HM Treasury confirmed yesterday that sub-sections (4) and (8) of section 118 of the Financial Services and Markets Act 2000 will now expire on 31 December 2014 and not at the end of 2011. The statutory instrument to effect this extension is here and the accompanying explanatory memorandum is here.
Sub-sections (4) and (8) reflect the scope of the UK’s market abuse regime before the Market Abuse Directive (MAD) was implemented. When the MAD came into force, it was decided to retain these sub-sections but make them subject to sunset clauses dependent on a review of whether they remained justified.
These two sub-sections make the UK market abuse regime wider than that required under the Market Abuse Directive. The reasons for the wider UK regime are summarised in the Treasury’s impact assessment:
“In the EU Market Abuse Directive, inside information is limited to precise information relating to an issuer of financial instruments. If published, it would have a significant effect on the price of those instruments or related financial instruments. Issuers are required to disclose this information to the market and Member States are required to prohibit the use of such information by trading in the instruments to which it relates.
The UK has a dual definition of inside information, encompassing information that must be disclosed but also a wider horizon of information that should also not be used to inform trading decisions. This is information which is not generally available to those using the market, but which would be regarded (if it was available) as relevant when deciding the terms of a transaction, provided that a reasonable regular market user would regard the behaviour concerned to be unacceptable. Dealing or attempting to deal in qualifying investments on the basis of that information constitutes market abuse in the UK.
The advantage of having a broader provision in this area is that it would capture an unfair trade that was made using any kind of privileged information which a regular market participant would view as relevant. It is not necessarily the case that in every trading situation, for every kind of asset, inside information is necessarily of a “precise” nature and falls within the narrower EU definition. An example might include an employee’s knowledge that the Chief Executive Officer of the company had decided to resign but that information had not been announced. If that employee sold shares in the company he may commit market abuse under the broader provision. This behaviour creates an unfair marketplace based on information asymmetry – as the person buying the shares from the employee would be unlikely to purchase them, or to do so at that price, if he was aware about the impending resignation. This behaviour would not necessarily be picked up by the EU’s Market Abuse Directive definition of inside information as it may not be sufficiently important to be likely to have a significant effect on the share price.”
The European Commission is currently reviewing the MAD. The reason for the 31 December 2014 date is that any revisions to the MAD as a result of the Commission’s review are expected to have been implemented into law by that date. The relationship between MAD and the wider UK market abuse regime is discussed on pages 11 and 12 of the Treasury’s impact assessment.
The Financial Services Authority’s approach to insider trading
The impact assessment also sets out information on how the FSA has used the market abuse provisions in its work on insider trading:
“…nearly all market abuse investigations initiated by the FSA into insider trading will be conducted under both sections 118(2) (which reflects MAD), and 118(4) (which is one of the two UK sunset provisions). This enhances the confidence of the regulator to proceed in the preliminary stages of an investigation ahead of this escalating to full-scale enforcement. It should be noted that there is also a practical difficulty with undertaking Enforcement investigations solely under sunset provisions. The FSA has indicated that most of its insider dealing investigations and prosecutions take 2-3 years to progress to a public outcome. As a matter of practicality and overall case prioritisation, it would not be sensible to build a long-running insider dealing case around a provision that has a risk of expiring in the near future – thus potentially appearing to an administrative tribunal and the public that resources had been wasted. Nonetheless, the capacity of the sunsets to strengthen enforcement and act as a contributory legal basis was considered very helpful by the regulator.”
The FSA has obtained five criminal convictions for insider dealing and levied 15 penalties totalling over £8 million in 2010/11. 13 defendants are currently awaiting trial for insider-dealing offences.
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