Delivering assertive action on market abuse is a key policy commitment of the Financial Conduct Authority (FCA) annual work programme (formerly the business plan). But what exactly is market abuse, and how can you avoid it?
Key takeaways
- Market abuse falls into three categories: insider dealing, unlawful disclosure of inside information and market manipulation.
- The main laws governing market abuse are the Market Abuse Regulation (MAR), the Criminal Justice Act 1993, the Financial Services Act (FSA) 2012 (all UK), and the Market Abuse Regulation EU and Criminal Sanctions for Market Abuse Directive in the European Union.
- Violations carry major consequences, including unlimited financial penalties for civil offences and up to 10 years’ imprisonment for criminal market abuse.
- Firms must perform risk assessments to identify, evaluate and mitigate market abuse risks.
- Market rumours can create market abuse, so you should know how to deal with them.
- Report suspicious transactions to the FCA via Suspicious Transaction and Order Reports (STORs).
The FCA says “Market abuse undermines the integrity of the UK financial system, eroding confidence and lowering participation, to the detriment of all market participants.” Through effective enforcement of related regulations and laws, investors are protected, and the playing field is levelled.
In our webinar, Katharine Leaman and surveillance specialist Emily Wright highlighted that the FCA is focusing on firms conducting market abuse risk assessments, a core compliance tool.
Making sense of market abuse regulation
- What is market abuse?
- What are the main laws relating to market abuse?
- Inside dealing expanded
- Market abuse risk assessment
- How to deal with market rumours
- What are the consequences of market abuse?
- What are the exemptions to market abuse rules?
- What do you do if you suspect market abuse?
What is market abuse?
Market abuse occurs when a person or group acts to disadvantage other investors in a qualifying market. It covers three broad categories of behaviour: market manipulation, insider dealing and unlawful disclosure of inside information.
- Market manipulation occurs when a person distorts or affects qualifying investments or market transactions (or attempts to). Methods include direct intervention and disseminating information designed to give misleading investment signals.
- Insider dealing (or trading) occurs when a person uses non-public (inside) information to deal in qualifying investments to their advantage or that of others.
- Unlawful disclosure of inside information is when an individual “possesses inside information and discloses that information to any other person, except where the disclosure is made in the normal exercise of employment, a profession, or duties”, or in market soundings (for example, a company is preparing to raise capital).
Market abuse can be a civil and/or a criminal offence in the UK and the EU.
What is inside information?In general terms, inside information is of a precise nature which:
Therefore, it must be non-public, specific and markedly price-sensitive. Factors likely to have a minor effect on the price of a qualifying security don’t count as inside information. |
What are the main laws relating to market abuse?
In the United Kingdom, laws include the UK Market Abuse Regulation (MAR) for the civil regime and the Criminal Justice Act 1993 and Financial Services Act (FSA) 2012 for the criminal side.
The EU is governed by the Market Abuse Regulation ([EU] No 596/2014, or EU MAR) and the Criminal Sanctions for Market Abuse Directive (2014/57/EU (CSMAD / MAD II).
In terms of timeframes:
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EU MAR inception: came into force on July 3rd, 2016
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UK exit date: formally left the EU on January 31st, 2020
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Transition end: 23:00 GMT on December 31st, 2020
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UK MAR activation: Transposed into UK domestic law via the European Union (Withdrawal) Act 2018 at the same time the transition period ended
The main differences between the UK and EU MARs are:
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notification requirements for:
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delaying the disclosure of inside information
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transactions of persons discharging managerial responsibilities (PDMRs)
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where to report suspicious transactions and order reports (STORs)
Furthermore, the relevant European Securities and Markets Authority (ESMA) Guidelines and Recommendations aren’t incorporated into UK law.
However, the FCA 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 is subject to both regimes.
The UK legislation covers dealings that affect qualifying markets. These are:
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UK or EU-regulated market
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Multilateral trading facility (MTF)
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Organised trading facility (OTF)
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Any other financial instrument of value where it influences the value traded in a facility or market listed above – for example, derivatives, emission allowances and certain benchmark contracts and spot commodities
Dealings in private companies and commercial property aren’t subject to the legislation unless they affect a qualifying market.
Inside dealing expanded
Below, we dive deeper into insider trading and how to prevent it.
Public vs. inside information
As noted above, public information cannot be classified as inside. It includes the following types:
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Disclosed to the market via an accepted channel (for example, a regulatory information service)
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Contained in records that the public can access
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For which full and accurate details have been publicised via the Internet, newspapers and magazines
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Gleaned from an observation that doesn’t infringe on rights or obligations of privacy, property or confidentiality
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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’s procured overseas or at a cost.
It’s not always easy to identify inside information, but everyday examples may include:
- Results or projections before reporting or publication
- Proposal to amend the terms of an agreement
- 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
- Proposal that could result in industrial action
- Impending departure of a high-level and influential executive
Bear in mind that even if the information isn’t inside in its own right, it might be when considered with other info, so factor in potential cumulative effects. An information audit is a useful way to help identify inside information.
How can you reduce the risk of insider trading?
1. Conduct due diligence
Investigate the background of potential and existing employees and suppliers. Beware of red flags, including non-financial misconduct. It's essential you know who you’re dealing with and how they behave.
