VII. MARKET ABUSE
254. The draft Bill introduces a new regime for dealing
with cases of market abuse, defined in broad terms in Clause 56.
This regime is to apply to everyone, whether authorised or not.
The market abuse regime is intended to supplement, but not replace,
the existing criminal sanctions for insider dealing, misleading
the market and market manipulation. It is designed to allow the
FSA to deal with any conduct that is damaging to the markets and
in particular it is intended to enable the FSA to deal with market-abusive
behaviour by non-authorised persons which is not caught by the
existing criminal offences. If the FSA is satisfied that a person
has engaged in market abuse or has induced another person to do
so, it can impose an unlimited fine. As noted above, the FSA must
publish a policy statement on fines for market abuse and must
act in accordance with that policy in deciding whether to impose
a fine and when determining the amount of a fine. A person on
whom the FSA decides to impose a fine for market abuse has the
right to a hearing before the Tribunal.
255. Some of the written submissions received by
the Treasury questioned the entire approach adopted in relation
to market abuse and suggested that, as an alternative, consideration
should be given to amending existing criminal provisions relating
to insider dealing and market manipulation so as to address perceived
difficulties in the operation of those sections.
In written evidence the FSA explained that the existing criminal
offences cover only "a limited range of serious misconduct"
and that the Government has decided that "the FSA, in pursuit
of its objective of maintaining confidence in the financial markets,
ought to be able to take administrative action against any market
participant who abuses the market". 
256. We accept in principle the need for a market
abuse regime that complements the existing criminal offences.
257. Clause 56 having established the perimeters
of market abuse, the draft Bill requires the FSA to draw up and
publish a Code of Market Conduct. The Bill provides for compliance
with the Code to be evidence that market abuse has not occurred
and for infringement of the Code to be evidence that it has. The
Code thus operates within the statutory perimeters set by the
Bill but compliance with or, as the case may be, infringement
of the Code is not conclusive that market abuse has, or has not,
258. The status of the statutory provision (Clause
56), the Code, and related FSA guidance, is set out in Table III.
Table III :Requirements Generally Applicable
- Market Abuse and Criminal Offences
Nature of Requirement
Public Announcement of FSA Decision (after Tribunal Hearing (if any))
Market Abuse (cl 56)
FSA can fine any person (cl 58) or can ask the court to fine (cl 64)
Yes, for FSA decision to fine
Not mandatory; no stated FSA policy
Authorised persons also subject to FSA enforcement action as for contravention of rules (above)
As for contravention of rules (above)
FSA can ask the court for injunction (cl 203) or restitution order (cl 205) against any person
No FSMB action by other persons
Imposition of fine does not affect transactions (cl 66)
Code of Market Conduct (cl 57)
Helps to determine whether behaviour amounts to market abuse (cl 57)
Code may be relied upon so far as it tends to establish whether or not conduct complies with statement of principle (cl 57); has evidential value but is not conclusive
FSA Guidance (cl 87)can relate to market abuse
No FSA power to modify or waive market abuse requirements
As for FSA Rules, above
As for FSA Rules, above
eg, misleading statements and practices offence (cl 212
FSA can prosecute through criminal courts
259. Many witnesses expressed concerns about the
proposed market abuse regime. Specific concerns mainly centred
on two issues. The first is a perceived lack of certainty, arising
from the very general way in which Clause 56 is drafted, the absence
of any intent requirement in Clause 56, and the lack of a safe
harbour for conduct in compliance with the FSA Code. The second
is fairness, and the compatibility of the proposed regime with
the European Convention on Human Rights. In a joint written submission,
the ABI and the BBA encapsulated the concerns of many on this
issue when they said that whilst they agree with the policy objective
of seeking to ensure the open, transparent and fair operation
of the UK markets, the draft Bill needs to be amended to ensure
the fairness and sufficient certainty that are essential if firms
are to feel confident in operating in those markets.
Lord Hobhouse went so far as to suggest that the deficiencies
were such that the relevant Clauses should be dropped altogether
from the Bill and that a market abuse regime should be held over
for subsequent legislation.
