A Comprehensive Review from MAD to MAR in the UK

Introduction

Market abuse regulation has been a part of the UK law since 2003 when the EU market abuse directive (MAD) was implemented in the UK to reduce market abuse. The MAD was subsequently replaced by the Market Abuse Regulation (MAR) in 2016. Within the EU, there has been a focus on preventing insider dealing within the Member States since 1989 when the EU Insider Dealing Directive was adopted. Therefore, it can be said that there has been a recognition of market abuse and an emphasis on harmonising the law on market abuse in the EU since 1989, which also had an impact on the shaping of the UK market abuse law. Since then, the EU has adopted further regulations and directives to strengthen the market abuse regime and this includes the Criminal Sanctions Market Abuse Directive of 2014. For students who are seeking business dissertation help, understanding all these regulatory frameworks and their implications is important for conducting deep research in this particular field. The law prohibiting insider dealing and market manipulation (market abuse in general), has been explained well by one author as follows:

“The first rationale for insider-dealing regulation has a micro focus. It characterizes insider dealing as a breach of the fiduciary relationship of trust and confidence (a related strand characterizes insider dealing in terms of the allocation of property rights), where one can be established, between, typically, the insider and the company concerned. The macro focus of the second theory (which has shaped the EU regime) is on market efficiency, and on the support of efficient price formation and deep liquidity”

Therefore, the rationale for the regulation of market abuse is linked to micro and macro focus with the former being the relationship between the insider and company and the latter being the concern for the market efficiency. In the UK, while the market abuse law has been enacted to give effect to the EU regime, there is a question on how Brexit is likely to have any possible implications on the future regulation of market abuse in the UK. Therefore, apart from critically appraising the market abuse regime in the UK, this essay also explores the possible effects of Brexit on the this regime.

Market abuse: Law in the UK

Market abuse has been illegal in the UK since 2000 when the Financial Services and Markets Act 2000 was enacted. The law was enacted to deter illegal insider trading and other forms of market abuse. Insider trading around the time of a merger and acquisition announcement has been particularly addressed by the law; however research indicates that there is evidence to suggest that there is insider trading activity ahead of mergers even after the enactment of this law. This points at the inefficacy of this law to prevent insider trading.

Market Abuse: Meaning and kinds

Market abuse has been defined as the general term than describes actions that unfairly take advantage of other investors, “such as by providing false information about a company’s performance, thereby creating a misleading impression of its economic value and, therefore, a false market in the shares.” The underlying and common factor between different kinds of market abuse is that these actions distort and undermine the market, and damage the interests of its ordinary participants. Such actions, especially when they are reported in the public domain, have the impact of leading to the perceptions of the market not being fair; therefore, the aim of the market abuse legislation is to deter such actions because the market must be fair, and must be perceived to be fair.

Market abuse is a civil offence under the UK Market Abuse Regulation (UK MAR) and there are three kinds of unlawful behaviour in the financial markets that come within the definition of market abuse: Insider dealing (Article 14, UK MAR); Unlawful disclosure of inside information (Article 14, UK MAR); and Market manipulation (Article 15, UK MAR). The UK MAR applies the EU Market Abuse Regulation (596/2014) in the UK. Prior to 2016, when the UK MAR came into force, the civil offence of market abuse was regulated by Part VIII of the Financial Services and Markets Act 2000. Directions and principles as to the behaviour of the listed companies is also managed under the Financial Services and Markets Act 2000, Section 119, which establishes the FSA as the main regulator and also producer of the Code of Market Conduct, which specifies and explains behaviour that would amount to market abuse. The FSA model code is adopted in chapter 9 of the Listing Rules and all listed companies have to adopt this model so that they can take proper and reasonable actions to meet the criteria contained in the model code. In effect, the approach adopted by the FSA is said to be preventative in nature which means that the companies are required to take certain steps to prevent instances of insider dealing, which include effective systems within the company to control insider dealing, a short insider list, internal reviews following any leaks, monitoring staff personnel during account dealing, robust controls when dealing with third parties, information technology controls. Post 2012 changes made to the regulatory system under the Financial Services Act 2012, and the creation of the FCA, which regulates this area with the Bank of England and Prudential Regulation Authority, the FCA has continued to utilise the same powers as FSA, which includes enforcement and investigative powers.

