Understanding Market Abuse Regulation

Posted by

Hari Gupta

on 27 May 2022


A key policy commitment of the FCA Business Plan is to deliver assertive action on market abuse. What exactly is market abuse, and how can you avoid it?

Understanding Market Abuse Regulation

As noted by the FCA, market abuse undermines the financial system's integrity, erodes confidence in markets, and, consequentially, reduces market participation. The FCA hope that the effective enforcement of laws prohibiting market abuse will help to protect investors and ensure a level playing field.

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Making sense of market abuse regulation

What is market abuse?

Market abuse occurs when a person or group acts to disadvantage other investors in a qualifying market. It incorporates two broad categories of behaviour: market manipulation and insider dealing.

  • Market manipulation occurs when a person distorts or affects qualifying investments or market transactions. This is either by direct intervention or by disseminating information designed to give misleading investment signals.
  • Insider dealing occurs when a person uses specific non-public information to deal in qualifying investments to their advantage or the advantage of others. Insider dealing in this context also incorporates the concept of unlawful disclosure of inside information.

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The main laws relating to market abuse

In the UK, there are criminal and civil laws prohibiting market abuse.

Criminal offences

In the UK, insider dealing is not just a civil offence under the UK Market Abuse Regulation (MAR); it is also a criminal offence under Part V of the Criminal Justice Act 1993.

To prove a criminal offence, you need to provide evidence of intentional use of inside information (information not known to the public) to deal in publicly-available price-sensitive securities.

The offence can only be levelled against someone (an insider) who had and knew they had inside information. Also, the insider must have knowingly received the information directly or indirectly from an inside source or procured it from their particular role.

The 'inside information' must have been specifically related to particular securities or issuer(s). Also, it would only be 'insider information' if it would have been likely to have had a significant effect on the price of securities if it were made public.

Civil offences

The EU MAR came into effect in July 2016. A decision was taken to onshore the MAR into UK law on 31 December 2020 via the European Union (Withdrawal) Act 2018. After authorities made minor changes through the Market Abuse Exit Regulations 2019, the UK MAR was born.

The main differences between the UK MAR and the EU MAR are:

  • the notification requirements for delaying the disclosure of inside information,
  • notification requirements for transactions of persons discharging managerial responsibilities (PDMRs),
  • and the reporting of suspicious transaction and order reports (STORs).

Furthermore, the relevant European Securities and Markets Authority (ESMA) Guidelines and Recommendations are not incorporated into UK law.

However, the FCA has made it clear that they expect all market participants to continue applying the ESMA Guidelines before the end of the transition period, where relevant. Any individual or company based in the UK and the EU would naturally be subject to both regimes.

The UK legislation covers dealings that affect qualifying markets. These are:

  • A UK or EU regulated market
  • A Multilateral Trading Facility (MTF)
  • An Organised Trading Facility (OTF)
  • Any other financial instrument of value where an instrument influences that value traded in a facility or market listed above. Such as derivatives, emission allowances and trades in certain benchmark contracts and spot commodities.

    Therefore, dealings in private companies and commercial property are not subject to the legislation unless the dealings affect a qualifying market.

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Market abuse as a civil offence

The UK MAR establishes civil offences for three forms of market abuse: market manipulation, unlawful disclosure of inside information, and insider dealing.

  1. Market Manipulation
    A person may be accused of market manipulation if they attempt to give or appear to give false or misleading signals about a financial instrument's supply, demand, or price. Market manipulation may also be seen to occur if a person manages to secure the price of a financial instrument at an artificial level.
  2. Unlawful disclosure of inside information

    The UK MAR provides that a person commits an unlawful disclosure of inside information if they have inside information and disclose it to another, except where the disclosure is in the normal exercise of employment, a profession, or duties. Another exception exists if a disclosure is made in market soundings (e.g., a company to raise capital).

    Although our company and its employees, like any other body or person, are subject to insider dealing and market manipulation prohibitions, most of these provisions are only legally applicable to issuers of financial instruments, market participants, and trading venues.

    On the other hand, the provisions relating to unlawful disclosure of inside information in Articles 10 and 14 of UK MAR apply universally. They apply to any natural or legal person, not just those who commit the offence. Hence, unlawful disclosure of inside information presents very real operational, reputational, and legal risks to our company and its employees.

    If you are not careful, it is easy to disclose inside information unintentionally. For example, an unlawful disclosure may result from:

    - discussing an unpublicised deal in a social context and being overheard;
    - selective briefing of analysts;
    - openly gossiping about the imminent loss of a high-ranking executive to a competitor before this news is made public;
    - leaving papers relating to an important supplier contract in plain sight; or
    - losing an unencrypted flash drive containing files relating to an unpublicised new project.

    Anyone could be liable for unlawful disclosure of inside information under UK MAR. To best protect your company, employees and associates, all employees need to take extra care when dealing with potentially inside information.

  3. Insider dealing
A person commits an offence of insider dealing under UK MAR if they possess 'inside information' and use it to deal in qualifying financial instruments, potentially putting other market participants at a disadvantage.

Dealing includes cancelling or amending existing orders, inducing or engaging another person to deal, or even attempting to deal.

You are likely to possess 'inside information' relating to your company in your employment. Even though the possession of 'inside information' is not an offence, the unlawful use or disclosure is.

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What is 'inside information'?