Statutory Definition of Market Abuse
260. The draft Bill defines the term "market
abuse" as covering any behaviour which occurs in relation
to qualifying investments traded on a market designated by the
Treasury and which satisfies any one or more of the following
- it is based on information which is unavailable
to informed participants in the market but which, if available
to them, would be likely to be regarded by them as relevant in
deciding whether or not to enter into transactions involving investments
of that kind;
- it is likely to give such informed participants
a mistaken impression as to the supply of, or demand for, or as
to the price or value of, investments of that kind; or
- it is likely to distort the market so far as
it relates to investments of that kind.
261. Additionally the behaviour must be likely to
damage the confidence of such informed participants that the market
is true and fair. It is intended
that the market abuse regime will apply initially to all investments
and commodities traded on UK-based recognised investment exchanges
and to derivatives entered into by reference to such investments
262. The Minister explained
to us that the high degree of generality in the wording of Clause
56 is deliberate and is designed to give the market abuse regime
a very broad application. However, many witnesses told us that
they felt that the present wording, and especially the reference
to a "true and fair market" in Clause 56(1)(c), creates
too much uncertainty. Mr Morton said that "the main point
about market abuse is the need for greater certainty in the definition,
which does seem to us not to give an adequately clear impression
of what behaviour is regarded as objectionable".
He developed this point: "If you look at the definition of
market abuse, Clause 56(1)(c) in particular, that is not, I submit,
a prime example of something that gives people a very clear indication
of what conduct is permissible".
Lord Hobhouse, in a letter of 19th April,
drew attention to the absence of any stipulation either that the
person accused of market abuse should himself be a participant
in the relevant market, or that the conduct in question should
be conduct in or directed at that market. Other witnesses expressed
The potential for the regime to apply extra-territorially
and the inclusion of inaction
as a form of behaviour that could amount to market abuse were
also identified as points of concern.
263. We acknowledge that achieving an appropriate
balance between certainty and flexibility is not an easy task.
For most purposes adequate certainty could in principle be provided
by the Code. However, it will in some cases be necessary to fall
back on the statutory definition; and in any case the statutory
definition will set the perimeters of the Code. We are therefore
persuaded that a clearer statutory definition of market abuse
is required than the one in Clause 56 as drafted.
264. The Law Society Company Law Committee suggested
to the Treasury that the general lack of a mental element is unduly
severe and may give rise to great uncertainty and potential injustice.
This concern about the absence of an intent requirement was echoed
in much of the written evidence which we received
and also in oral evidence.
Mr David Mayhew, a partner in Clifford Chance, expressed a view
that we heard from several witnesses when he said that "We
do not believe that strict liability is an appropriate mechanism
in this case".
265. The explanation given by the Government for
the absence of an intent requirement is that the market abuse
regime is concerned with the efficient operation of the market,
not the moral culpability of individual players in the market:
confidence in the markets can be affected by the effects of a
player's conduct even if this is not the player's intention.
Mr Davies told us the same; but he added reassuringly, "We
do not propose to prosecute people for accidental offences".
266. We acknowledge the force of the Government's
argument against requiring proof of intent, and accept Mr Davies's
assurance that in practice the FSA will not victimise those whose
intentions are honest. However we consider that the broad wording
in the draft Bill and the absence of a general intent requirement
strengthen the case for the regime to be modified so as to include
some form of "safe harbour" for honest and careful persons.
267. A "safe harbour" is a defined class
of conduct which is guaranteed to be safe from regulatory challenge,
perhaps with qualifications requiring good faith and due care.
It is widely felt that some form of safe harbour should be incorporated
into the market abuse regime so as to achieve fairness and greater
certainty. From the evidence we have received three possibilities
- The first is for compliance with the FSA Code
of Market Conduct to be in some sense a safe harbour.
- The second is for the FSA to be empowered or
even obliged to give (or refuse) pre-clearance in respect of a
particular transaction, which would then create a safe harbour
for that transaction. This process is sometimes described, in
language borrowed from US practice, as a "no action letter".