The Financial Services and Markets Act 2000, Section 397, makes the following actions unlawful: to knowingly make a misleading, false or deceptive statement, promise or forecast; to dishonestly conceal any material facts whether in connection with a statement, promise; to recklessly make a misleading, false or deceptive statement, promise or forecast.

Insider dealing

Insider dealing has been defined as “trading in organised securities market by persons in possession of material non-public information.” The insider dealing issue has been dealt with in the law through the combination of criminal sanctions and a civil recovery route. A criminal offence can only be committed by a person and not a company.

The Criminal Justice Act 1993, Section 52 defines insider dealing as an event where an individual with information as an insider deals in stocks or shares whose price will be affected by that information when it is publicly disclosed. To explain it as an example, insider dealing can happen when an insider to a company, who may be a director in the company or may be another individual with inside information, buys shares knowing that the share price will rise significantly due to the inside information, or sells them or short sells them knowing that the share price is going to fall. Insider dealing can also happen when a person attempts to make profits by inflating share price.

Under the Financial Services and Markets Act 2000, civil law with regard to insider dealing is provided. It is notable that the civil offence provisions were a response to the failure of the criminal law contained in Criminal Justice Act 1993 to deter insider dealing. Therefore, the civil law provisions were seen by the Parliament to be necessary to buttress the law deterring insider dealing. The principal provision for civil offence of insider dealing was first introduced by Section 118 of the Financial Services and Markets Act 2000, which contains two civil offences of market manipulation, these being false or misleading impression and the distortion of the market. Section 118 identified seven types of market abuse and defined inside information in a slightly wider sense so that prosecution could take place for those situations that were outside the scope of the criminal law.

The civil law regime has been further bolstered by the scheme contained in the Market Abuse Regulation (MAR). The civil law regime addresses the issue that insider dealing is a manifestation of inefficient markets and corporate governance problem. The European Union Directive on Insider Dealing and Market Manipulation also requires EU member states to create a civil offence for insider dealing. Prior to the civil law regime being introduced in the UK through amendment to the Financial Services and Markets Act 2000, which incorporates the insider dealing provisions in the MAR, criminal law was the only regime that addressed the issue of insider dealing. Currently, both civil law and criminal law regimes are applicable to insider dealing.

Article 14 of MAR prohibits insider dealing and the unlawful disclosure of inside information. Thus, there are three actions that are barred under the MAR, these being the engagement or its attempt in insider dealing; inducing another person to engage in insider dealing; or unlawfully disclosing inside information. MAR, Article 8 defines insider dealing as a situation where a person possesses inside information and uses that information by acquiring or disposing of financial instruments to which that information relates. Article 10 defines unlawful disclosure of inside information as a situation where a person possesses inside information and discloses this to another person. Article 9 allows certain ‘legitimate’ actions that can be carried out by a person with inside information, as including transactions carried out in the discharge of obligation due in good faith and not to circumvent the prohibition against insider dealing, and using information obtained in the conduct of a public takeover or merger with a company, for the purpose of proceeding with that transaction.

The Financial Services and Markets Act 2000, Section 123 allows the FCA to impose a penalty on individuals who have contravened the prohibition on insider dealing or unlawful disclosure of inside information. FCA can also publish a public statement censuring the person instead of imposing a penalty on the person. In either case, the FCA issues a ‘decision notice’ informing the individual of the decision. The matter may be referred to the Tax and Chancery Chamber of the Upper Tribunal and the latter is required to consider appropriate action for the FCA to take. FCA may also apply to the High Court for an injunction restraining actual or likely contravention of MAR Article 14. Furthermore, FCA may apply to the High Court for an order restraining any assets which the individual is likely to dispose of, or otherwise deal with.

