This note summarises three key aspects of the changes brought about by the Financial Services and Markets Act 2000 (the "Act") which will impact on listed companies. It also outlines some of the practical implications for listed companies following the Act coming into force on 1 December 2001, in particular in relation to the operation of the market abuse regime. The note is for general information only and specific legal advice should be sought in relation to any particular issues which may arise.
The three key areas are:
Changes to the Listing Rules and UKLA Guidance
This is a summary of the new market abuse regime and focuses on its impact on listed companies. We have also prepared a more detailed briefing on the new market abuse regime generally.
Market abuse is behaviour which relates to, or has an impact on, investments traded on a UK market and which does not meet the standard of behaviour reasonably expected of a person in that market because it involves a misuse of information, the creation of a false or misleading impression, or the distortion of the market in the investments.
Market abuse is a civil rather than a criminal offence. This means that there is a lower standard of proof and whether or not a person is guilty of market abuse is determined by the FSA rather than by a court or a jury. Market abuse gives rise to a liability to pay an unlimited penalty to the FSA, or to be censured by the FSA, and can be prohibited by the FSA by way of an injunction or can be the subject of a restitution order.
The FSA has issued a code to provide guidance as to what behaviour amounts to market abuse. This code is the FSA's Code of Market Conduct and is set out in Chapter 1 of the Market Conduct Source Book in the FSA Handbook. The Code will be crucial in determining whether particular conduct amounts to market abuse or whether the conduct falls within one of the safe harbours created by the Code.
The new market abuse regime supplements the existing criminal offences of insider dealing and the creation of a false market; it does not replace them, and they continue as before. The only change is that the FSA now has power to prosecute for these offences as well as taking action in relation to market abuse.
What Constitutes Market Abuse?
In summary, for behaviour to constitute market abuse under the Act it must:
occur in relation to a "qualifying investment" on a prescribed UK market; and
satisfy one or more of the following conditions:
- involve the misuse of information;
- be likely to give a false or misleading impression;
- be likely to distort the market; and
fall below the standard expected by a regular user of the market; and
not fall within a safe harbour created by the FSA's Code of Market Conduct.
The three categories of behaviour constituting market abuse, as defined in the Act are:
(a) Misuse of Relevant Non-Public Information
"the behaviour is based on information which is not generally available to those using the market but which, if available to a regular user of the market, would or would be likely to be regarded by him as relevant when deciding the terms on which transactions in investments of the kind in question should be effected".
(b) False or Misleading Impression
"the behaviour is likely to give a regular user of the market a false or misleading impression as to the supply of, or demand for, or as to the price or value of, investments of the kind in question".
(c) Distorting the Market
"a regular user of the market would, or would be likely to, regard the behaviour as behaviour which would, or would be likely to, distort the market in investments of the kind in question".
In order for behaviour to constitute market abuse, not only must it fall within one of the three categories set out above but it must also meet the regular user test. This means that it must be behaviour:
"which is likely to be regarded by a regular user of that market who is aware of the behaviour as a failure on the part of the person or persons concerned to observe the standard of behaviour reasonably expected of a person in his or their position in relation to the market".
A regular user is defined as a reasonable person who regularly deals on the market in investments of the kind in question.
The regular user test is not the same as a test relating to what is normal practice. Although normal market practices will in general not amount to market abuse, there is no safe harbour in this respect - it is open to the FSA to decide that certain normal market practices do nevertheless constitute market abuse.
The Code of Market Conduct sets out certain safe harbours from the market abuse regime. In particular, there are specific safe harbours for listed companies in relation to compliance with some of the specific provisions of the Listing Rules.
Territoriality and Scope
It is important to note that it is irrelevant where the person accused of market abuse is located or where the behaviour takes place.
All that is required is that the behaviour occurs in relation to "qualifying investments" (which includes the full range of debt and equity securities, futures and options) on a UK recognised investment exchange, which includes the London Stock Exchange and LIFFE.
A further key point is that the behaviour need only be "in relation to" the investment and need not involve the investment directly. For example, action taken in the US in relation to a company's American Depository Shares will be caught if that company's shares, to which the American Depository Shares relate, are traded on the London Stock Exchange.
Under the Act, the sanctions available to the FSA for market abuse against any person (including for this purpose a legal person such as a company or partnership as well as an individual) are:
A public censure
An unlimited fine
Asking the court to make a restitution order under which the court may order any amount paid to the FSA pursuant to the order to be paid out to those who have suffered a loss as a result of the market abuse
An injunction to prevent market abuse or a freezing order to prevent the disposal of assets.
Practical Implications for Listed Companies
Behaviour in relation to other securities or investments
When a listed company is acting in relation to another company's securities, it will have to consider the same issues in relation to market abuse as any other person would. For example, it will have to consider whether it has any confidential information which might result in the transaction being regarded as a misuse of information or whether a particular dealing or action might lead to a false or misleading impression or a distortion of the market.
Behaviour in relation to own securities or information
In relation to the release of a listed company's own confidential information to the market, the Code of Market Conduct imposes a more onerous set of requirements on the listed company, and a lower threshold to cross, than for other market participants. The fact that there are safe harbours for listed companies in relation to compliance with specific provisions of the Listing Rules should not give listed companies and their directors a false sense of security that their position is better than other market participants - in fact they have more stringent tests imposed on them.
Specifically, the two circumstances described in the Code in which a listed company or its directors could be guilty of market abuse in relation to information about the company's own securities, are:
If a listed company releases official information through an "accepted channel" (e.g. the Regulatory News Service) and that information is false or misleading and the company or its directors have failed to take reasonable care when issuing the information, then the listed company may be guilty of market abuse by creating a false or misleading impression.
If a listed company discloses its own confidential information to persons other than those described in the Code of Market Conduct (which essentially corresponds with the limited range of people to which such information can be disclosed under the Listing Rules, prior to a Chapter 9 announcement) and other than for a legitimate purpose and subject to a confidentiality restriction, then the listed company could be guilty of encouraging market abuse by way of misuse of relevant information.
This second category imposes a three-fold test that companies must adhere to before disclosing confidential information. The disclosure must be to a permitted person, for a legitimate...