The Financial Services and Markets Act 2000 - Essay Example

?In respect of a Director of a UK ised service company and their obligations under FSMA 2000, the Criminal justice act and the company act 2006evaluate how the law on insider dealing could be simplified without diminishing their effectiveness. Introduction The Financial Services and Markets Act 2000 (FSMA) contains the statutory regime for controlling and regulating market abuse within the UK.1 Essentially FSMA confers upon the Financial Services Authority the power to take action against those whose conduct does not comport with accepted standards but does not reach the level of criminal activity. Thus the purpose of the FSMA is to fill gaps left by the Criminal Justice Act 1993 (as amended) and the Companies Act 2006.2 The Companies Act 2006 regulates insider dealing by describing directors’ duties and forbidding directors taking advantage of information that they come across in the course of performing their statutory and common law fiduciary duties.3 The proliferation of statutory regulation of insider dealing is a manifestation of the fact that it has become increasingly obvious that it is unrealistic to trust that abusive corporate behaviour can be left to companies alone.4 The governance of insider dealing thus appears to be a significant preoccupation by the government and by the proliferation of statutes that essentially deal with the same problem there is a perception that each statute must necessarily be introducing a different aspect of the law. It makes sense that insider dealing should be simplified and included in one statute that could cover each of the behaviours that the government seeks to prevent and monitor. This research study demonstrates how the law relative to insider dealing can be simplified by simply placing it in one statute. By taking this approach directors can more easily inform themselves of the prohibitive conduct and have more certainty as to what amounts to insider dealing and what the consequences of insider dealer are. In this research study is divided into two main parts. The first part of the paper defines insider dealing and analyses the statutory provisions defining insider dealing. The second part of the paper analyses how and why insider dealing laws should be simplified. Insider Dealing Definition Dealing refers to activities in which an individual obtains: Or disposes of the securities himself, whether for himself or as the agent of some other person, or procures an acquisition or a disposal of the securities by someone else.5 Information in the context of inside dealing refers to inside information associated with “the securities themselves or to the state of the company” issuing the relevant securities.6 Grier defines insider dealing as gainful use of “secret information” related to investments that are traded in the open market by “those who are privy to that information and should not be taking advantage” of that information and knowledge.7 These definitions take account of the fact that insiders have sensitive market information that can significantly influence buying and purchasing behaviour and investment trends generally. An insider with this kind of information can exploit this knowledge for purposes that can either harm the company or the market for self-gain.8 It is entirely understandable that insider dealing laws are promulgated to safeguard against market abuses that constitute insider dealing. Statutory Definitions and Regulations of Insider Dealing The Criminal Justice Act 1993 which implements the EU Directive on insider dealing creates two offences of insider dealing.9 The offence of insider dealing occurs when an “individual has information as an insider in circumstances mentioned in subsection (3)” and “deals in securities that are price-affected securities in relation to that information.”10 Subsection (3) provides: The circumstances referred to above are that the acquisition or disposal in question occurs on a regulated market, or that the person dealing relies on a professional intermediary or is himself a professional intermediary.11 The offence thus far is difficult to understand, at least from the wording contained in Section 52(3) of the Criminal Justice Act. For instance, the term securities is not defined in Section 52 but rather it is purported defined in Section 55 of the Act. However, Section 55 redirects attention to Schedule 2 for the precise definition of securities where securities are defined as shares, debt securities, warrants, depositary receipts, options, futures and contracts for differences.12 Information is also described later on in Section 56 of the Criminal Justice Act and requires that information be specific and not general in nature. Moreover the information is not inside information unless that information would “have a significant effect on the price of any securities” if it were be made available to the public.13 Another terms appearing in the Section 52 offence of insider dealing, “price-affected securities” is also defined by Section 56(1). To this end: Securities are “price-affected securities” in relations to inside information, and inside information is “price-sensitive information” in relation to securities, if and only if the information would, if made public, be likely to have a significant effect on the price of the securities.14 In addition to using terms that are capable of various interpretations, the Criminal Justice Act only attempts to define these terms after creating the offence and then the definitions require further explanation, but none are given. For example, it is not clear what a “significant effect on the price of securities” means. Is the price of securities assessed at the time of sale or should the court take account of future prices of the securities in question? What amounts to a significant effect? Does it require a calculation of the current price, past prices and future prices? The insider dealing offence created by Section 52 (2) is no less complicated. It creates an additional offence of insider dealing where an individual “encourages another person to deal in securities” that “are price-affected securities in relation to information” when the person who encourages the other person either knows or has “reasonable cause to believe that the dealing would take place in the circumstances mentioned in subsection (3)” or “he discloses the information, otherwise than in the proper performance of