Why does the UK financial services regulator take such a dim view of both market abuse and insider dealing - Essay Example

? Why does the UK financial services regulator take such a dim view of both market abuse and insider dealing? of Instructor: Date of Submission: United Kingdom’s financial services regulator has been cracking down on both market mistreatment and insider dealing in the recent past. The financial service regulator, FSA, introduced market abuse regime as a means of bringing people who trade on inside information to justice (Avgouleas, 2005, p. 179). Since the past decade, financial markets have experienced essential reforms. This is because globalization has had dramatic and far-reaching effects on United Kingdom. Market abuse and insider dealings are criminal cases for which one is to be fined or publicly censured (Avgouleas, 2005, p. 179). Market abuse is more loosely delineated than insider dealings. Most of the offenses in the financial markets are dealt with under the market abuse regime. The financial service regulator can enforce a criminal prosecution on a market abuse case if it deems fit and if there is sufficient evidence. Market abuse, according to Alexander (2001, p. 12), refers to improper behavior that destabilizes the United Kingdom markets and harms the interests of the ordinary market users and participants. For this reason, the financial services regulation Act has created sanctions and penalties which are adjacent to the criminals’ offenses Act (Compliance Reporter, 2011, p. 2-3). The primary aspect of market abuse is behavior in relation to shares and other financial instruments transacted publicly in United Kingdom. For behavior to be termed as an insider dealing, it should typify one of the seven types of insider dealings and market abuses as described by the financial service regulator. However, it should be noted that insider dealing and market abuse acts amount to criminal offenses subject to penal sanctions. The misleading statements and courses of conduct with the aim of inducing another person to implement or desist from carrying out rights in relation to investments amount to criminal offenses (The Compliance Reporter, 2011, p. 4). The market abuse regime will nab anyone: not only the individuals working in the financial markets or who manage the quoted companies on the board but also anyone who will attempt to abuse the securities markets in delineated ways. An individual is liable even when the actions were unintentional and or indirect (encouraging such behaviors). According to Alexander (2001, p. 4), market abuse and insider information regime covers financial instruments such as the shares, futures, warrants, options and debt insurance, and contracts for differences, transacted on every regulated market in United Kingdom. In addition, the regime covers all the operations associated with the financial instruments even when carried out off-market. In other instances, conduct according to other related financial instruments or essential goods may be nabbed, even when the instruments are not transacted on a normal regulated market. In addition, an individual’s conduct involving securities transacted on an overseas unfettered market may be nabbed if an option related to them is merchandized in United Kingdom. The market abuse regime purposes to safeguard markets from harm to their efficiency and to guarantee effectiveness, order and fairness. The financial service regulator has the responsibility of issuing codes of conduct in the market, which give appropriate direction to individuals determining whether behavior constitutes abuse or not. An insider, in reference to Alexander (2001, p. 10), refers to an individual who has inside information about an investment as a result of his or her membership in the administrative or supervisory body of an issuer of qualifying venture or management. An individual may also be an insider due to holding capital of an issuer of a stipulated venture or due to having right to use the data by the fact of employment, professionalism, or responsibilities. In addition, an individual may be an insider as a result of criminal activities. There are two different types of insiders: primary and secondary insider. A primary insider is an individual who possesses express data about a company, such as an employee, a shareholder or an issuer of securities, while a secondary insider is an individual who obtains information from an inside source. Inside information for the aim of market abuse refers to accurate information, not generally accessible, which a rational investor would use to help him or her make viable investment decisions. It also refers to information, if available, that would considerably affect the price of the venture. Inside information is remarkably different from research information that is generally available (Alexander and Linklater, 2001, p. 63). For instance, if a passenger called his or her broker to sell his or her shares on the site of a burning factory, this decision by the passenger would be generally available from observation of an event that occurred on the way. The information obtained is not inside information but obtained rightfully through observation. A regular user refers to an effectively rational person who deals recurrently with and apprehends the transactions of the market concerned. The financial services regulator notes that behavior is noted as a