Tuesday 6 July 2004,
Speech by Hector Sants
QEII Conference Centre, London SW1

Good morning. I am delighted to provide the key note address for this market abuse seminar. The purpose of this session is to briefly outline the Treasury and the FSA approach to the UK implementation of the market abuse directive and to highlight some of the key issues that will be discussed in the sessions that follow.

By way of introduction, I would like to make some initial comments about our approach generated by the Market Abuse Directive.

  • Our main objective, in addition to ensuring proper implementation of the Directive, has been to minimise potential disruption to the established UK regime.
  • To achieve this, we have not only been working very closely with the Treasury in considering the impact of the changes, but have also participated in a number of informal pre-consultation exercises including roundtable sessions and workshops hosted by ourselves and the Treasury and an informal consultation on the proposed changes to the COB rules resulting from the Directive's research disclosure obligations.
  • The sessions that follow will focus on the specific changes that are resulting from the implementation, so I will just make a few brief comments on the current market abuse regime, and the key changes that we envisage when we implement the directive.

Market Abuse Regime

  • The UK's market abuse regime, in force since N2, has established the framework for industry participants to be clear about what behaviour will amount to market abuse.
  • Despite early misgivings about the regime, it is fair to say that over time industry has come to recognise its benefits. Not least the widespread impression that the UK markets are orderly and clean.
  • Speaking as someone who has recently been an industry participant, I can say that the market abuse regime is now an accepted and well regarded part of the compliance culture.

The Market Abuse Directive

  • So with the current regime already well established, are there benefits for the UK from the implementation of the market abuse directive?
  • The Directive is a key part of the Financial Services Action Plan and is intended to provide a European wide framework for the prevention of market abuse. A consequence of this will be greater confidence in the integrity of the integrated European market. By adapting our current framework into the wider European framework, we stand to benefit from the cross-border co-operation that the directive intends.
  • The Directive also goes beyond the framework of the current UK regime and includes implementing measures aimed at the prevention of market abuse both through greater transparency (disclosure of inside information, manager's dealings and conflicts of interest relating to research recommendations) and other measures such as the reporting of suspicious transactions to the FSA, and the maintenance of insider lists by issuers. Although the majority of these additional measures are covered by current FSA rules and guidance, implementing the directive brings them together under one regime aimed at tackling market abuse.

Changing the Regime

  • Our overall approach to implementation has been to, as far as possible, minimise the impact of the Directive changes on the existing regimes. A key objective has been to ensure that all behaviour which is considered to be market abuse under the current regime will continue to be market abuse once the directive has been implemented. It would not be appropriate to reclassify as acceptable, behaviour which we currently feel is unacceptable. Doing so could only damage the growing confidence in the integrity of the markets that we have worked so hard to achieve since N2.
  • As a result of this approach, we are retaining some aspects of the current regime that are potentially wider than under the Directive. For example we are keeping the offence of misusing information that is relevant and not generally available.
  • We are proposing a number of changes to the Listing Rules to take account of the Directive preventative measures. These changes will be covered in more detail during the conference today, but again our approach here has been to ensure that we take on board the intention of the directive provisions while preserving the effectiveness of the current regime.
  • Finally, in implementing the Directive's research disclosure obligations, we are completing our programme of regulatory changes aimed at addressing investment research conflicts.
  • We have worked very closely with Treasury in working out the best way of incorporating the directive requirements into FSMA and the FSA rules. The UK regulatory authorities have committed to project manage the implementation of the FSAP measures on a joint basis, as demonstrated by our combined consultation document.
  • And the work doesn't stop here. There is still a lot of work to do at Level 3, for example the process for determining accepted market practices that is being worked on by CESR-l. We will continue to ensure that we play an active role in managing the development of the EU-wide market abuse regime.

Handbook Simplification

  • When John Tiner put forward his plans for the future of the FSA at the Mansion House last September, he outlined a commitment to make the Handbook more accessible to firms. There are a number of initiatives underway aimed at meeting this objective. For example:
    • The development of an upgraded online navigation facility; and
    • A move to refocus Handbook content on FSA rules.
  • Amending the various sections of the Handbook in line with the implementation of the Directive has provided an opportunity to streamline the content of the Code of Market Conduct and the Listing Rules.
  • The changes may seem somewhat radical, particularly the reduction in the level of additional guidance, but we do not believe that the changes are substantive.
  • However, as the handbook simplification process is still in the early stages, we welcome your feedback on the changes.

Conclusion

I hope I have provided a useful framework to help facilitate subsequent discussions. May I hand over to Stephen Hanks of the Treasury, who will outline the overall UK approach to implementation focusing on the changes required to FSMA.

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