In this briefing
Preservation of existing offences of insider dealing and false market
Definition of behaviour which amounts to market abuse
Scope of market abuse provisions: Markets, investments and territories
The Code of Market Conduct - overview
The Code of Market Conduct - types of market abuse
The Code of Market Conduct - regular user test
Listed companies and Listing Rules safe harbours
Takeover Code safe harbours
Safe harbour for stabilisation
FSA information and seeking FSA guidance
One of the most important changes introduced by the Financial Services and Markets Act 2000 ("FSMA") is the creation of the market abuse regime.
Provisions in the FSMA and the definition of market abuse
Sections 118 to 137 (Part VIII) of the FSMA set out the market abuse regime.
Market abuse is behaviour which relates to, or has an impact on, investments traded on a 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.
A civil offence
Market abuse is not a criminal offence. It is conduct which gives rise to a liability to pay a penalty to the FSA, or to be censured by the FSA, or which can be prohibited by the FSA by way of an injunction or be the subject of a restitution order. Many commentators refer to the concept as being a "civil offence".
The fact that market abuse is a civil offence means that there is a lower standard of proof than for a criminal offence. Whether or not a person is guilty of market abuse is determined by the FSA (subject to an appeal to the Financial Services and Markets Act Tribunal) rather than by a Court or a jury. It also means that it can be committed by any person, including a body corporate and any other legal person, rather than just by an individual.
Purpose of the new regime
The two similar offences existing prior to the introduction of the FSMA, are the offence of insider dealing under Part V of the Criminal Justice Act 1993 and the offence of making false statements or engaging in false conduct under Section 47 of the FSA 1986. They covered what the FSA described as a "relatively narrow range of very serious misconduct". As a result, the new market abuse regime has been introduced, with a much wider remit in terms of behaviour which it prohibits. In addition, because both of the existing offences are criminal, the standard of proof to be met in order to successfully prosecute for the offence, is the criminal standard. Market abuse carries a lower standard of proof.
The regime is aimed not just at criminal behaviour but at behaviour which undermines confidence in the market and which falls below reasonably expected standards. This is a fundamental shift. It is why the tests applied under the market abuse regime are objective - it is not necessary to show any intention to deceive or manipulate the market or to profit from inside information; it is enough to show that the behaviour falls below the expected standards.
The Code of Market Conduct and Safe Harbours
Under Section 119 of the FSMA, the FSA is required to issue 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, which is described in further detail below, 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.
FSA Summary of Regime
The FSA has published a short summary of the market abuse regime aimed at unauthorised persons. This is available from the market conduct page of the FSA website (www.fsa.gov.uk/marketconduct).
PRESERVATION OF EXISTING OFFENCES OF INSIDER DEALING AND FALSE MARKET
The new market abuse regime supplements the existing offences of insider dealing and the creation of a false market, it does not replace them.
The provisions in relation to insider dealing are set out in Part V of the Criminal Justice Act 1993 ("CJA 1993") and this continues in force as before. Part V has not been amended by the FSMA. However, there is one important change in relation to enforcement. Under Section 402 of the FSMA, the FSA is now authorised to institute proceedings for an offence under Part V of the CJA 1993.
The regimes for market abuse and insider dealing are quite different in terms of their territorial extent, the investments and activities covered and the tests to be applied. There must be a separate analysis in each case of whether or not the activity constitutes either insider dealing or market abuse or both.
Misleading statements and conduct
The offence contained in Section 47 of the FSA 1986 for misleading statements and misleading conduct is found in virtually the same form in Section 397 of the FSMA. Again, the important change is that the FSA now has authority under Section 401 of the FSMA to institute proceedings in relation to the Section 397 offence.
Choice of routes for the FSA
The FSA may therefore sometimes have a choice as to whether to prosecute for insider dealing or for the creation of a false market or alternatively to impose a penalty for market abuse (see below on enforcement). Given the rarity of insider dealing/false market charges, and the scarcity of convictions under the old regime, it is highly likely that the FSA will be using its powers under the new market abuse regime in the majority of circumstances. Using the market abuse route will also allow the FSA to impose an appropriate penalty on a firm or company rather than just on an individual.
DEFINITION OF BEHAVIOUR WHICH AMOUNTS TO MARKET ABUSE
For behaviour to constitute market abuse under Section 118 of the FSMA it must:
occur in relation to a qualifying investment on a prescribed 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 types of behaviour that constitute market abuse
Under Section 118(1)(b) of the FSMA, in order to constitute market abuse, the behaviour must fall within at least one of the three conditions set out in sub-section 118(2). These three conditions constitute the three types of behaviour that are regarded as market abuse. They are:
(a) Misuse of 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".
Note that for the purpose of each of these conditions "behaviour" includes action or inaction. It is also not just limited to dealing - it can be any type of behaviour.
Regular user test
In order for behaviour to constitute market abuse, not only must it fall within one of the three types of behaviour set out in Section 118(2) but it must also meet the test set out in 118(1)(c) in relation to the regular market user. 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 in Section 118 as a reasonable person who regularly deals on the market in investments of the kind in question.
The market abuse regime does not depend on any concept of an intention to mislead or abuse the market. Instead, the test is an objective one - whether the behaviour falls below the standard reasonably expected by a regular user of the particular market. The Code of Market Conduct describes how this test will be applied by the FSA (see below).
Requiring or Encouraging market abuse
Under section 123 of the FSMA, the FSA may take action both against a person who has engaged in market abuse and against a person who has required or encouraged another person to engage in behaviour which would amount to market abuse if the requirer/encourager had carried out the behaviour.
Defences to market abuse in the FSMA
The test of whether or not behaviour constitutes market abuse is objective. No intent is required and there are no specific defences in the FSMA, unlike in the insider dealing regime. However, under Section 123(2) of the FSMA, the FSA may not impose a penalty on a person who has engaged in market abuse if there are reasonable grounds for the FSA to be satisfied that:
the person believed on reasonable grounds that the behaviour did not fall within the market abuse offence; or
that he took all reasonable precautions and exercised all due diligence to avoid behaving in a way which fell within the market abuse offence.
SCOPE OF MARKET ABUSE PROVISIONS: MARKETS, INVESTMENTS AND TERRITORIES
All Market Participants
The market abuse provisions are not restricted to authorised persons...