Large fines have also been issued to individuals in civil recovery cases, a notable case being that of Philippe Jabre and the hedge fund manager of GLG Partners LLP who were fined £ 750000 each for insider dealing and market abuse. In another case, the FSA fined Mark Lockwood in 2009 to the tune of £ 20000 for failure to prevent insider dealing. In 2015, Kenneth Carver was fined £ 35212 for insider dealing that saw him make a profit of £ 24206, with the director of enforcement with the FSA noting that due to his early and full cooperation, he was fined only £ 35212 and were it not for this cooperation, he would have been fined at the minimum of £ 122212. The case of R v McQuoid, can be considered here to understand how sentencing in criminal cases may be different from the way in which civil law is used to collect fines. In this case, McQuoid passed inside information to his father-in-law, through whom he the purchased of a number of shares in the company and was convicted of a single count of insider trading and was sentenced to eight months imprisonment with the court also laying down the McQuoid guideline which is based on the overriding principle of totality, which was explained by the Court of Appeal in another case as being just and proportionate sentencing reflecting the overall criminality of the offences.

The criminal law with respect to insider dealing goes back to 1980 when the Part V of the Companies Act 1980 made it a criminal offence to do insider dealing certain specified circumstances. The Company Securities (Inside dealing) Act 1985 consolidated these provisions and the Financial Services Act 1986 amended the same subsequently. Finally, criminal law provisions for insider dealing were made under the Criminal Justice Act 1993, which implemented the EC Directive on Insider Dealing. The 2003 European Directive on market abuse has also been incorporated in the law and it extends the responsibility of the authorities to investigate individuals in the UK linked to market abuse conducted elsewhere in the EU.

As mentioned earlier, the Criminal Justice Act 1993 defines insider dealing in Section 52, which makes it unlawful for an individual to deal in stocks or shares with inside information which, if it were made public, would be likely to have a significant effect on their price. In effect, any information that is specific, and relates to a particular stock or share or a particular issuer of shares, and has not been made public as yet, and is price-sensitive, then it would be insider dealing. It is notable that the prosecution of the larger cases involving insider dealing in the UK have been done in conjunction with the Criminal Law Act 1977, Section 1, which related to conspiring to commit an act which would be a substantive offence in criminal law. Therefore, in certain cases insider dealing is seen as a substantive offence.

Criminal Justice Act 1993, Section 57 describes the situation when a person can be said to have insider information, which provides that a person has inside information when they know it is, inside information, and they know they have it from an inside source, which may be a director, employee or shareholder of an issuer of securities. Inside source can also be related to a person who has access to the information by virtue of their employment, office or profession; or direct or indirect source of the information any of those mentioned before. Inside information is defined in Section 56 as information that related to particular securities or to a particular issuer/s of securities, is specific or precise, has not been made public and is price sensitive. Thus, inside information definition does not extend to securities generally or to issuers of securities generally or to non-price sensitive information. The Criminal Justice Act 1993, schedule 2, lists the securities to which insider dealing applies these being shares, debt securities, warrants, depositary receipts, options, futures, and contracts for differences.

The penalty for insider dealing is punishment of up to seven years imprisonment and/or a financial penalty and can expect to be pursued for any benefit accrued as a result of his criminal conduct under Part 7 of the Proceeds of Crime Act 2002. There are also some statutory defences that are allowed under the law, specifically under Section 53 and schedule 1 of the Criminal Justice Act 1993. Thus, defences can be allowed where the individual shows that he did not at the time expect the dealing to result in a profit attributable to the fact of the information being price-sensitive, or the individual believed on reasonable grounds that the information was widely disclosed so that those not taking part in the dealing would be not be prejudiced, or individual would have done what he did irrespective of his not having the information. Special defences are also allowed under schedule 1 of the Criminal Justice Act 1993. These special defences include acting in good faith as a market maker, that it was market information and it was reasonable for the person to act the way he did.

