The Financial Services and Markets Act 2000 ("the Act") received Royal Assent in the United Kingdom on the 14 June 2000. Since then the UK Treasury and the Financial Services Authority (see below) have been drafting and consulting on the large amount of secondary legislation and rules required before the Act can come into force. The date of coming into force in respect of most regulated business is known as "N2" at midnight on 30 November 2001 the regulation of mortgages, for example, beginning at the end of August 2002.
The Act will establish a single statutory regime for the regulation of many kinds of financial sector business and a single statutory regulator, the Financial Services Authority ("the FSA"), to replace nine existing financial services regulators, including the Self-Regulating Organisations (the SFA, the PIA and IMRO). The FSA acquires formal statutory responsibility for the regulation of insurers, building societies and friendly societies. The FSA already exercises the banking regulatory functions of the Bank of England. It will also take over external regulation of the Lloyd's insurance market and will regulate firms which were formerly authorised to carry on investment business by professional bodies such as the accountancy bodies and the Law Society.
Under the Act, the FSA must act in a way which is, so far as is reasonably possible, compatible with its four regulatory objectives. When the FSA exercises its rule-making powers, it will have to set out how the proposal fits into this framework. The objectives are:
a. maintaining confidence in the financial system;
b. promoting public understanding of the financial system;
c. securing the appropriate degree of protection for consumers; and
d. the reduction of financial crime by regulated persons and by those who are carrying on regulated activity in contravention of the General Prohibition in Section 21, (as to which, see "Financial Promotion" below).
Under the Act, the FSA is given statutory powers over authorised persons in the main, but also over any person, whether or not authorised, in relation to market abuse, market manipulation, financial promotion and investigations.
This note gives a brief overview of the Act and summarises two key aspects of the changes brought about by the Act which will impact on unauthorised persons. The note is for general information only and specific legal advice should be sought in relation to any particular issues which may arise.
This is a summary of the new market abuse regime and focuses on its impact on 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 in relation to these offences is that the FSA now has power to prosecute for these offences as well as taking action in relation to market abuse.
Purpose of the new regime
Prior to the introduction of the market abuse regime, only a narrow range of very serious misconduct was caught by the two existing criminal offences and there were very few prosecutions. The new market abuse regime gives the FSA a much greater power to pursue those who manipulate or abuse financial markets. It has a much wider remit in terms of the behaviour which it prohibits and it is not just aimed at criminal behaviour but at behaviour which undermines confidence in the market. The tests applied are objective - it is not necessary to show any intention to deceive or manipulate, it is enough to show that the standard falls below those expected.
The draft European Directive on market abuse has very much the same aims as the UK market abuse regime and is similar in its approach - that is to create a wide ranging civil regime covering market manipulation in order to maintain confidence in European financial markets.
What Constitutes Market Abuse?
In summary, for behaviour to constitute market abuse under the Act it must:
occur in relation to a "qualifying investment" (which includes the full range of debt and equity securities, futures and options) 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 ("the regular user test"); 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...