market abuse if it falls below the values and measures anticipated by a regular user (Alexander, 2001, p. 9). The Seven Behaviors In reference to the Compliance Reporter (2011, p. 12), the financial services regulator stipulates seven conducts which amount to market abuse and insider information. These behaviors include insider dealing, inappropriate revelation of inside information, misuse of information, manipulating transactions and devices, circulating information to give a false or misleading notion, and market distortion. Insider dealing may imply dealing or an effort to deal by an insider in a venture founded on the inside information with regard to the investment (Alexander, 2001, p. 23). Inappropriate disclosure of the inside information by an individual is subject to penal punishment. This occurs when insiders disclose information to other persons when not in line of their duties, employment or profession. Insider dealing is perpetrated if the clearance of securities takes place on a controlled marketplace or when an individual transaction depends on a specialized mediator (Rider and Ashe, 1993, p. 167). Under the criminal offenses act, the encouragement of insider dealings is a criminal offense. This offense envelops the circumstances when a clue is issued to an individual by an insider to trade (Alexander and Linklater, 2001, p. 57). Misuse of information focuses on behavior rooted in information not normally accessible to individuals but probably seen by regular users as pertinent when making decisions on the guidelines on which transactions in investments should be made (FSA, 2012). On the other hand, misuse of information behavior is likely to be seen by regular users as the one below sensible and suitable guidelines. Manipulative transaction behavior is regarded by the financial service regulator as taking part in activities to do business that offer or are likely to offer a phony or deceptive notion about the provision and worth of a viable venture or associated venture, or as protecting the value of such a venture at a temporary level (FSA, 2012). On the other hand, manipulating devices imply taking part in transactions that use fabricated devices or any other kind of conduct that is deceptive or misleading. Individuals may be fined or sanctioned for circulating information that may give a false and a misleading notion. This comes to act when an individual who knows or is reasonably expected to have known information spreads causes such false information to be spread (Alexander, 2001, p. 34). The information can be about a qualifying or associated venture (Chuah, 2001, p. 25). Lastly, market distortion refers to the behavior that is seen by an ordinary market client as an inability to observe the guidelines that could be practically anticipated in the situation and that provides, or is likely to provide, deceptive and misleading notions as to the provision, value, or demand of a viable or linked venture (FSA, 2012). On the other hand, market distortion behavior could be anticipated in the situations that can be considered as being prone to distort the market in the venture for the regular market users. Numerous behaviors have been cropping, and this has led to an additional guidance on what amounts to market abuse or not (The Compliance Reporter, 2011, p. 13). Once an individual is guilty of a market abuse offense, the financial service regulator considers numerous critical factors in determining the penalties and punishment to inflict on the offender. When deciding on whether or not to take control action against market abuse by individuals, the financial service regulator, FSA (2012), considers the following factors. The degree and nature of the supposed behavior The demeanor of the individual after identification of his or her behavior The extent of complexity of the market users in question, the liquidity and size of the market, and the market vulnerability to abuse Whether other authorities have taken satisfactory legal action against the behavior The action the regulatory body had taken in similar previous cases The effects of the action taken on the financial markets or the interest of the consumers, for instance an action such as a financial punishment or a public statement. The probability that such a behavior might reoccur if action is not taken; and The punitive records and the general observance record of the individual who has committed the crime to the set guidelines and standards. Financial services regulator, FSA, has imposed fines on individuals and companies found to have perpetrated a market abuse (Hillis, 2011, p. 2). In addition, it has imposed public statements of an individual or a company that participated in a market abuse. Needless to say, FSA has also imposed a court injunction to shun the repetition of such a behavior. Moreover, FSA has also imposed a requirement to give up any benefits acquired to compensate the victims of an abuse. The financial services regulator imposes fines and other sorts of punishments to show the importance of dealing with and eliminating financial crimes. The criminal offense of insider dealing has been stipulated in the Criminal Justice Act 1993 to show the importance of the matter (Avgouleas, 2005, p. 179). This will help alleviate such conducts where individuals use or support the use of information about a non-existent company to deal for their own selfish interests. The primary