A key policy commitment of the FCA Business Plan is to deliver assertive action on market abuse. What exactly is market abuse, and how can you avoid it?
As noted by the FCA, market abuse undermines the financial system's integrity, erodes confidence in markets, and, consequentially, reduces market participation. The FCA hope that the effective enforcement of laws prohibiting market abuse will help to protect investors and ensure a level playing field.
In our recent webinar, Katharine Leaman and surveillance specialist Emily Wright identified that the FCA is focusing on firms having market abuse risk assessments, which involve the consideration of different types of market abuse and how these apply to different areas across a business.
Market abuse occurs when a person or group acts to disadvantage other investors in a qualifying market. It incorporates two broad categories of behaviour: market manipulation and insider dealing.
In the UK, there are criminal and civil laws prohibiting market abuse.
In the UK, insider dealing is not just a civil offence under the UK Market Abuse Regulation (MAR); it is also a criminal offence under Part V of the Criminal Justice Act 1993.
To prove a criminal offence, you need to provide evidence of intentional use of inside information (information not known to the public) to deal in publicly available price-sensitive securities.
The offence can only be levelled against someone (an insider) who had and knew they had inside information. Also, the insider must have knowingly received the information directly or indirectly from an inside source or procured it from their particular role.
The 'inside information' must have been specifically related to particular securities or issuer(s). Also, it would only be 'insider information' if it would have been likely to have had a significant effect on the price of securities if it were made public.
The EU MAR came into effect in July 2016. A decision was taken to onshore the MAR into UK law on 31 December 2020 via the European Union (Withdrawal) Act 2018. After authorities made minor changes through the Market Abuse Exit Regulations 2019, the UK MAR was born.
The main differences between the UK MAR and the EU MAR are:
Furthermore, the relevant European Securities and Markets Authority (ESMA) Guidelines and Recommendations are not incorporated into UK law.
However, the FCA has made it clear that they expect all market participants to continue applying the ESMA Guidelines before the end of the transition period, where relevant. Any individual or company based in the UK and the EU would naturally be subject to both regimes.
The UK legislation covers dealings that affect qualifying markets. These are:
The UK MAR establishes civil offences for three forms of market abuse: market manipulation, unlawful disclosure of inside information, and insider dealing.
The UK MAR provides that a person commits an unlawful disclosure of inside information if they have inside information and disclose it to another, except where the disclosure is in the normal exercise of employment, a profession, or duties. Another exception exists if a disclosure is made in market soundings (e.g., a company to raise capital).
Although our company and its employees, like any other body or person, are subject to insider dealing and market manipulation prohibitions, most of these provisions are only legally applicable to issuers of financial instruments, market participants, and trading venues.
On the other hand, the provisions relating to unlawful disclosure of inside information in Articles 10 and 14 of UK MAR apply universally. They apply to any natural or legal person, not just those who commit the offence. Hence, unlawful disclosure of inside information presents very real operational, reputational, and legal risks to our company and its employees.
You are likely to possess 'inside information' relating to your company in your employment. Even though the possession of 'inside information' is not an offence, the unlawful use or disclosure is.
In general terms, inside information is information of a 'precise' nature which:
As noted, public information cannot be inside information. Public information includes information:
Information may be public even if it is only available to a restricted group, for example, if it is procured overseas or at a cost.
It is not always easy to identify inside information, but everyday examples may include:
Bear in mind that even if the information is not inside information in its own right, it might well be when taken with other information. It is important to consider the potential cumulative effect of the information on the price of the qualifying financial instrument. An information audit may be a useful way to help identify inside information.
In short, if you have non-public information that can affect the value of a security, you must avoid using or acting on that information. It may be appropriate to impose blackout periods during which the company may ban employees and executives from dealing with financial instruments related to the company.
A market abuse risk assessment is put together by a business and outlines where it anticipates risks to arise. This is specific to a business and needs to align with the risks associated with a business. This is to the extent that no two businesses should have the same market abuse risk assessment as control frameworks would influence them differently. Here are the steps to developing a full risk assessment:
Surveillance is a system that is used for detection, but it is unlikely to detect every single risk. In terms of how these types of systems influence a firm's risk rating, they will not prevent an event from happening.
However, surveillance prevents the risk from occurring a number of times. Detecting efficiently means detecting early so there is time to prepare for an identified market abuse risk. This ensures the avoidance of ongoing behaviour.
The nature of the business, type of risks and risk appetite inform the risk assessment. The risk assessment, in turn, informs what you do in surveillance. The use of AI is expected to even the playing field between small and large firms as deploying a machine takes the human factor out of it.
It is important to be careful when dealing with market rumours to avoid inadvertently committing a civil offence of market abuse.
A market rumour is any information related to an unverified security but claimed to be fact. Circulating market rumours poses serious risks. If the rumour is false, spreading it could mislead other market participants and lead to allegations of market manipulation.
Conversely, if the rumour is true and the substance of the rumour constitutes inside information, disseminating it or acting on it could be seen as unlawful disclosure or insider dealing.
When approached for your opinion on a market rumour, you may feel compelled to address the issue. In this scenario, it may be appropriate to:
In the UK, insider dealing is not just a civil offence under the UK MAR; it is also a criminal offence under Part V of the Criminal Justice Act 1993. To prove a criminal offence exists, you need to provide evidence of intentional use of inside information (information not known to the public) to deal in publicly available price-sensitive securities.
The offence can only be levelled against someone (an insider) who had and knew they had inside information. Also, the insider must have knowingly received the information directly or indirectly from an inside source or procured it from their particular role.
The 'inside information' must specifically relate to particular securities or issuer(s) of securities. Also, it would only qualify as insider information if the information would have been likely to have had a significant effect on the price of securities if it were made public.
A person guilty of criminal insider dealing may be sentenced to imprisonment for up to 10 years and/or be subject to an unlimited fine.
There are three main defences to a charge of criminal insider dealing. These are that at the time of the offence, the accused:
Market manipulation through misleading statements or impressions is also a criminal offence under sections 89-91 of the Financial Services Act 2012, subject to penalties of up to ten years imprisonment and/or a fine.
Under the civil regime, offenders may be subject to unlimited fines, injunctions, and bans for the individuals and companies involved. Although it may be harder to quantify, there would also be the inevitable damage to reputation.
There are certain exemptions to market abuse in the UK Market Abuse Regulation.
UK trading venues and any firms or individuals who professionally arrange or execute transactions in relevant financial instruments are under an obligation to detect and immediately report suspicious transactions and orders to the FCA via Suspicious Transaction and Order Reports (STORs).
Your company should always report suspicious disclosures, transactions and behaviours to the FCA. Therefore, if you have any knowledge or suspicion of market abuse, you must immediately report it to your supervisor, Legal/Compliance or via your company's whistleblowing hotline.
Since certain forms of market abuse are criminal offences, any profits generated due to the behaviour could amount to the proceeds of crime. Handling these in any way could also lead to charges of money laundering.
As well as reporting suspicions of market abuse, there is also a legal obligation to report suspicious activity under the money laundering regulations. Therefore, it is imperative that you don't investigate further or tip anyone off about suspicions for fear of exposing yourself to liability under that regime.
It is your responsibility to understand the compliance requirements established by the market abuse legislation – ignorance of the law is never a valid defence.
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