Co-Authored by Tim Flood and Bruce Lincoln
Enforcement levels post- N2
More than a year after N2, the anticipated headline market abuse cases have not materialised. It is the Market Integrity Group (MIG) of the FSA's Enforcement Division which is responsible for handling market abuse cases. Apparently, between 15-20 investigations were opened last year and 20-30 are active (including pre-N2 cases). However, between 5-10 have progressed to the Regulatory Decisions Committee and 60-70% of MIG's workload is said to be insider dealing related.
To date, only one case in the Enforcement Division (which in total comprises approximately 180 people), has been through the mediation process, producing a settlement. The mediation facility has been under a one year trial period and the FSA has decided to extend the period for 6 months. It is considered appropriate for there to be an informal process under which a resolution might be achieved, avoiding the need for a hearing before the Financial Services and Markets Tribunal. Although a mediation under the FSA disciplinary procedures differs considerably from a commercial mediation given the FSA's limited room for negotiation, it can still clarify issues and identify common ground.
MIG comprises approximately 35 people, responsible for policing insider dealing, the civil market abuse rÈgime and disciplinary sanctions for matters such as breaches of the Listing Rules. Insider dealing is a significant issue and in any investigation the FSA will look both at trading practices of those who deal on the basis of price sensitive information and the behaviour of the source(s) of the information.
Whilst the FSA should not get too excited about technical breaches, it is difficult to set a minimum threshold of offence without accommodating experienced market abusers. Therefore, action has to be taken in certain small cases but with the focus largely being on bigger cases and more systemic issues.
There is a range of guidance available to market participants: the Code of Market Conduct, FSA consultation (e.g. its recent paper on pre-hedging convertible and exchangeable bond issues - see below); the Market Watch newsletter; and the Market Abuse Helpline for individual guidance.
The FSA's Market & Exchanges Division supervises the market abuse rÈgime. Over the past fifteen months or so, it has produced the Market Watch newsletter. Although it is not strictly FSA guidance, the FSA might have some difficulty in pursuing enforcement action in circumstances falling squarely within statements in the newsletter and seems unlikely in practice to do so. The Market Abuse Helpline has been receiving calls and emails from both authorised and unauthorised persons, enquiring about a range of issues from the scope of the rÈgime to the responsibilities of those who disseminate information. Complex questions are unlikely to be answered immediately on the telephone, and the oral guidance is not binding on the FSA.
In addition, where the FSA identifies a risk in a particular sector which warrants attention, it is likely to begin its approach through proactive supervision, site visits and guidance on the standards it expects of firms, with enforcement action reserved for the most serious cases, where firms or individuals fail to comply despitereceiving guidance.
Co-operation is to be encouraged and credit should be given when it is provided. The FSA will consider whether and if so how promptly the breach was identified by the party concerned and how much assistance was provided in the subsequent investigation. Remedial steps taken by the party concerned and the chances of reoccurrence, will also be taken into account.
After a year of constant dialogue about the new market abuse rÈgime and the potential impact of the EU Market Abuse Directive (see below), the year 2003 is likely to herald notable enforcement activity under the market abuse rÈgime and steps towards implementation of the new Directive.
Frequently Asked Questions (FAQs)
In ever changing markets, it is impossible for the FSA to introduce exhaustive rules or guidance, and the list...