the functions of his of his employment, office or profession, to another person.”15 It would appear that the second part of the Section 52(2) offence is unnecessary because if an individual discloses insider information for gain, he is not acting in the proper performance of his profession. The fact that the Criminal Justice Act 1993 specifically identifies this conduct as an offence under insider dealing, suggests that it must be somehow different from the offence of providing information relative to price-affected securities. It must therefore create difficulties for law enforcement when attempting to determine whether or not investigations should centre round collecting information and evidence to support a Section 52 offence of insider dealing by reference to improper professional information disclosure or information that is price-affected. Moreover, since the Companies Act 2006 prescribes the proper conduct of directors and forbids insider dealing, it would have perhaps been a lot simpler for the Companies Act 2006 to simply state that failure to comply with that particular section is a crime. The Companies Act 2006 however provides little help relative to insider dealing and merely provides methods by which a director may take advantage of insider information by ensuring that any transaction that a director comes across in course of performing his or duties may be absolved of culpability provided that he discloses his intention to take advantage of that transaction.16 The Companies Act 2006 imposes upon the director a number of statutory duties that can be interpreted to safeguard against insider dealing. For the most part the director is required to promote the success of the company, use business judgment, take account of the interest of stakeholders, act with due diligence and to avoid a conflict of interests.17 The fact that the Companies Act Sections 171-177 fails to specifically caution against insider dealing, it is not altogether certain that directors can be guilty of a breach of fiduciary duties should they engage in insider dealing. It can be argued that the omission is necessary because anyone can be guilty of insider dealing. However, since Sections 171-177 is specifically concerned with regulating directors’ conduct, insider dealing should have been among the prohibited acts of directors. As it now stands, a director seeking to inform himself of directors’ duties and liabilities will not obtain all the necessary information by reference to Sections 171-177 of the Companies Act and will necessarily have to look at FSMA and the Criminal Justice Act 1993. Even then, he cannot be assured that insider dealing is a prohibited act on the part of directors. The FMSA was intended to address the flaws implicit in the law relative to market abuses generally.18 However, the complex nature of the new rules when read together with the Criminal Justice Act in particular has: Left issuers and managers sometimes unsure as to what rules apply to the capital markets aspects of securitization and how they are to be applied.19 Much of the confusion was created as a result of three on-going efforts to implement laws in response to three different developments. As previously stated, the Criminal Justice Act 1993, implemented an EU Directive on insider dealing. The Companies Act 2006 came about as a result of the UK government’s attempt to codify the common law and to place the company law in one place.20 FSMA was a result of the implementation of the EU Directive on Market Abuse which gave all member states until July 1, 2005 to implement.21 On December 1, 2001, FSMA came into force and introduced a regulatory framework prohibiting and monitoring market abuse. The 2000 Act therefore serves as a supplemental statue in relation to the Criminal Justice Act 1993 in relation to insider dealing. It was largely believed that the law relating to insider dealing was entirely inadequate and needed to expanded on.22 The law relative to insider dealing at the time was contained in the Criminal Justice Act 1993. In its current state, insider dealing is vaguely defined and supplemented by definitions that come after the offence and elements of the offence are described. These definitions raise questions as to their interpretation and application and thus do not really clarify the offences. It would have made more sense to amend the Criminal Justice Act 1993, by clarifying it and expanding on the offences rather than providing a separate form of civil liability and expansions in another Act. Nevertheless, in its original form FSMA introduced three forms of market abuse. They included the abuse of information not made public when the information was material in nature; making false or misleading statements or impressions relative to the market and distorting the market. FSMA also stipulated that conduct falling within these spectrums were not market distortions if they were consistent with the standards of regular users of the relevant market.23 To avoid the obvious confusion that FSMA would create by allowing abuse of the market if it was common practice, the Financial Services Authority introduced the Code of Market Conduct which identifies conduct that would not constitute market abuse. The Code of Market Conduct also defines conduct that would constitute market abuse.24 The Code of Market Conduct therefore adds another source of information by which market users can determine the definition of insider dealing. It would therefore appear, that with all these sources of law and regulations, market users should be more confused and less enlightened. Each new source of information speaks to the inadequacy of the laws and regulation that precedes it. Regardless, FSMA does serve an important function. It provides for civil fines and restitution and thus reliance on the Criminal Justice Act and the vagaries of the Company Law Act 2006 can be circumvented. Changes were introduced to FSMA following the EU’s Directive on Market Abuse in 2003. The 2003 Directive was intended to implement its Financial Services Action Plan for harmonizing EU financial services markets. The intention was to promote honest, open and efficient financial services markets within the EU. The Directive mandates that member states prohibit and punish insider dealing and market abuse generally and to ensure that price sensitive information is disclosed to market users in a timely fashion.25 The changes to FSMA were centred on introducing new rules regulating disclosure obligations relative to price sensitive information on the part of securities’ issuers and preparing investment investigations. The resulting FSMA identifies conduct that constitutes market abuse. They are: 1. Insider dealing. 