2. Take extra care outside the office
Especially at trade or social events, where you may be in close contact with other financial firms. Remove yourself immediately from any conversations that stray into sensitive or off-limits topics. And when you're on the move, take extra data protection precautions.
3. Clearly define sensitive non-public information
Ensure employees and suppliers know what they’re legitimately allowed to share with others to prevent unlawful disclosure.
4. Never disclose non-public information to outsiders
This includes but is not limited to details about takeovers, mergers, earnings, profit warnings, litigation or security offerings.
5. Don't recommend or induce based on inside information
It’s an offence under MAR to deal in (or attempt to) financial instruments or recommend/induce another person to transact based on inside information.
6. Be cautious in informal or social settings
Overlapping work relationships where staff socialise with former colleagues in other firms create the risk of sharing improper information.
7. Promptly report any concerns
All employees should promptly report any insider trading, unlawful disclosure, or market manipulation concerns to their manager, HR, or the legal/compliance team.
8. Probe and document the work history of job candidates
This evidence will be invaluable if suspicious activity is discovered later (for example, if a trader deals in the stock of a company owned by a business school acquaintance).
9. Watch out for irregular trading patterns
Be vigilant about trades outside normal buying patterns as they may indicate suspicious activity.
10. Organise blackout periods
Where traders are barred from trading securities at certain times, such as earnings announcements.
Market abuse risk assessment
To identify, evaluate and mitigate market abuse risks, firms conduct a market abuse risk assessment. It’s specific to the business in question, meaning no two organisations should have the same results. Here are the steps to developing a full risk assessment:
- Identify the risks and risk factors
- Identify control measures for factors
- Evaluate internal controls
- Calibrate surveillance systems
- Mitigate risk factors
- Reporting and whistleblowing
- Finalise risk assessment report
- Regularly review and update
The nature of the business as well as the risk types and appetite inform the assessment. Artificial intelligence (AI) is expected to even the playing field between small and large firms.
How to deal with market rumours
Rumours are a type of manipulation that can create market abuse, so you should know how to deal with them to avoid inadvertently committing an offence.
A market rumour is unverified or unconfirmed information about a publicly traded company or an economy. Example topics include mergers and acquisitions, earnings announcements and management shakeups. Circulating them poses serious risks. If the rumour is false, spreading it could mislead other market participants and lead to allegations of manipulation.
Conversely, if the rumour is true and its substance constitutes inside information, disseminating it or acting on it could be seen as unlawful disclosure or insider dealing.
If approached for your opinion on a market rumour:
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Do not confirm or deny
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State that you can’t discuss speculation or unverified information
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Record who contacted you, when, and what they asked
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Notify your compliance or legal team immediately
What are the consequences of market abuse?
In the UK, the FCA investigates market abuse cases, and the consequences vary.
Civil offences
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Profit disgorgement
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Industry bans and restrictions
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Public censure
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Injunctions and restitution
Criminal offences
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Up to 10 years in prison
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Unlimited fines
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Asset Confiscation
What are the exemptions to market abuse regulation?
There are certain exemptions to market abuse in the UK Market Abuse Regulation.
Safe harbours
A 'safe harbour' means certain conduct doesn’t violate a particular market abuse rule. The UK MAR has safe harbours for:
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Market soundings (pre-deal interactions)
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Buy-back schemes
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Price stabilisation measures
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Monetary, public debt and climate activities
What do you do if you suspect market abuse?
UK trading firms or individuals who professionally arrange or execute transactions 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 inform your supervisor, legal/compliance or via your company's whistleblowing hotline.
Since certain forms of market abuse are criminal offences, any profits generated could amount to the proceeds of crime. Handling these could also lead to money laundering charges.
Alongside the above, there’s also a legal obligation to report suspicious activity under the money laundering regulations. So, don't investigate further or tip anyone off for fear of exposing yourself to liability under that regime.
It’s your responsibility to understand the compliance requirements established by the market abuse legislation – ignorance of the law is never a valid defence.
Market abuse: FAQs
Are there any defence mechanisms for people who inadvertently breach MAR?
MAR allows legitimate disclosures in certain controlled contexts, such as market soundings, provided proper procedures, insider lists and equal disclosure obligations are respected.
Which financial instruments and markets does MAR cover? Does it apply to every security or asset?
MAR applies to regulated markets, MTFs, OTFs, auction platforms, and instruments admitted for trading on those venues (shares, bonds, derivatives, commodity derivatives, emission allowances, etc.). Private company shares or purely commercial property transactions (with no link to a qualified market) generally fall outside MAR.
What are some notable UK insider trading cases?
Here are some links:
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Richard Bloomfield charged by the FCA with 5 counts of insider dealing
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FCA fines two individuals a combined £108,731 for insider dealing
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Written by: Hari Gupta
Hari has worked for over 25 years as a legal researcher, editor, author and consultant for many organisations across several countries. He worked in the private sector for legal publishing, law and insurance firms and the Law Society of Ireland, and in the public sector through his work for the Australian and Irish Parliaments and the UNHCR. Hari has a BA/LLB and a Masters of Peace and Conflict Studies.
