Critically analyse the law on market abuse and its enforcement by the Financial Services Authority in the context of the aim of promoting efficient, orderly and fair markets.

    The case of Deutschebank23 demonstrates how the FSA has dealt with the behaviour of manipulating transactions. Indeed, the act of buying shares on a scale representing 90% of the shares in the company being traded, constituted, ‘trading, or placing orders to trade, that gives a false or

misleading impression of the supply of, or demand for, one or more investments.’24 This therefore raised the price of the investment to an artificial level. Deutschebank were fined £6,363,643. 

    All these cases illustrate how the FSA has recently pursued higher profile cases and imposed larger fines as a means of increasing the penalties for breaches of market abuse. The objective of these increased penalties is to act as an incentive for deterring future wrong doers.25 

    Cases such as Davidson and Baldwin26, highlight the problem for the FSA in pursuing enforcement activities, namely, that ‘market abuse is notoriously difficult to detect and prosecute.’27 However, the FSA is ‘stepping up its efforts’ by strengthening the capacity of its Market Monitoring department and developing its SABRE ll market monitoring system.28 In addition, the FSA believes that the most effective strategy is for ‘the regulator and market participants [to] work together to help combat market abuse.’29

4. How has the new regime amended/extended the penalties resulting from market abuse?

    The statutory framework for the market abuse regime was created by the FSMA in 2000,30 the primary objective of which was to fill a perceived gap in the protection of financial markets in the UK.31 This gap was the result of the narrow focus of the criminal offences of insider dealing and market manipulation. Moreover, the regime only extended to members of the

regulated community.32 The decision was taken to introduce a civil regime for tackling market abuse based on objectively measured behaviour.33 The Revised Code of Market Conduct works alongside the criminal law but applies to a wider range of activities.34 The existing criminal offences of

insider dealing and market manipulation remain and continue to carry stiff penalties against someone found guilty I.e. up to seven years in jail.35 Market abuse for the purposes of the new regime (as defined in the Code) is not a criminal offence, so conviction will not result in a jail sentence. However, the possible penalties for market abuse that may be inflicted by the FSA remain the same. Indeed, the  FSA can seek to impose an unlimited fine, a public censure, or for authorised firms, the removal of their licence36 if they can prove that market abuse has occurred. Also, since the civil regime entails a lower standard of proof, the new regime ought to result in more punishments for the participants of market abuse.

        The superequivalences concern behaviour not covered by the directive’s prohibitions on insider dealing.37 Also, where the directive provisions require

some specified positive action (such as dealing or disseminating information etc), the superequivalent provisions focus on ’behaviour’ that might capture inaction.38 In this respect, the omission to correct information that gives a false or misleading impression, will also constitute market abuse. This should result in a higher detection of market abuse cases.

5. Problems with the market abuse regime:

    Various issues have been raised regarding the market abuse regime. Indeed, there has been mixed views as to the merits of a ‘superequivalent’ regime, and so the HM Treasury has committed to ‘assess whether the superequivalances remain justified.‘39 This review, is currently in progress and is expected to lead to an ‘agreed policy’ by 30 June 2008.40 However, the practical benefits of the super equivalent regime cannot be clearly evidenced. Indeed, the offences have not been used since 2005 and the industry had a mixed understanding of the specific offences that are prohibited.41 Despite covering a broader range of interests, the costs of the super equivalences are estimated at around £4.8 million a year.42 As a consequence, we cannot be certain as to how effective they really are, particularly since governments are not fully committed to introducing them due to their cost.43 

    Also, the adoption of the directive resulted in a much more complex regime.44 For example, the use of a single definition of ‘inside information’ to establish both disclosure obligations and market abuse offences has been criticised.45 This has led to a call for the EU to address this in its 2008 review of the Directive.46 

    The FSA’s risk based approach to enforcement (unique among EU regulators) is indicative of the fact that the directive has not led to a sufficiently harmonised regime. This approach means that the FSA does not investigate all instances of suspected market abuse.47 

    The directive required regulators to be given powers to deal with abuse across jurisdictions.48 It also introduced requirements which obliged firms to produce insider lists and establish mechanisms such as suspicious transaction reporting regimes (STR).49 Unfortunately, this adds a layer of complexity for firms trading across borders, who now have to comply with standards and respond to requests in more than one jurisdiction.50 

    Finally, the original UK regime benefited from a number of ’safe harbours,’ which were absolute defences. There was an overall position that conduct was only abusive if a regular user of the market in question would speculate that if fell below the standard reasonably expected.51 Although the current regime retains the regular user test, it has lost the safe harbours in favour of the general guidelines set out in the FSA’s code of Market Conduct.52 

6. Effectiveness of the regime:

    The question of how effective the new regime has been, will remain open for some time, precisely to provide time for the FSA’s practices to settle. The factors for a successful regime include; flexibility, fairness, transparency, integrity, efficiency and adaptability.53 

    It can be said that the regime has achieved flexibility. Switching to a system with a single regulator, is indicative of co-ordinated regulation which ought to provide the focal point for balancing flexibility and certainty. Indeed, the regulatory framework for the market abuse regime has been designed to deal with cross-boarder market abuse cases across jurisdictions.54 The transposition of the Market Abuse directive, and the ‘superequivalent’ provisions are designed to address new or changing situations and hence provide the incentive for markets and industries to innovate and thrive.55 In this respect, flexibility is a structural attribute. However, the increased complexity of the regime, may have been to the detriment to the requirement of certainty. Worryingly, the FSA has indicated that it can take action on high-level principles alone. This is a serious issue for the industry, and compliance implications are profound - threatening the expectation that rules provided a sound-basis for development of an effective compliance function. Whilst the benefits to the FSA of holding open the possibility of enforcement on the basis of principles alone, is clear, factors such as efficiency and fairness ought to point the FSA to the need for a clear statement that it will pursue enforcement proceedings on this basis only in exceptional circumstances, where not to do so would be to allow a serious violation.56 

    Despite the tackling of market abuse as being at the top of the FSA’s agenda, incidences of market abuse remain high. Indeed, the FSA’s research suggests that 24% of takeover announcements in 2005, were preceded by informed price movements I.e. this may be indicative of suspicious trading activity.57 It is not known, however, how much of this trading is attributable to speculation based on rumours. However the act of publishing these results, demonstrates the FSA’s willingness to be transparent in trying to measure the effectiveness of regulation. 58

7. Conclusion:

    Since the market abuse regime came into force in 2001, the FSA has only brought 16 successful market abuse cases with total fines of £19.5 million.59 However, the first case was not concluded until 2004 and ‘compares favourably with the 10 year period from 1987 to 1997, in which there were only 13 successful convictions relating to insider dealing.’60

    The market abuse regime is an effective tool in promoting efficient, orderly and fair markets. However, the requirements and complexity of the regime, ought to be kept under review so as to ensure it does not prove to become a burden on firms. Striking the right balance between flexibility and certainty should not be underestimated.

Bibliography

Primary Sources

Financial Services and Markets Act 2000

(Market Abuse) Regulations 2005/381

‘The FSA’s Market Abuse Strategy: Prevention & Cure’ Speech by Margaret Cole, Director of Enforcement, FSA, 29 June 2007 <http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2007/0629_mc.shtm>l

HM Treasury, ‘FSMA Market Abuse Regime: A Review of the Sunset Clauses – Consultation’ http://www.hmtreasury.gov.uk/consultations_and_legislation/fsma/market_abuse/consult_fsma_marketabuse.cfm.

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