Market Abuse and Insider Dealing - Will the Regulator come knocking at dawn?

23 June 2009

Recent weeks have seen the third set of arrests carried out by the Financial Services Authority (FSA) in connection with suspected insider dealing. To date, there have been five criminal insider dealing prosecutions with a successful conviction in March of this year. 

One of the FSA’s statutory objectives is maintaining confidence in the UK’s financial markets. Market abuse is improper conduct that undermines the UK financial markets or damages the interests of ordinary market participants. The Financial Services and Markets Act 2000 creates civil penalties for market abuse. However, more recently, the FSA has sought to flex its muscle through criminal penalties rather than civil sanctions.

Suzanne MacDonald, head of TLT's Financial Services Regulation team comments:

"In the last few months, the FSA has pushed forward its credible deterrence agenda, which is concerned with delivering results that focus markets’ and individuals’ attention. Criminal, rather than civil sanctions are more effective at demonstrating significant consequences for misconduct.

The FSA is currently concerned with the market abuse offences of making misleading statements and engaging in misleading conduct for the purpose of inducing another person to exercise or refrain from exercising rights in relation to investments. Insider dealing on the other hand occurs where individuals use, or encourage others to use, information which is not generally available, to deal for financial advantage. Part V of the Criminal Justice Act 1993 sets out the criminal offence of insider dealing.

Whilst the civil disciplinary regime allows for a wider range of penalties which include financial penalties; public censure or restitution orders, the criminal offences of market abuse and insider dealing are punishable by a maximum of seven years’ imprisonment or an unlimited fine.

In terms of what this means for businesses and individuals, as a general rule, the FSA is likely to pursue criminal action where there is sufficient evidence providing a realistic prospect of conviction due to the higher burden of proof or where a criminal prosecution is in the public interest taking into account the seriousness of the offence and the circumstances surrounding it.

In order to manage the potential risk of market abuse and insider dealing, the matters that regulated entities and individuals need to consider are numerous but primarily include:

• reviewing internal policies and procedures for handling market sensitive information;
• improving individual awareness of securities dealing rules;
• making greater use of information dissemination on a ‘need to know’ basis;
• improving information technology security;
• ensuring effective monitoring of staff personal account dealing;
• providing staff training on confidentiality obligations, information technology security etc;
• providing additional staff vetting, including criminal record checks for key staff; and
• ensuring robust systems and controls when dealing with third parties."

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