Recent figures on the prosecution on insider dealing by the FCA suggests that there are only a few cases where prosecution is done; from 2013-2018, the FCA has prosecuted only nine insider dealing cases, securing twelve convictions. One of the reasons why there may be a low number of prosecutions for insider dealing is that it involves arguments about whether or not the ‘information’ was in fact ‘inside information’ as defined by the Criminal Justice Act 1993, which then leads to questions of how specific or precise the information is and whether it was in public domain. Consequently, prosecutions into insider information have been made difficult due to the potential for arguing that the defendant did not know that the information was inside information or the potential of difficulties associated with the establishing of an alleged nefarious nature of the relationship between an insider and the person being prosecuted. Another problem with prosecution of insider dealing is that there is large amount of insider dealing on a relatively low level basis which means that a significant amount of insider trading goes unnoticed because it is low level and the transactions may not raise red flags due to that.

Market manipulation

The law related to market manipulation prohibition is traced back to common law decisions in the US case law. The law was based on the common law provisions of fraud. The market manipulation regime in the EU was restructured under market abuse laws in the wake of the financial crisis of 2007/08, which saw the EU introduce a Directive and Regulation which were adopted in 2014. One of the problems related to regulation of market manipulation is that the concept of market manipulation is not well defined or is vague. Market manipulation is generally related to circumstances where investors are unreasonably disadvantaged by others who use information not publicly available to trade in financial instruments to their advantage (insider dealing), or distort the price-setting mechanism of financial instruments, or disseminate false or misleading information. Therefore, while there is some vagueness to how market manipulation is defined, there is some clarity about the kinds of actions that are described here. Market manipulation in general is described as “conduct that can misinform or deceive others into making misleading investment decisions.” Market manipulation has also been defined in terms of being something that harms the capital markets and can encompass a variety of actions that can be said to be actions that can harm the market:

“Market manipulation is a general term covering a number of practices deemed harmful to the capital markets. Conduct that can lead to a violation of the market manipulation provisions extends from active trading to merely spreading information about a particular security or company. Market manipulation comes in many forms, whose number is limited only by human ingenuity.”

Thus, there is a wide definition of market manipulation and as noted above it can come in many forms and the underlying factor is that these actions harm the capital markets. Furthermore, the Market Abuse Directive has sought to provide a definition of market manipulation in Article 5. This helps to clarify the actions that can be considered to be market manipulation (this is discussed below). Furthermore, according to the FSA, market manipulation has three characteristics: first, financial dealings that provide fictitious indicators to get the price at a synthetic level; second, series of contracts to utilise fabricated products or devices; third, sharing information that provides false or misleading signals. What market manipulation does is to provide information that can see improper use of market power or move price of investments or result in prices of shares fluctuating. The Guinness fraud of 1980s is an example of market manipulation and can be used here to illustrate the way in which market manipulation be brought about. The Guinness fraud was a manipulation of the London stock market for inflating the price of Guinness shares for assisting in a takeover bid for Distillers. Four businessmen or the so-called Guinness four, were charged with the offence by the Serious Fraud Office and they served time as well as paid fines.

The 2007-2008 financial crisis brought more attention to the issue of market manipulation and its impact on the capital market. In particular, attention was brought to the LIBOR and the EURIBOR and FOREX manipulation. LIBOR and EURIBOR are used across the world for a range of financial products by a wide variety of financial market participants, for both hedging and speculative purposes.’ The continual manipulation of the LIBOR, EURIBOR, and the FOREX by financial institutions and traders which came to head in the 2007 and 2008 crisis, which also led to the sense that the “integrity of LIBOR and EURIBOR rates is central to the global financial markets, and any alleged manipulation can have a significant impact on and ramifications for the global markets.” The incidents of market manipulation using LIBOR and EURINOR have come to light even before 2007. In 2005, the FSA determined that Barclays Bank manipulated LIBOR and the EURIBOR interest rates in London and New York. Barclays was fined £ 59.5 million by the FSA and UBS was fined £ 160 million. These events have also added to the perception of market manipulation taking place in the UK market. Other events of market manipulation after 2008 include financial penalty of £ 14 million on ICAP Europe Ltd in 2013 for the firm’s traders colluding with UBS traders to manipulate the Japanese Yen (JPY) LIBOR rates. In 2014, Lloyds TSB was fined £ 104 million for breaches of the LIBOR and other benchmarks.

