Mark Spiers (pictured) recently hosted a seminar about market abuse in the London offices of Bovill, the compliance consultancy. His conclusions are of interest to many private banks and fund firms with exchange-facing operations.

Market abuse, Spiers (pronounced 'Spires') explained, can either occur in one's firm or be perpetrated by one's clients through one's firm. The seminar covered the rules of the United Kingdom in this area, the respective jobs of compliance and front office teams and some practical, helpful tips about pre-and-post-trade controls and how to control insider information. Joining Spiers on the panel were Mike Booth and Beth Cazalet, also of Bovill.

Asset managers and others ought to be aware that the Financial Conduct Authority published a thematic review very recently, thereby renewing interest in this topic throughout the financial services industry. Everyone, moreover, knows about the London Interbank Offered Rate or Libor scandal and all the investigations that derive from it – another instance of the subject's importance. All this proves that the FCA is pursuing people who abuse the market with increasing vigour. It is also widening the reach of its market abuse investigations.

Regulatory change and its deleterious effect on monitoring

Spiers told the audience of compliance experts: “We also know that our [client-] firms and our personal franchises are in danger if we are involved in a market abuse case and that hasn't gone away.

“One thing that our firms tell us is that there has been such a weight of regulatory pressure over the last few years that a lot of talented compliance focus has been put on dealing with the regulatory change. As a result, people are missing the "business-as-usual monitoring," and potentially this is one area of market abuse where "B-A-U monitoring" is absolutely vital. Because of competing pressures from the regulator, maybe some firms are not actually doing the monitoring they need to do.

“There is regulatory change in this area as well. On the same day that MiFID and MiFIR [the Markets in Financial Instruments Directive and its accompanying regulation] were released in the European Union, you also had MAD II, the return of MAD, [the Market Abuse Directive] which...changes things quite a lot for some people, but not much for others.”

Word searches

Up came a word-picture derived from the FCA's recent thematic review (TR-15). By far the four largest (and therefore most frequently used) words were firm, abuse, risk and fund. Next came trading, managers, dealing, post-trade, controls, practice, surveillance, review, received and management. Bovill had removed the most obvious words – inside, information and firm – to make room for the others.

Spiers said that the fund managers in the audience ought to have read TR-15 and taken note. He thought that not only was this continuing to be a very topical area, but also that it was likely to increase in importance over the next few years. He then yielded the floor to Mike Booth, whose job it was to recap the current British rules in this area, and Beth Cazalet, an expert in the practical aspects of it.

An overview of the UK's rules

Parts of the FCA’s rulebook or 'handbook' such as The Market Conduct Sourcebook (which is known as ‘MAR’), set out standards of conduct in this area. MAR includes the Code of Market Conduct (known as MAR 1, which sets out types of conduct such as insider-dealing and market manipulation that may constitute market abuse) and the Price Stabilising Rules (known as MAR 2).

Booth began: “Mark mentioned MAD II, the prequel to which was MAD I, and also we have had primary legislation in the UK, but nobody likes to read primary legislative directives and that's why we have the Code of Market Conduct, the MAR section in the FCA handbook. You will all be familiar with this as it's great bedtime reading. Here's one of those parts of the FCA handbook that is written in English, in sentences and paragraphs, so that you can actually read it. The code is applicable to your regulated firms, and to you as employees at regulated firms, but also just to individuals in general, i.e. individuals who are not in regulated firms.”

Territorial issues

What about the territorial reach of the rules? Booth said: “Here in the UK, you'll be subject to being slapped on the wrist by the FCA if you're found caught doing market abuse. In relation to any qualifying investments in prescribed markets, or related investments, it could be the case from a territorial perspective that you may face investigation here in the UK but the market abuse allegations are in relation to a listed investment in Germany, France or Italy, for example. So you could be subject to investigation by more than one regulatory authority.”

Six abusive types of behaviour

Market abuse can consist of any one, or many or all, of six abusive 'behaviours,' as Booth called them. These are only relevant when they relate to a qualifying investment or a related investment. Leaving an explanation of 'qualifying investments' for later, Booth said that a 'related investment' could be something resembling a derivative where the underlying reference asset was a qualifying investment.

Two of these activities – insider-dealing and improper disclosure – pertain to inside information. The rest can be grouped together under the general heading of “market manipulation.” They are: the manipulation of transactions; the manipulation of devices; dissemination; and distortion and misleading behaviour.

Two regimes apply here: a criminal and a civil one. The FCA's Code of Market Conduct works alongside criminal law. The consequence of this is that not only can a full range of civil penalties be applicable but any form of market abuse also includes a risk of criminal proceedings. The FCA is growing ever-more willing to go down the criminal route and prosecute individuals who are caught abusing the market.

Powers and penalties

The maximum criminal penalties are an unlimited fine and seven years' imprisonment. The civil disciplinary regime, in the meantime, allows the FCA to:

• levy an unlimited fine;
• issue a public statement about the behaviour, although this is something the civil regime, and indeed the common law, allows any private citizen to do as well;
• convince a judge to issue an injunction requiring the person to stop the abusive behaviour, although, once again, anybody else is free to talk or write to a judge as well;
• ask a judge to make an order for restitution, requiring the individual to return or make good any profit he has made from the abusive behaviour – something, once again, that any private citizen can do; and
• require the payment of compensation to victims.

Qualifying investments and prescribed markets

There is a wide variety of qualifying investments, which includes:

• transferable securities;
• units in collective investment undertakings;
• money-market instruments;
• financial futures contracts, including equivalent cash-settled instruments;
• forward interest-rate agreements;
• interest rate, currency and equity swaps;
• options;
• derivatives on commodities;
• auction products;
• emissions trading;
• and more.

Prescribed markets are defined as UK-recognised investment exchanges, all other regulated markets in the European Economic Area, plus OFEX, the off exchange trading platform. The list of these is at http://www.fsa.gov.uk/register/exchanges.do – and it is definitely 'fsa', despite the disappearance of the old, unlamented Financial Services Authority two years ago.

* In the next instalment of this epic tour of the market abuse landscape, Bovill's experts discuss Chinese walls, the true nature of 'inside information,' Twitter's fake takeover bid and the struggle between front offices and compliance departments to control 'inside information.' Mark Spiers is the head of Bovill's private client department and can be reached on +44 (0)207 620 8443 or at mspiers@bovill.com