Keeping the U.K. Financial Markets Clean: FSA Proposals for Preventing Market Abuse

This is one of the most important and innovative aspects of the new regulatory regime. It is not without its controversial elements, but the key message is that market abuse will not be tolerated in the U.K. That is not only the position of the regulator, it is also the desire of market participants themselves, as clean markets benefit all market users. Our markets already have a good reputation, and we intend to reinforce that through the application of this Code.

From mid-2001, under the new Financial Services and Markets Act, all market participants will for the first time be subject to the same, non-criminal regime for dealing with market abuse, so levelling the playing field for all market users. Regulated firms and individuals who already comply with FSA Principles relating to market conduct should already be meeting the broad requirements of the new regime. In addition, they will for the first time have detailed guidance to help clarify what does and does not amount to market abuse.

Financial penalties will be imposed on those who abuse markets. As an alternative, the FSA can use public censure. The new market abuse regime complements the existing criminal offences of insider dealing and market manipulation. Once the Act takes effect, the FSA will also be able to prosecute these offences.

The Act defines three categories of market abuse. The draft Code sets out the FSAs opinion on behaviours that would or would not constitute abuse in each category so as to give guidance to those affected by the new regime:

• Misuse of information: - for example, knowing of a forthcoming takeover and buying shares in the target company prior to general disclosure of that information.

• Giving false or misleading impressions: - for example, posting on a bulletin board an inaccurate story that an important deal had been secured by a major company in order to give a false or misleading impression.

• Market distortion: - for example, undertaking trades just prior to an exchange closing, with the purpose of positioning the price of a share or basket of shares at a distorted level. This could, for example, be to avoid having to pay out on a related derivative contract.

A key determinant of whether or not behaviour constitutes market abuse will be the regular user test. This test, laid down in the Act, is a close relative of the courts reasonable man, or the woman on the Clapham Omnibus. The regular user is a reasonable person who regularly deals on the market. For behaviour to count as abuse, it needs to correspond to one of the three descriptions of market abuse set out above and to fall below the standards reasonably expected by the regular user.

Commenting on the draft Code, David Strachan, Head of Market Conduct and Infrastructure, said:

Since the first consultation on the Code, in June 1998, we have been working closely with practitioners, the exchanges and the DTI to ensure that we take proper account of comments received. Although we have re-affirmed our thinking in many areas, the text accompanying the Code identifies a number of important questions that still need to be considered. We look forward to continuing the debate in the coming months.

The UKs markets have the reputation of being fair and transparent. If this reputation is sustained, the FSA does not expect to be pursuing large numbers of market abuse cases, but will not hesitate to take action whenever appropriate. The consultation paper issued today contains further details on how the FSA will impose financial penalties for market abuse.

The FSA can enforce the market abuse regime through court injunctions etc where these are appropriate, or through its own administrative process:

• the FSAs Regulatory Decisions Committee hears cases. The Committee is quite separate from the FSAs investigative staff, and includes public interest and practitioner representation to ensure objectivity. If it finds that market abuse has taken place, the Committee can propose a financial penalty, public censure, or restitution of money to those who suffered as a result of the market abuse;

• if the findings and proposed penalty are not accepted by the alleged abuser, the whole case is referred to an independent statutory tribunal run as part of the Court Service, under the auspices of the Lord Chancellors Department;

• only after the tribunal has concluded can any penalty be imposed by the FSA;

• the FSA cannot publicise any aspects of any case until any recourse to the tribunal has been completed.

Financial Journalists

Any journalist dealing as an insider on information that is not generally available, or publishing misleading information with a view to influencing the prices of shares, for example, will be covered by the regime and could be fined or publicly censured by the FSA.

Notes for editors

1. The consultation period on the Code runs until 20 October. The consultation paper runs to 124 pages, of which 39 pages constitute the draft Code. In the electronic version, hyperlinks allow easy cross-referencing between related sections.

2. The FSA will be hosting a conference on the Code of Market Conduct on 7 September at the London Marriott, Grosvenor Square, London, W1.

3. The current FSA Principle 3 requires authorised persons to observe high standards of market conduct. After the implementation of the Act, the new FSA Principle 5 will require that, A firm must observe proper standards of market conduct.

4. The FSA is the body established by parliament to regulate financial services and protect consumers. Under the Financial Services and Markets Act, due to be implemented in mid-2001, the FSAs four objectives are: market confidence; public awareness of the benefits and risks of financial services; the protection of consumers; and the reduction of financial crime.

Appended information

This Consultation paper is available from the publications section of our web site. The direct URL is http://www.fsa.gov.uk/Pages/Library/Policy/CP/2000/59.shtml.