Recent scandals have brought market abuse into sharp focus. In 2011, three banks were fined $2billion in relation to the LIBOR scandal. Recent years have also seen heavy fines in relation to manipulation of FX rates.
All these behaviours have a negative effect on the market – reducing the integrity of the system itself and reducing competition. These behaviours are therefore carefully regulated. The Financial Conduct Authority is the main enforcement authority operating in this field and has powers to investigate and prosecute.
How is market abuse and manipulation regulated?
Market abuse and manipulation are covered by both a civil and a criminal regime.
The criminal regulation is contained in the Criminal Justice Act 1993 and the Financial Services Act 2012. The civil regime is contained in the Financial Services and Markets Act 2000 and the EU Market Abuse Regulation.
The Criminal Justice Act 1993 deals with the offence of insider dealing. This is a crime which can only be committed by individuals – not corporate bodies.
Section 52 of the 1993 Act provides that an individual who has information as an insider is guilty of insider dealing if, in certain circumstances, he deals in securities that are price affected securities in relation to the information.
The relevant circumstances are that the acquisition or disposal occurs on a regulated market or that the person dealing relies on a professional intermediary or is himself acting as a professional intermediary.
An individual is also guilty of insider dealing if, he has information as an insider and encourages another person to deal in security that are price-affected securities, knowing or having reasonable cause to believe that the dealing would take place on a regulated market or involve a professional intermediary.
An individual is also guilty if he discloses the information to another person, other than in the proper performance of the functions of his employment or profession.
Crucial to this crime is the definition of inside information. Information will qualify as inside information if it relates to particular securities, or to a particular issuer of securities and has not been made public. It must be specific and, if made public, it must be likely to have a significant effect on the price of securities.
Section 53 of the Act provides for defences against insider dealing. A person will not be guilty if they can show that he did not expect the dealing to result in a profit attributable to the fact that the information was price sensitive; or that he reasonably believed that the information had been disclosed widely enough to ensure that none taking part in the dealing would be prejudiced by not having the information in question. It is also a defence if he would have done what he did even if he had not had the information.
Similar defences exist in relation to the offence of encouraging others to deal and also in relation to the disclosure of information.
Part 7 of the Financial Services Act 2012 also deals with market manipulation offences. Section 89 makes it an offence to make misleading statements; section 90 makes an offence of creating misleading impressions; and s.91 deals with making misleading statements in relation to benchmarks.
To focus in on one of the most common offences, section 89 deals with the offence of misleading statements. This applies to a person who makes a statement which is he knows is (or is reckless as to whether it is) false or misleading in a material respect or dishonestly conceals any material facts. It is an offence if the statement or concealment is made with the intention of inducing (or recklessness as to whether it indices) another person to enter into or refrain from entering into a relevant agreement or to exercise or refrain from exercising any rights conferred by a relevant investment.
Defences are available for this offence. If it can be shown that the statement was made in conformity with price stabilising rules, control of information rules or the relevant EU provisions for buy-back programmes or stabilisation, then there is no offence.
The Financial Services and Markets Act 2000 and the EU Market Abuse Regulation
While the above deals with criminal offences, there are also civil regulations in place to deal with the civil aspects of market abuse and manipulation.
The Market Abuse Regulation only came into force in the last year and has a broader scope than previous regulations. The civil regulatory sphere also deals with insider dealing and market manipulation, but as this is civil regulation there is a lower standard of proof.
Again, defences are available. For example, the Market Abuse Regulation provides certain exceptions for buy-back programmes and stabilisation; for monetary and public debt management activities on behalf of Members States; and for accepted market practices.
Mark Kelly - Expert Market Abuse and Market Manipulation Barrister
Evidently, this area of law is incredibly complicated – both in terms of the criminal and regulatory regimes that apply and the factual matrix at play.
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