statutory goal of the financial service regulator is to sustain confidence in the United Kingdom financial market. FSA recognizes the desire for a balance between the advantages of innovative and competitive market procedures and processes to the United Kingdom’s economy and safeguarding the market participants from the misuse of information or any other abusive practices mentioned (Chuah, 2001, p. 72). In carrying out its activities, FSA partners with the stakeholders in the financial market industry to combat market abuse. This includes distortion, inappropriate disclosure of information, and misuse of information. The stratagem of the financial service regulator, FSA, is two faced. On one hand, FSA embarks on practical work where it collaborates with market participants to prevent market abuse. On the other hand, FSA employs enforcement tools to reduce and alleviate cases of market abuse (FSA, 2012). FSA’s primary role is to prevent cases of market abuse and misconduct. FSA undertakes numerous activities that assess systems and controls in main areas, in samples of companies (Chuah, 2001, p. 76). The financial service regulator aims to identify favorable practices and areas of weakness that it can share with the society. The financial service regulator longs for companies to evaluate their processes and procedures against their results and consider making positive reforms to their controls and practices. In addition, FSA aims to strengthen controls and practices across the financial market industry and create awareness of the prospective risks (FSA, 2012). In order to achieve this, FSA’s markets division has undertaken a monumental thematic work of reviewing the systems and practices of firms in the industry as regards inside information and public takeovers. It is impossible to expect a situation where there is no leak of any information at all, but the extent of price movements before the takeover announcements is usually too high, giving the implication that a number of the price movements may be caused by informed trading (FSA, 2012). Moreover, the company is taking steps to mull over the causes of the leaks to diminish the opportunities for the insider dealing and promote investor confidence in United Kingdom. Financial services regulator implemented the Suspicious Transaction Reporting (STR) regime. This provides valuable information and plays a primary role in market abuse monitoring regime. An evaluation of all the STRs obtained in the past year into the new market abuse regime revealed that many of the suspicious transaction reports came from small to medium sized brokers and merely a small handful from the major companies (Chuah, 2001, p. 77). It also revealed that many of the suspicion cases were related to equity markets and exceedingly few were related to products such as commodities or bonds. In addition, the STRs revealed that most of the market abuse cases were linked to insider dealing issues, with minor amount of reports in other areas such as possible market manipulation. Financial service regulator, FSA, has shown the importance of the matter and its commitment to reduce cases of market abuse by involving company senior management in key aspects of prevention and enforcement of strategies. FSA has involved key senior management personnel in the move towards a precepts-founded regime (FSA, 2012). The senior management engage proactively in the dangers they encounter and the difficulties experienced in making regulation suitable for their business and risk silhouette. FSA focuses more on the behaviors and the outcomes than the procedures and processes. By doing so, FSA expects that the principles will act as a basis for their approach to regulation, for the principles will assist the company in engaging with the industry in a proactive way, emphasized by the premise of the senior management’s obligation (FSA, 2012). This implies that FSA expects that senior management will take responsibility of checking that their business recognizes and considers the dangers that it encounters and has due regard to the activities that take place in the financial market as a whole. Needless to say, senior management should develop suitable controls and systems to manage the risks (Alexander and Linklater, 2001, p. 43). FSA expects company executives to be conscious of their people-risks and to reflect on the appropriate checks for a certain role. These include references from previous employers, criminal record checks and credit checks. FSA emphasizes that companies and firms should apprehend the significance of generating honest and open relationships with the firm. Arguably, FSA encourages companies and firms to ensure that they train their personnel well. FSA also emphasizes that it is imperative that the company senior management deal properly with wrong doers and the employees suspected in the misconduct. Equally, FSA encourages firms to have an open culture where the personnel can freely report any cases of market abuse (FSA, 2012). In dealing with the emergent market abuse cases, the second strategy is the use of enforcement to deter such actions. Financial services regulator has successfully prosecuted and imposed fines on several firms and individuals. Recently, David Einhorn, a high-profile United States hedge manager, was fined ?7.3 million for involvement in a market abuse. According to the financial service regulator, FSA, the malpractice took