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. 1. Introduction: Market abuse can be defined as ‘the misuse of information, the giving of false or misleading impressions, and market distortion.
Efficient, orderly and fair markets are crucial as the financial services industry seeks to play an effective role in supporting economic activity by ‘facilitating commerce, allocating savings […] and allowing consumers to plan and make long term financial decisions in confidence. ‘2 As a consequence, a key objective for the FSA is tackling market abuse. 3 The purpose of this essay is to critically analyse the current law on market abuse, before proceeding to assess the extent to which the enforcement activities of the FSA, are successful in promoting efficient, orderly and fair markets. As the single regulator, the Financial Services Authority (FSA) regulates the financial services industry in the UK.
Under the Financial Services and Markets Act 2000 (FSMA), the FSA is given extensive ‘rule-making, investigatory and enforcement powers’ in order to meet its four statutory objectives. 5 These objectives govern the FSA’s general functions and cover: (I) market confidence; 6 (ii) public awareness; 7 (iii) the protection of consumers; 8 and (iv) the reduction of financial crime. 9 Together with the principles of good regulation10, the objectives are summarised in the FSA’s strategic aims, which include ‘helping retail consumers achieve a fair deal’ and ‘promoting efficient, orderly and fair markets. ‘
2. The Market Abuse Regime: The current market abuse regime is contained in the Revised Code of Market Conduct, which encapsulates the changes resulting from the Market Abuse Directive,12 describes seven different types of behaviour that amount to market abuse. The Directive requirements for market abuse includes: (i) insider dealing;13 (ii) improper disclosure;14 (iii) dissemination 15 (iv) manipulating transactions;16 and (v) manipulating devices (fictitious devices)17. The remaining two categories embrace: (i) abusive behaviour (misuse of information);18 and (ii) distortion and misleading behaviour.
19 These ‘superequivalent’ categories reflect the wider scope of the market abuse regime in the UK, prior to the implementation of the Market Abuse Directive. The reciprocating categories, namely, abusive behaviour and distortion and misleading behaviour, reiterate the meanings of the requirements, so as to reflect the wider ambit of the market abuse regime in the UK, prior to the implementation of the Directive. 3. How have the courts dealt with market abuse cases within the context of the new regime?
The case of Hutchings20 reveals how the FSA has dealt with Insider Dealing/Improper disclosure, whereby the insider (Smith) improperly disclosed inside information to another (Hutchings) who traded on the basis of it. The FSA fined 18,000 and 15,000 for the illegal trading of shares. In relation to dissemination, the information Issacs21 placed on an internet bulletin, constituted ‘giving out information that conveys a false or misleading impression about an investment’ 22 As Issacs knew the information to be false or misleading, this artificially raised the price of the company’s shares.
This could lead to people making the wrong investment decisions. He was fined 15,000. 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.
This therefore raised the price of the investment to an artificial level. Deutschebank were fined i?? 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.
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.
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.
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.
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.