 2000, p.363.
[55] P Johnstone and R Jones, Investigations and Enforcement, Butterworths & Company, UK, 2001, p36.
[56] A Alcock, The Financial Services and Markets Act 2000: A Guide to the New Law, Jordans Ltd, UK, 2000, p. 170.
[57] Haynes, op. cit, p.1.
[58] G Wilson and S Wilson, ‘Market misconduct, the Financial Services Authority and creating a system of "city grasses": blowing the whistle on whistle-blowing’, Company Lawyer, vol. 31, no.3, 2010, pp.67-80.
[59] M Filby, ‘Part VIII Financial Services and Markets Act: filling insider dealing's regulatory gaps’, Company Lawyer, vol.15, no.12, p.363.
[60] s 402 (1) FSMA 2000
[61] C Conceicao, ‘The FSA's approach to taking action against market abuse’, Company Lawyer, vol.28, no.2, 2007, p.44.