- The third is for compliance with the rules of
an appropriate recognised investment exchange to be in some sense
a safe harbour.
Safe harbour for conduct compliant with the Code
268. With regard to the first proposed safe harbour,
we have received much evidence to the effect that compliance with
the Code should be made an absolute defence to a charge of market
abuse. As described above, as the Bill is drafted, this would
not be the case; but the FSA told us in its first memorandum,
"Generally, where a person has acted in compliance with the
standards set out in the Code, [we] will not seek to impose a
civil fine for market abuse". In its second memorandum,
the FSA indicates that it now favours a statutory provision in
269. We favour strengthening the status of the Code.
However we have some concerns about making it an absolute safe
harbour, because this could leave scope for sharp practice that,
technically, complies with the Code but which was in reality conducted
in order to abuse the market. It would also give protection to
novel forms of abuse on which the Code was silent and therefore
could not be contravened. In this context we note that Lord Hobhouse,
who was generally supportive of the proposition that the Code
should be a safe harbour, qualified his support by saying that
the safe harbour should only protect those who act bona fide.
270. In our view, persons who disregard the consequences
of their actions should properly be regarded as being within the
scope of a regime that is concerned with the effect that behaviour
may have on the operation of the markets. However, where there
is compliance with the Code, it is fair for the legislation to
place the onus on the FSA to prove intent, recklessness or possibly
negligence. This approach also provides more certainty than the
present draft Bill in that it ensures that honest and careful
persons who act in accordance with the FSA's Code cannot be penalised
for the inadvertent or accidental consequences of their actions.
We recommend that the draft Bill should provide a safe harbour
for behaviour that complies with the FSA Code of Market Conduct
except where the FSA proves that the person responsible for it
intended to engage in market abuse or exhibited recklessness or
possibly negligence about the abusive effect of the behaviour.
This is consistent with our recommendation above to enhance the
evidential status of non-actionable rules and codes of practice.
Conduct in breach of the Code
271. In its second memorandum
the FSA puts forward the suggestion that the Code should be made
altogether definitive so that conduct that contravenes the Code
is deemed, without proof of anything more, to be market abuse.
This suggestion is the counterpart to their proposal discussed
above for compliance with the Code to be an absolute safe harbour.
It would relieve the FSA of the burden of proving anything other
than a breach of the Code. The conditions specified in Clause
56 would become merely the outer limits of the FSA's rule-making
power. It would make the FSA the law-maker in the area of market
abuse, raising the question of parliamentary control, on which
the House of Lords Delegated Powers Committee would undoubtedly
comment. This would be especially significant, as the FSA concedes,
because the market abuse regime applies to everyone, not just
to authorised and approved persons.
272. Our recommendation above, for compliance with
the Code to be a safe harbour except where there is intent to
abuse the market, or recklessness or possibly negligence, is based
on the view, embodied in the draft Bill, that the limits of market
abuse should be set by the legislation rather than by the FSA.
The alternative model now suggested by the FSA is less flexible
than our preferred approach, in that it would not catch those
who set out to exploit a loophole in the Code or who abuse the
market through recklessness or negligence. Under its model the
FSA would have to act quickly to close the loophole and would
not be able to pursue those who have already slipped through.
We therefore recommend the "safe harbour" approach
described above, rather than making the Code altogether definitive.
Guidance and Pre-clearance
273. The question of guidance and pre-clearance is
discussed generally above in the context of discipline and enforcement.
We noted there that the Government intend the powers of waiver
and guidance to achieve the same effect as no-action letters.
However, as the Bill is drafted at present, FSA guidance does
not have any formal evidential status and the FSA does not have
express power to waive or modify its Code of Market Conduct.
274. With regard specifically to the operation of
guidance in the area of market abuse Mr Whittaker told us:
"If you were to come to us for guidance on a particular transaction,
and we were to say that we thought that transaction was consistent
with the market abuse provisions, then, provided you had been
open with us in what you said and the situation was as you described
it, I think we would be extremely unlikely to take any action
in relation to those provisions". Mr Davies told us that
in relation to market abuse, "We are currently working on
a policy statement ...
about the circumstances in which we will be prepared to issue
He sounded a note of caution: "You have to be very, very
clear about the terms of the transaction you are approving, because
you do not want to approve something and then discover that, when
it is actually effected, the transaction is rather different in
crucial ways from the one that was put to you".
