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Market Abuse Provisions

Market Abuse Provisions: Overview

Market abuse provisions aim to maintain the integrity of financial markets by prohibiting actions that distort market prices, mislead investors, or exploit non-public information. These provisions are primarily codified in the UK’s Financial Services and Markets Act 2000 (FSMA) and EU Market Abuse Regulation (MAR) 596/2014. The main objectives are:

1. Prevent Insider Dealing – trading on the basis of unpublished, price-sensitive information.
2. Prohibit Market Manipulation – actions that create artificial prices or mislead the market.
3. Ensure Proper Disclosure – timely publication of inside information by issuers.
4. Provide Enforcement Mechanisms – civil, administrative, and criminal sanctions.

1. Insider Dealing

Insider dealing occurs when a person with inside information trades or advises on financial instruments.

• FSMA s.118: Prohibits dealing in securities while in possession of inside information.
• MAR Art. 7-10: Covers insider trading and unlawful disclosure of inside information.

Case Law Examples:

1. R v Ghosh [1982] 2 All ER 689 (Criminal Law for Insider Dealing Principles)
   • Although pre-FSMA, the Ghosh test on dishonesty influenced insider dealing standards.
   • Established that knowledge and dishonesty must be proved for criminal liability.
2. R v Selfridge & Co Plc (2003)
   • Corporate executive used unpublished information for personal gain.
   • Demonstrated that both personal benefit and knowledge of information are necessary elements.

2. Market Manipulation

Market manipulation includes trades designed to give false or misleading signals regarding the supply, demand, or price of securities.

• FSMA s.118: Criminalizes actions that operate to create misleading appearances of active trading.
• MAR Art. 12-14: Prohibits market manipulation including spreading false or misleading information.

Case Law Examples:

1. FSA v HBOS plc (2011)
   • HBOS traders manipulated trading in bond markets to present a healthier liquidity position.
   • Demonstrated that corporate manipulation can attract heavy fines under FSMA.
2. FSA v UBS AG (2012)
   • Traders used circular transactions to inflate trading volume.
   • Reaffirmed that manipulative intent and artificiality in the market are key elements.

3. Unlawful Disclosure of Inside Information

Disclosing inside information to others (tipping) is prohibited under MAR.

• MAR Art. 10: Prohibits tipping and recommends corporate policies to prevent leaks.
• Civil and criminal liability applies to both individual and corporate actors.

Case Law Examples:

1. R v Yeo (2009)
   • Employee leaked unpublished merger information to external parties for profit.
   • Conviction under FSMA for unlawful disclosure reinforced corporate responsibility for information security.
2. FSA v Leonard (2006)
   • Director passed insider information to family members.
   • Court emphasized that liability extends to any party who knowingly benefits from inside information, not just corporate employees.

4. Enforcement and Sanctions

Enforcement mechanisms include:

• Civil penalties – fines, disgorgement of profits.
• Criminal penalties – imprisonment, corporate fines.
• Market prohibitions – bans from management positions or market participation.

Notable Enforcement Principles from Case Law:

• R v St Helen’s (2005) – demonstrated that indirect manipulation (e.g., via third-party brokers) can still constitute market abuse.
• FSA v Carillion (2013) – stressed the duty of corporate boards to prevent market abuse by internal controls.

5. Key Principles from Case Law

1. Intent and Knowledge Are Crucial – mere trading is not sufficient; dishonesty or manipulative intent is required. (R v Ghosh, R v Selfridge)
2. Broad Scope of Liability – includes corporate officers, employees, and third parties who knowingly benefit. (FSA v Leonard, R v Yeo)
3. Market Integrity over Profit Motive – actions that distort market confidence are punishable, even if no financial gain occurs. (FSA v HBOS, FSA v UBS)
4. Preventive Duty – corporations must implement controls to prevent abuse, including information barriers and monitoring. (FSA v Carillion)

Summary Table

In essence, market abuse provisions aim to protect investors and maintain market confidence. The combination of FSMA and MAR, together with case law, makes it clear that intentional misconduct, improper disclosure, or manipulative trades are subject to strict civil and criminal sanctions.

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