As a result of changes that have occurred in the financial markets over recent years, it was felt the current European Market Abuse Directive (MAD) was not adequate to deal with the evolution in trading platforms. The ever growing financial market quickly outpaced MAD, which showed much promise but little effect. As an example, the recent LIBOR scandal demonstrated that the MAD regime did not extend to the manipulation of market benchmarks. As a result, the European Commission decided to review MAD to take account of recent developments and enhanced technology. To that end, a public consultation was launched by the Commission in 2010.
The outcome of the Commission’s consultation revealed gaps in the regulation of new types of trading platforms and in the regulation of commodities and commodity derivatives. It was also felt that effective enforcement of the MAD regime was proving to be problematic. Currently, sanctions are avoided by investors who take advantage of differing laws and regulation between Member States – a process known as “regulatory arbitrage”. As an example, criminal sanctions may not apply to certain insider dealing and market manipulation offences in some Member States, whereas in other Member States regulators lack effective powers to sanction offenders.
On 4 February 2014 the European Parliament approved the Commission’s proposal for a Regulation on insider dealing and market manipulation and a Directive on criminal sanctions for insider dealing and market manipulation (Directive). Implementation of the Directive by individual Member States will now establish a European Union-wide minimum rule for criminal sanctions for market abuse.
The Directive defines four offences:
Inciting, aiding and abetting any of the above offences will also be considered as a criminal offence under the Directive. To the extent that incidents are serious and committed intentionally, Member States should consider the above as criminal offences.
A number of aggravating and mitigating factors will be taken into account when deciding on the severity of the offence and the resulting sanction. Factors such as the impact on market integrity and any profit/loss involved will be considered accordingly.
Penalties for individuals:
Penalties for legal entities:
Companies and other legal entities can face sanctions such as judicial winding up, temporary or permanent disqualification from commercial activities and temporary or permanent closure of establishments which have been used for committing any of the offences in question.
Companies and other legal entities can also be held liable for offences committed for their benefit or on their behalf by any person who is authorised to:
In addition to the company or other legal entity, those persons who perpetrated, incited or aided the offence(s) in question will also face criminal proceedings.
The UK’s position
The UK has had something of a head start in this area through the Criminal Justice Act 1993 (CJA), Financial Services and Markets Act 2000 (FSMA) and Financial Services Act 2012. The aim of these acts is to promote market stability and integrity. Regulation and sanctions are robust, taking into account many forms of market manipulation.
The CJA’s provisions mirror those of the Directive by criminalising insider dealing if the accused has:
Penalties under the CJA are stiffer for individuals than those under the Directive. Although those guilty of an offence under the CJA face a maximum term of imprisonment of seven years if convicted on indictment, to date, the longest prison term to date has been three years and six months handed down in 2012 to Ali Mustafa, Pardip Saini and Paresh Shah who were convicted of obtaining confidential and price-sensitive information from investment banks concerning proposed or forthcoming takeover bids contrary to section 52 of the CJA.
FSMA aims to promote not only market stability, but also consumer confidence, financial stability, public awareness and the reduction of financial crime. As an example, market abuse which occurs in relation to qualifying investments is dealt with robustly with seven types of market abuse behaviour listed in section 118, which sets the scope of the market abuse regime. It applies to behaviour in the UK or behaviour abroad in relation to qualifying investments traded on prescribed markets.
The Financial Services Act brings into force a new criminal offence of creating a false impression where it is likely to lead to personal gain or expose another to risk of loss.
In addition to existing legislation, the Financial Conduct Authority (FCA) has been given more powers than its predecessor to ensure protection for consumers and the integrity of the UK financial system. With the assistance of the Prudential Regulation Authority, a system of dual regulation is now in force, thereby following the Treasury Committee’s statement on 18 January 2013 that “[the] Financial Conduct Authority must adopt a radically different approach than that of [the] Financial Services Authority”.
To date, there have been 23 successful prosecutions for the FCA and previously the Financial Services Authority for insider dealing.
Although the UK has an adequate legislative framework in place to deal with market abuse, which is evidenced by 23 successful prosecutions since 2009, it still lags the United States, where the Securities and Exchange Commission brought 44 insider trading actions last year alone. However, it remains one of the main flag bearers in the EU in the constant fight against market abuse.
It must be hoped that the new Regulation and Directive will provide a new impetus to enforcement measures in other Member States who are lacking proper and adequate controls in this area and thus might minimise the risks of regulatory arbitrage across the EU.
For further information, please contact Sophia Purkis, Partner, Fladgate LLP (firstname.lastname@example.org)