275. We recommend that the Treasury should consider
the case for giving FSA guidance on the market abuse regime the
same evidential status as the FSA Code of Market Conduct.
This would further increase the certainty of the regime; on the
other hand, it might make the FSA more cautious about giving guidance
than they would be if it had no special status.
Rules of exchanges as safe harbour?
276. Mr Whiting considers that his exchange, the
London Metal Exchange, has succeeded in defining market abuse
clearly in its own rules, and that compliance with such rules
should constitute a safe harbour.
Mr Whittaker explained to us in evidence
the difficulty that behaviour could affect more than one market.
However he added, "We do think it is desirable that a Code
should give weight to the rules of the exchange in the way in
which it describes particular abuses". Also, "Where
an abuse arises only within a particular exchange, we would expect
it to be that exchange that would take enforcement action, we
ourselves would not get involved".
277. We regard this as a sensible approach and do
not consider that a case has been made for the enactment of this
type of safe harbour.
Civil or criminal?
278. The impact of the ECHR on the proposed market
abuse regime featured prominently in the representations made
to us. We recognise, as noted above in the general context of
discipline and enforcement, that this is an area of legal complexity
and that there is scope for contrasting views on how the ECHR
applies. Nevertheless, a strongly-supported view, based on the
oral and written representations we received, is that although
the draft Bill classifies the market abuse regime as civil, such
classification under the domestic law is not conclusive for the
ECHR and that, for that purpose, it is likely to be regarded as
criminal. This conclusion is arrived at by considering the nature
and scope of the regime and the nature and severity of the penalties.
279. The characterisation of the regime as criminal
carries with it a variety of implications. It means that the legislation
by which it is created must satisfy Article 7 of the ECHR, which
has been interpreted as meaning that the nature of a criminal
offence must be stated with sufficient certainty to enable a person
to be able to foresee the legal consequences of his actions. It
also means that the special safeguards provided by Article 6 of
the ECHR for proceedings involving criminal charges apply.
280. Earlier, we said that the Government should
publish their thinking as to whether the Bill's general disciplinary
and enforcement processes are civil or criminal in ECHR terms,
and in the light of that how the relevant Convention standards
are to be met. In view of the weight of evidence that we have
heard about this point in relation to the market abuse regime
in particular, we consider that there is a compelling case
for the Government to respond to the concern that the market abuse
regime is criminal in substance in ECHR terms and that the necessary
safeguards do not appear in the Bill as drafted.
281. There are three main options:
- they could recognise on the face of the Bill
that the regime is criminal and make the whole of market abuse
a criminal offence, limiting the FSA's role to that of prosecutor
through the criminal courtsthis approach would run the
risk of creating a regime so heavy-handed as to be of limited
- they could incorporate criminal justice safeguards
(in particular, privilege against self-incrimination and some
form of legal aid) into the enforcement regimes established by
the Bill, for cases sufficiently serious to count as criminal
in ECHR terms; or
- they could make the regime more clearly a civil
regime, by restricting the remedies available (which might weaken
the effectiveness of the regime) or by requiring the FSA to have
greater recourse to the civil courts.
We look forward to seeing the Government's response
on this issue. As noted above, we intend then to revisit the question
with fresh evidence and a further report.
347 E.g. LIBA, Goldman Sachs Back
4, para 33 Back
13, para 32 Back
Consultation Paper 10 Back
Farrow QQ 201, 221; Mayhew Q 202; Blunden Q 261; Buxton Q 276 Back
Q 202. Also Bates Q 223 Back
Q 433 Back
APCIMS, Appendix 37, para 4.1 Back
Bates Q 245; Vipond Q 284; Sylvain Q 284 Back
117, 288 Back
78; cp Whittaker Q 448 Back
Farrow Q 223 Back
4, para 39 Back
5, para 4 Back