The Financial Services Act 1986 criminalised market manipulation. Section 47(1) of this law defines and criminalises market manipulation and this was incorporated in the Financial Services and Markets Act 2000 and Section 397 of that act also gave powers to the FSA to prosecute for market manipulation. Section 397(1) provided definition of market manipulation. Section 397 relates to misleading statement and dishonest concealment and provides that an individual will be liable for making a misleading information, forecast or profit, which they knows to be false, misleading or deceptive in a material particular or reckless in that regard. In R v Bailey and Rigby, the chief executive and chief financial officers of a firm were convicted of issuing misleading statements, which pushed the price of shares and induced investors to buy. The principle behind the criminal liability is that investors to whom the statement or concealment is made should invest on that basis, and even if the consequences do not occur, a misleading statement that the defendant makes actually intending the consequences, is adequate to make someone criminally liable for market manipulation. What this also means that Section 397 has a mens rea element because what is needed to be established is that the defendant had the intent to cause the consequences. The Financial Services Act 2012 restructured and broadened the law relating to market manipulation and misleading statements and impressions. Market manipulation is considered to be a complicated type of the market abuse concept.

Coming back to Financial Services Act 2012, the offences of market manipulation are provided in this law in Part 7 of the Financial Services Act 2012. There are three offences that are defined here. The first is offence of misleading statements in Section 89, which makes it an offence for a person state or conceal facts with the intention of inducing another person to enter into or refrain from entering into a relevant agreement or to exercise. Thus, if a person knows that they are making a false or misleading statement, or if they are reckless as to whether their conduct may so induce, or if they dishonestly conceals the material facts. The second offence is related to making misleading impressions under Section 90, which makes it an offence to act or engage in a course of conduct which creates a false or misleading impression as to the market or the price or value of relevant investments. The offence is committed if the person intends to make the impression and intends to induce another person to acquire or dispose of investments, or to make a gain. The punishment for these offences can include a maximum of 7 years imprisonment or an unlimited fine. The third offence is making misleading statements in relation to benchmarks under Section 91.

The EU Market Abuse Directive illustrates some types of market manipulation like false or misleading information, false, or misleading transactions, transactions involving deceptions, and price positioning. The MAR, Article 15 which came into force with the commencement of the Financial Services and Markets Act 200 (Market Abuse) Regulations 2016 on 3 July 2016 is related to prohibition of market manipulation. The concept of market manipulation is defined by Article 12 of the MAR. According to this, the following activities come within the scope of market manipulation: entering into transaction which gives false or misleading signals related to supply, demand, price, etc., activity or behaviour which affects price of financial instruments; knowingly transmitting false or misleading information in relation to a benchmark or any other behaviour which manipulates the calculation of a benchmark; placing orders to a trading venue, which has one of the effects referred to in paragraph 1(a) or (b) (in MAR Article 12). These effects can include disrupting or delaying the functioning of the trading system, making it more difficult for other persons to identify genuine orders on the trading system of the trading venue, or creating or being likely to create a false or misleading signal about the supply, demand, or price of, a financial instrument, in particular by entering orders to initiate or exacerbate a trend. Similar to insider dealing, Section 123 of the Financial Services and Markets Act 2000 allows the FCA to impose a penalty for market manipulation as defined in Article 15 of MAR or to publish a public statement censuring the person.

