Chapter 12Criminal liability in businessPenalty for insider dealing
The contract to buy or sell the shares is unaffected. The
sanctions are criminal, the maximum sentence being
seven years’ imprisonment and/or a fine of unlimited
amount. In order to be found guilty, the offence must in
general terms be committed while the person concerned
was in the UK or the trading market was.
Exemptions
Schedule 2 to the Criminal Justice Act 1993 sets out,
in particular, an exemption for persons operating as
dealers, so that, for example, those engaged in dealing
for clients on the stock exchange are exempt because
they would find it difficult to operate deals in shares if
they had to stop dealing in them when in possession of
what might be inside information about some of them.
It should be noted, however, that the exemption covers
only the offence of dealing. They are not exempt from
the offence of encouraging another to deal.
Market abuse – the civil powers of
the Financial Services Authority (FSA)
The Financial Services Authority (FSA) is the regulator
of the UK financial sector. It was given statutory powers
by the Financial Services and Markets Act 2000 (FSMA).
The FSA is, however, a company limited by guarantee
and is funded through firms it regulates.
The regulation of market abuse in the UK can be
found in the FSMA 2000, Part VIII (ss 118–131). Section
119 of the FSMA requires the FSA to issue a code which
contains provisions that will give appropriate guidance
in determining whether certain behaviour amounts to
market abuse according to the FSA. Accordingly, de-
tailed rules can be found in the FSA’s handbook and
particularly in the Code of Market Conduct. Under the
FSMA 2000, market abuse is behaviour in relation to
investments traded on recognised UK investment ex-
changes, e.g. the London Stock Exchange, which satisfies
at least one of the following tests:
■the misleading impression test, being behaviour likely
to give those participating in the market a mistaken
impression as to supply, demand, price or value;
■the distortion test, being behaviour likely to distort the
market;
■the privileged information test, being behaviour based
on information which is not available to participants
in the market who would regard that information as
relevant when deciding whether or not to trade.
Proof of market abuse is on a balance of probabilities
(the civil standard). However, under guidance from the
Treasury, those dealt with for market abuse, such as
insider dealing, will get additional protection given for
criminal trials, and there is to be some support for legal
costs. Thus, the FSA will not be allowed to use evidence
which it has compelled someone to give as part of an
investigation of market abuse. In other words, there is to
be a rule against self-incrimination. The accusation that
the FSA might act as ‘prosecutor’, judge and jury has been
addressed. The investigation and disciplinary roles of
the FSA will be kept separate and cases will be heard by
an independent tribunal. The Criminal Justice Act 1993,
which provides a criminal regime, remains in force.
The ‘true and fair’ aspect of the definition was
regarded as too vague, so the government has now
amended the relevant section and replaced it with a
requirement that for behaviour to be abusive it must be
regarded by a ‘regular user’ of the market as a failure on
the part of the person concerned to observe the stand-
ards which the regular user would reasonably expect of
a person ‘in his...position in relation to the market’. A
‘regular user’ is defined as a reasonable person who regu-
larly deals on the market concerned in relevant invest-
ments. Other changes introduced into the Act are:■Before deciding whether or not to take action for
market abuse, the FSA must have regard to the extent
to which the person involved took care to avoid en-
gaging in abuse or actually believed that his beha-
viour was not abusive. There is, however, no ‘safe
harbour’ provision for those who take reasonable
steps to avoid engaging in market abuse. It is a matter
for the FSA.
■A person will not be found to have engaged in abuse
if he has complied with rules made by the FSA as
where, for example, he acts in accordance with the
FSA’s rules regarding the stabilisation of investments.
■In determining the amount of any penalty to be
imposed for market abuse, the FSA must take into
account whether the behaviour has had an adverse
effect on the market and how serious the effect has
been, together with the extent to which the behaviour
was deliberate or reckless and whether the person
who is to be penalised is an individual as distinct
from, e.g. a corporate organisation.
■As regards the possibility that the FSA would not
accept conduct that was within the City Code as a
defence to market abuse, the Act now allows the FSA375