If you are a rogue trader whose perfect day would include a few wash trades followed by an abusive squeeze, then you might be alarmed by the imminent enactment of the Financial Services and Markets Bill. It contains new provisions attacking "market abuse" which are designed to plug a perceived gap in the regulation of stock markets in the UK. There are criminal offences already of course, such as insider dealing and misleading the market.
They will remain and in many cases activities caught by the "market abuse" regime may also be punishable under those provisions. However, the new law goes further and seeks to clamp down on activities that all market professionals would regard as "dodgy" even if not actually criminal.
"The FSA hopes that the new 'market abuse' regime will see some more of the guilty get trapped, without inconveniencing the innocent more than is absolutely necessary" The aim is to make the markets an even cleaner and more reliable place to trade. The Bill creates a civil law, strict liability offence which will be enforced by the new Financial Services Authority (FSA).
It will have the power to impose unlimited penalties by "decision notice" following a prior "warning notice", with a right of appeal for the alleged culprit to a specially constituted tribunal (and up to higher courts if necessary). "Market abuse" is currently defined in the Bill as behaviour likely to be regarded by a regular user of the market as unacceptable in the context of the relevant person's relationship to the market because:
it is based upon information which is price sensitive but not known to the market, or it is likely to create a mistaken impression in the market, or it is likely to distort the market.
The FSA is to issue a code which will give examples of behaviour which will or will not constitute market abuse, either in the form of market manipulation or misuse of privileged information. The current draft code includes examples such as "wash trades" - artificial trades which give the impression of activity, but at the conclusion of which the parties are back in their original positions.
Clearly the FSA will apply different standards of behaviour to professional market users and to corporations than to private investors. There are also various "safe harbour" defences, of which the most significant is that the relevant person took care to avoid engaging in abuse, or honestly believed that the behaviour would not amount to abuse. The passage of the Bill has not been without controversy. Major city figures are concerned that "market abuse" will be invoked as a tactical defence to hostile takeovers and are seeking amendments to ensure that the Takeover Panel could not be side-stepped in that way. They argue that the peculiarly "non-legal" regulation of takeovers in the UK is a significant asset. Effective sanctions against the wide-boy elements of the investment community have proved to be elusive goals during the last two decades. The insider dealing laws in particular seem to be a net with a hopelessly wide mesh.
The FSA hopes that the new "market abuse" regime will see some more of the guilty get trapped, without inconveniencing the innocent more than is absolutely necessary.
The information contained in this article is intended only to provide a general guide to the subject matter. Advice from specialists is still recommended for your specific requirement and particular circumstances.