In general terms, inside information is information of a 'precise' nature which:

  • has not been made public
  • directly or indirectly relates to one or more issuers or financial instruments; and
  • if it were made public, it would be likely to affect the price of a qualifying financial instrument significantly.

    Therefore, information must be non-public, specific, and price-sensitive to a significant effect for information to be inside. Things that are likely to have a minor effect on the price of a qualifying security would not count as inside information.

As noted, public information cannot be inside information. Public information includes information:

  • disclosed to the market via an accepted channel (e.g. a regulatory information service);
  • contained in records that the public can access;
  • for which full and accurate details have been publicised via the internet, newspapers and magazines;
  • gleaned from an observation that does not infringe rights or obligations of privacy, property or confidentiality; and
  • obtained through research or analysis of material which is generally available.

Information may be public even if it is only available to a restricted group, for example, if it is procured overseas or at a cost.

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It is not always easy to identify inside information, but everyday examples may include:

  • results or projections before reporting or publication;
  • a proposal to amend the terms of an agreement;
  • a pending client order;
  • knowledge of an imminent government policy change;
  • knowledge of a pending recommendation or review results that could directly affect the price of a qualifying financial instrument;
  • a proposal that could result in industrial action; or
  • the impending departure of a high-level and influential executive.

Bear in mind that even if the information is not inside information in its own right, it might well be when taken with other information. It is important to consider the potential cumulative effect of the information on the price of the qualifying financial instrument. An information audit may be a useful way to help identify inside information.

In short, if you have non-public information that can affect the value of a security, you must avoid using or acting on that information. It may be appropriate to impose blackout periods during which the company may ban employees and executives from dealing in financial instruments related to the company.
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Dealing with market rumours

It is important to be careful when dealing with market rumours to avoid inadvertently committing a civil offence of market abuse.

A market rumour is any information related to an unverified security but claimed to be fact. Circulating market rumours poses serious risks. If the rumour is false, spreading it could mislead other market participants and lead to allegations of market manipulation.

Conversely, if the rumour is true and the substance of the rumour constitutes inside information, disseminating it or acting on it could be seen as unlawful disclosure or insider dealing.

When approached for your opinion on a market rumour, you may feel compelled to address the issue. In this scenario, it may be appropriate to:

  • discuss the rumour, being sure to label it as a rumour, offering up no further details;
  • limit discussions to your personal opinion of the rumour; or
  • cite the rumour as affecting the price of a security.

Criminal offences

In the UK, insider dealing is not just a civil offence under the UK MAR; it is also a criminal offence under Part V of the Criminal Justice Act 1993. To prove a criminal offence exists, you need to provide evidence of intentional use of inside information (information not known to the public) to deal in publicly-available price-sensitive securities.

The offence can only be levelled against someone (an insider) who had and knew they had inside information. Also, the insider must have knowingly received the information directly or indirectly from an inside source or procured it from their particular role.

The 'inside information' must specifically relate to particular securities or issuer(s) of securities. Also, it would only qualify as insider information if the information would have been likely to have had a significant effect on the price of securities if it were made public.

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Consequences of market abuse

A person guilty of criminal insider dealing may be sentenced to imprisonment for up to 10 years and/or be subject to an unlimited fine.

There are three main defences to a charge of criminal insider dealing. These are that at the time of the offence, the accused:

  • did not expect that the information would have affected the price of the securities,
  • reasonably believed the information had been disclosed widely enough to limit any unfair advantage, or
  • would have done what they did even without the information.

Market manipulation through misleading statements or impressions is also a criminal offence, under sections 89-91 of the Financial Services Act 2012, subject to penalties of up to ten years imprisonment and/or a fine.

Under the civil regime, offenders may be subject to unlimited fines, injunctions, and bans for the individuals and companies involved. Although it may be harder to quantify, there would also be the inevitable damage to reputation.

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Exemptions to market abuse regulation

There are certain exemptions to market abuse in the UK Market Abuse Regulation.

  • Safe harbours
    A 'safe harbour' is a regulation stating that certain conduct will not violate a particular rule. The UK MAR provides safe harbours for conduct (such as legitimate disclosures of inside information in market soundings) in certain contexts.
  • Buy-back schemes and stabilisation measures
    Under the UK MAR, provided certain notification requirements are met, trading in securities or associated instruments for stabilising securities, or trading in own shares in buy-back programmes, are exempt from the prohibitions against market abuse.

What to do if you suspect market abuse

UK trading venues and any firms or individuals who professionally arrange or execute transactions in relevant financial instruments are under an obligation to detect and immediately report suspicious transactions and orders to the FCA via Suspicious Transaction and Order Reports (STORs).

Your company should always report suspicious disclosures, transactions and behaviours to the FCA. Therefore, if you have any knowledge or suspicion of market abuse, you must immediately report it to your supervisor, Legal/Compliance or via your company's whistleblowing hotline.

Since certain forms of market abuse are criminal offences, any profits generated due to the behaviour could amount to the proceeds of crime. Handling these in any way could also lead to charges of money laundering.

As well as reporting suspicions of market abuse, there is also a legal obligation to report suspicious activity under the money laundering regulations. Therefore, it is imperative that you don't investigate further or tip anyone off about suspicions for fear of exposing yourself to liability under that regime.

It is your responsibility to understand the compliance requirements established by the market abuse legislation – ignorance of the law is never a valid defence.

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