What is Market Abuse?
Market abuse refers to acts of deceit and manipulation in the financial market, such as insider dealing, unlawful disclosure of inside information and market manipulation. The European Union (EU) created the Market Abuse Regulations (MAR) to reduce the rate of market abuse due to increasing concern over market distortion. The MAR was enforced across all EU member states from 3 July 2016. Financial services firms must comply with these regulations to ensure that the financial industry maintains the integrity and the confidence of consumers can be restored. The Financial Conduct Authority works with law enforcement agencies and regulators to reduce market abuse across the UK. Therefore, it is important to understand what constitutes market abuse, how to report it and what will happen if you engage in this misconduct.
What is Market Abuse?
There are three types of behaviours which constitute market abuse:
- Insider dealing
- Unlawful disclosure of inside information
- Market manipulation
What are the Market Abuse Regulations (MAR)?
The MAR is a set of EU regulations used since July 2016 to actively reduce the amount of market abuse found within the financial services industry. Prior to the MAR, market abuse was dealt with in the Financial Services and Markets Act 2000.
In the EU, the MAR runs alongside the European Directive on Criminal Sanctions for Market Abuse. However, the UK does not implement this directive so there will be no change to the UK's criminal market abuse regime.
The MAR enforced the following changes:
- Issuers are required to inform the Financial Conduct Authority (FCA) if they have delayed the disclosure of inside information.
- An extension of the civil market abuse regime to new markets and financial instruments.
- A new offence: Attempted Market Manipulation.
- Specific procedures for issuers to follow when they are conducting market soundings.
Who does the MAR apply to?
The MAR applies to all members of the European Economic Area and enforces obligations upon financial instruments that are admitted to all multilateral trading facilities and markets. Therefore, the obligations stated under the MAR are applied to Alternative Investment Market (AIM) companies and the issuers which have been approved for admission to trade on a multilateral trading facility.
In the UK, the FCA is the body responsible for ensuring that AIM companies comply with the MAR and that it is appropriately enforced. The FCA enforcement and regulatory powers are established in Article 23.
What is the Market Abuse Directive (MAD)?
The MAD was passed by the European Parliament in 2003 and addressed market manipulation and misconduct across the EU. The directive established a legal framework for financial markets in the European Economic Area to follow.
The MAD considered the following as examples of market abuse:
- Dealing and disclosure of inside information
- Market manipulation
- Insider's lists
- Suspicious transaction reporting
- Research disclosure
- Disclosure of managers' deals
However, the MAD was replaced by the MAR on 3 July 2016 to expand the regulatory scope across more financial instruments and venues, effectively cracking down on market abuse more than previously.
In August 2006, Mr James Parker, a financial controller at Pace Micro Technology, was found guilty of market abuse due to his misuse of information. Following a thorough investigation, it was discovered that Mr Parker had inside information which was used in a clear breach of the company's share dealing rules. Mr Parker sold his shares in Pace Micro Technology, ahead of a profit warning, which resulted in a fall in the company's share price.
Mr Parker claimed that he did not exercise these trades due to any inside information that he had received. However, the tribunal found Mr Parker guilty of handling inside information incorrectly, after totaling his profit from the trades at £121, 742. Therefore, Mr Parker was fined £250,000 for market abuse.
The repercussions for engaging in market abuse can be severe, especially now as there is a strong drive to deter individuals from engaging in market abuse. Therefore, knowing how to identify market abuse and how to avoid it, is important.