place following a call on 9th June 2009 between Mr. David and a broker. During the call, he was informed that Punch Taverns, a United Kingdom company, was reflecting on a considerable equity fundraising. Following this call, Mr. David reduced his company’s stake from 13.3 percent to 8.98 percent. Later, the stake of Punch Tavern Company dropped by 30 percent and Mr. David saved up to five million pounds. According to investigations by the financial service regulator, the information provided to Mr. David by the broker was insider information, which helped him make decisions. In order to reduce any other future cases, FSA fined both Mr. David’s company and him. He was fined for losses that he would have incurred if he had not made the aided trade decision and paid additional charge of 3 million pounds for his misconduct (FSA, 2012). In 2010, FSA fined insurance companies that went against one of its principles. Principle 2 of the financial services regulator is based on skills, diligence and care. The sanction was imposed on the companies Direct Line Insurance and Churchill Insurance Company, which failed to observe the principle. According to a report by the financial service regulator, an analysis of the companies’ records indicated that 28 percent of them would not have satisfied FSA’s evaluation (FSA, 2012). On the review of the staff members of the two insurance companies, 27 of the staff records had been tampered with before being presented to the financial service regulator. The altered information consisted of telephone numbers, progress report and customer feedbacks. This amounted to market misconduct, and the firms were liable to be fined by financial service regulator (FSA, 2012). In combating market abuse and misconduct, FSA also fined a former USB customer adviser 150 thousand pounds for failing to act with integrity (FSA, 2012). This person used a pre-existing venture plan to advise a client to invest in Indian securities through a Mauritius based investment company. Most of the cases that had been brought to the financial services were involving insider information dealings. Another blatant example was when FSA fined James Parker, a financial controller at Pace Micro Technology, for breaching the company’s share dealings rules of insider information. According to Alexander (2001), insider dealing has been recognized as the principal market abuse and seems hard to eradicate. Because of the explosive expansion of takeover activities in the past few years, most of the insider transactions have involved acquisitions and mergers. The large society of lawyers, financiers, and public relations officers who obtain facts of projected mergers encounter temptation to benefit from the inside information (Alexander, 2001, p. 27). For this reason, the criminal law seeks for ways to safeguard the veracity of the financial markets. Under subdivision 47 of the criminal Act, deceptive accounts, insider dealings, and influential processes and behaviors amount to criminal offenses. Before the financial service regulator enforces any one of its enforcement tools in dealing with malpractices and market abuse, it carries out a thorough investigation on the tabled case. FSA has developed investigatory methods and approaches, and, in addition, it partners with foreign regulatory bodies and has access to numerous sources of information. Debatably, FSA has attempted to improve its techniques to monitor systems and practices and make it easy to identify inappropriate transactions (Alexander, 2001, p. 23). During investigations, FSA tries to have the right people carry out the process in order to make the whole process smooth. “The right people” are the senior management officials with outstanding knowledge of business in companies. The main objective of the investigation team is to get down to the cause of the matter or incident (Chuah, 2001, p. 81). Traditionally, United Kingdom viewed market misuse in tapered circumstances as it was linked to the legal association connecting the shareholder and the company manager (Compliance reporter, 2011, p. 5). More research and analysis indicated that market misuse leads to obstruction of efficient pricing of securities. For that reason, competent financial directive should control the method of revelation of pertinent price-perceptive facts to sustain appropriate integrity and pricing of securities markets. Financial service regulators’ action to investigate and impose fines in cases of market mistreatment is anticipated to castigate the conducts of the individuals involved in market misconduct. Reference list Alexander, K., and Linklater, L., 2001. Market abuse and insider dealing under UK Law. Butterworths. Alexander, K., 2001. Insider dealing and market abuse. The Financial Services and Markets Act 2000, 1(1), 1-50. Avgouleas, E., 2005. A critical review of the New EC Financial Market regulation: Peaks, troughs and the road. Transnational Lawyer, 18, 179. Chuah, J. C., 2001. EC legal developments: A proposal to deal with insider dealing and market manipulation. Finance and Credit Law. FSA, 2012. Cases of market abuse. FSA. Hillis, B., 2011. Recent developments in abuse and insider trading. Reed Smith, 1(1), 1-19. Rider, B. A., and Ashe, M., (1993). Insider crime. Jordans. The Compliance Reporter, 2011. A publication of institutional investor. Compliance Reporter, 18(13), 1-12. 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