2. Improperly disclosing inside information. 3. Misusing information that is not typically available to the public. 4. Transactions that have the capacity to generate inaccurate market impressions or falsely substantiate prices. 5. Transactions that use false or deceptive methods. 6. Sharing inaccurate or deceptive information. 7. Conduct that creates false or disingenuous impressions or distorts the market.26 Each of these market abuses are caught by the Criminal Justice Act and the fact that insider dealing is segregated from all of the other forms of market abuse, the definition of insider dealing under FSMA must necessarily create confusion and uncertainty about what amounts to insider dealing. The fact that each of the elements of market abuse are referred to Criminal Justice Act might give the impression that the Criminal Just Act deals with another form of insider dealing or that the FSMA deals with another form of insider dealing. Simplifying Insider Dealing Laws The development of insider dealing laws in the UK has taken it far from its original and much simpler laws. The Companies Act 1980 provided a definition of insider dealing that was much easier to understand, interpret and enforce. Section 68 of the Companies Act 1980 provided: it would be reasonable to expect a person and in the position by virtue of which he is so connected not to disclose except for the proper performance of the functions attaching to that position.27 Thus Section 68 of the Companies 1980 Act was able to capture the duty of those who should be trusted to safeguard securities sensitive information. It also specifically and concisely identified what amounted to insider dealing without creating further and unnecessary confusion and uncertainty. Moreover, those to whom insider dealing would apply could easily inform themselves of the relevant law. Understandably, changing markets conditions, the proliferation of corporate scandals and market crashes required an expansion of the law on insider dealing. As it is, FSMA, the Criminal Justice Act and the Companies Act 2006 work together to achieve a significant goal. The goal is to ensure that those who deal in securities, encourage others to do so and disclose information do so professionally and in a manner that does not distort the market. For the most part a code of professional conduct should have been sufficient for informing market users of how they should carry on business relative to securities and avoid insider dealing. Certainly, Sections 71-77 of the Companies Act 2006 can be looked upon as a Code of Conduct. Although Sections 71-77 of the Companies Act 2006 fails to specifically mention insider dealing it can be deduced from the language of the Companies Act 2006, that insider dealing would necessarily arise to the level of breach of the director’s fiduciary duties. The mere duty to avoid a conflict of interest would obviously mean that directors are not entitled to make a profit for themselves as a result of information they come across in the course of preforming their duties as directors. The defence available to market users in FSMA Section 123 could be left out altogether as it appears to be entirely contradictory. Section 123(2) provides that any individual accused of insider dealing can be exonerated if he/she can demonstrate the he/she reasonably believed that his “behaviour did not in effect amount to market abuse.”28 It is virtually impossible to prove innocent belief when insider dealing would necessarily involve considerable planning and strategizing.29 Thus from a practical perspective, the proliferation of insider dealing laws in the UK, particularly the Companies Act 2006, FSMA and the Criminal Justice Act 1993, demonstrates a serious concern about market stability. This concern is entirely justified given the number of corporate scandals, the collapse of financial institutions and market crashes over the last few years. However, less apparent is the fact that these laws predated the last financial crisis of 2008 and thus indicate that the laws are inadequate for stabilizing the market. Conclusion Each of the insider statutory provisions aimed at preventing market abuses, including insider dealing, are either too difficult to understand or too vague to allow for precise and consistent interpretations. Moreover, with insider dealing captured by three different statutes, it is conceivable that the general impression would be that insider dealing might be three different offences. The confusion and uncertainty created by including insider dealing in three different statutes could be removed by simplifying the laws relative to insider dealing. Simplification would be accomplished by first consolidating the law relative to insider dealing in one statute. Moreover, concise and simpler definitions of insider dealing and its elements would also help to make its interpretation and application more effective. Bibliography Blair, M. (2009). Blackstone’s Guide to the Financial Services and Market Act 2000. Oxford, UK: Oxford University Press. Bovey, P. (2008) “A Damn Close Run Thing –The Companies Act 2006.” Statute Law Review, Vol. 29(1): 11-25. Code of Market Conduct 2001. Companies Act 2006. Companies Act 1980. Criminal Justice Act 1993. Financial Services and Markets Act 2000. Grier, N. (1998). UK Company Law, Chichester, UK: John Wiley & Sons Ltd. Jain, N. (2004). “Significance of Mens Rea in Insider Trading. “Company Law, Vol. 25(5): 132-140. John, K. and Lang, L. (Sept. 1991). Insider Trading around Dividend Announcement: Theory and Evidence.” The Journal of Finance, Vol. 46(4): 1361-1289. Keenan, D. (2005). Company Law 13th Ed. Essex, UK: Pearson Education Ltd. Mantysaari, P. (2008). The Law of Corporate Finance: General Principles and EU Law. London, UK: Springer. Market Abuse Directive 2003/6/EC. Ng, L. (2006). “How UK Securitization is Adapting to Regulation”. International Financial Law Review, Vol. 25: 35. Sealy, L. and Worthington, S. (2008). Cases and Materials in Company Law. Oxford, UK: Oxford University Press. Wotherspoon, K. (May 1994). “Insider Dealing: The New Law: Part V of the Criminal Justice Act 1993.” The Modern Law Review, Vol. 57(3): 419-433. Read More