In the UK, the Fraud Act 2006 is also applicable to cases of market manipulation under Section 2 which makes it an offence to dishonestly make a false representation, and to intend, by making the representation for a gain for himself or another, or to cause loss to another or to expose another to a risk of loss. A punishment of up to10 years imprisonment and/or an unlimited fine may be levied for this offence.

Brexit: Possible effects on the market abuse regime

Due to Brexit, there is a question on how the UK will continue to apply the market abuse regime and whether it will change its laws on market abuse, which hitherto were based on the EU regulations on market abuse. One of the considerations for the UK is that if the banks, companies and other relevant stakeholders wish to have access to the European markets, then it would be necessary for the UK to either adopt the EU Criminal Sanctions Market Abuse Directive and the EU Market Abuse Regulation or align its law with these. This has been one of the arguments for the continuity of the EU law or continued alignment with this law in the UK.

Since 1 January 2021, the EU Market Abuse Regulation (596/2014) has been onshored into UK law through the European Union (Withdrawal) Act 2018 and The Market Abuse (Amendment) (EU Exit) Regulations (SI 2019/310). What this means is that the UK markets and financial instruments will remain subject to the same requirements and protections under UK MAR as under EU MAR. Thus, there are two market abuse regimes, these being the EU regime under the EU MAR and a new UK MAR. In effect, the UK MAR is similar to EU MAR and is designed to ensure that UK markets and financial instruments continue to be subject to the same requirements as under EU MAR.

Although it is too soon to assess the further changes that will happen after Brexit, at this point it can be said that there will remain alignment with the EU MAR and to that extent the requirements and protections with respect to the market abuse actions will remain.

Conclusion

Market abuse is recognised to be one of the important issues that are to be dealt with in the law. In the UK, both the civil and criminal law are used to counter market abuse. There are two types of activities that are recognised as market abuse, the latter being a wider umbrella term. These two activities are insider dealing and passing insider information, and market manipulation. Although there are two types of offences related with these, there are a number of activities under these two categories, so these are wide categorisations.

Both civil and criminal law are used to address market abuse. In the UK, the law responded to market abuse through first criminalisation of specified activities; however, the inability of the criminal law to deal effectively with these activities led to the enactment of civil law offences as well. This happened predominantly under the MAD and the MAR. Even after Brexit EU MAR will continue to be applied because it has been offshored to the UK through the UK MAR.

To compare the civil and criminal laws on insider dealing, the civil law provides a lower threshold for liability than the criminal law. On the other hand, the criminal law allows the sentencing of the offenders with the overriding principle of totality. The civil law provides the ways for the FCA to impose a penalty on individuals who have contravened the prohibition on insider dealing or unlawful disclosure of inside information or to publish a public statement censuring the person instead of imposing a penalty on the person. Criminal law has proven to be ineffective to some extent because of the challenges that prosecutors face with respect to prosecuting insider information. Some of these challenges are inherent to the way insider dealing is defined and difficulties associated with the establishing of an alleged nefarious nature of the relationship between an insider and the person being prosecuted.

The civil law relating to the market manipulation is contained in the UK MAR. The criminal law is contained in Financial Services Act 2012. Again like is the case with insider trading, the criminal law on market manipulation does not address the issue as effectively as the civil law. Part of the reason may be that being offences of intent, market manipulation under Sections 89, 90, and 91 of the Financial Services Act 2012, are more challenging to prosecute. Under the civil law, the requirement is that the person passes on false and misleading information knowingly, which is easier to establish as compared to the offences of intent in the criminal law.

To conclude, the civil law may have the advantages of lowered threshold for burden of proof, and the nature of offences (not being offences of intent in the case of civil law for market manipulation). With respect to insider dealing, as this essay has shown, there have been very few prosecutions under the criminal law.

Bibliography

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Ottaway AN, Barry Vitou and Gareth Hall, ‘The Financial Conduct Authority - Part 2 - Civil & Criminal Insider Dealing’ (26 February 2019) accessed

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