The financial services play a vital role in the UK economy. Banks, pension funds, professional trade bodies, individuals and stockholders are engaged in this complex process. All participants try to raise capital and gain from trading using range of methods. This can be a cause of different types of behaviour of the participants. Seven types of behaviour as defined in section 118 of FSMA are the civil offence and the first of them is an insider dealing.
Insider dealing - when an insider deals, or tries to deal, on the basis of inside information. (FSMA, section 118). In other words insider dealing is using information which should be confidential in making investment decisions. Knowledge of a piece of confidential information and using any information that is not publicly available can lead to a different outcomes such as destabilising markets, decreasing of market efficiency, damaging companies and their shareholders and undermining investor confidence. From these points it can be seen that insider dealing is the threat to the stable and fair operation of financial markets and is considered as an offence. For this reason, the law and regulatory bodies of the UK stock market play very important role. In the case of insider dealing there are always guilty insiders and victims because any profit accruing to an insider means a loss to other participants i.e. victims (Mervyn and Ailsa, 1993).
Insider trading was not considered as criminal offence at the beginning of the twentieth century. It became a criminal offence in the UK since 1980 when sections 69-73, Part V of the Companies Act 1980 came into force. Part V of the 1980 Act was re-enacted in the 1985 Company Securities (Insider Dealing) Act 1985 and finally amended by the Financial Services Act 1986 (MAD). The SFO and DTI dealt with insider dealing but serious cases of insider dealing didn't disclose. This was the result of problems in detection, limited resources and high cost of prosecution. (GP Gilligan 'Regulating the Financial Services Sector' 1999, chapter 6, p.186). Further reform came from the European Community in 1989 and as a result implementation of the Directive in the UK resulted in Part V of the Criminal Justice Act 1993. The Criminal Justice Act 1993 (CJA 1993) represented an extension of the basis of liability for the insider dealing offence. The offence of insider dealing is set out in Section 52(1) of the CJA 1993. The elements of the offence have detailed definitions which are contained both within primary and secondary legislation. There are three ways in which individual can commit an offence under the Section 52: dealing in securities; encouraging another person to deal in securities; disclosing inside information (CJA 1993). Under the Section 57 of CJA 1993 there are two types of insider: a primary insider is a person who has direct knowledge of inside information; secondary insider is a person who knows inside information from the inside source. Overall, Part V of the CJA 1993 presents a wider definition of 'securities' and 'insider' than the Act 1985. Large cases have been prosecuted under the CJA 1993 but it was very difficult to detect and prove an offence under the criminal law because of the high evidentiary requirements to prove beyond a reasonable doubt the guilt of the defendant. Today there is a huge amount of information available for people and hence a wide range of reasons present to explain their actions. That is why it can be impossible to detect and often cases are built on circumstantial evidence. The CJA 1993 mostly focuses on individuals' prosecution and ignore corporations because the term 'individual' excludes corporations (Kern Alexander, 'Insider dealing and market abuse: the financial services and markets act 2000', Working paper No.222, 2001).
UK is a leading interantional financial centre and its position depends on its reputation as clean and fair market. So it became necessary to complement existing criminal law and fill the gap. FSMA reduces this gap and makes the offence applicable to the corporations and individuals.
Since 2000 insider dealing became one form of market abuse after the FSA was established and began to consider these as civil offence. FSA was established in 2000 under the FSMA 119 and now it is the single and main UK regulator which is responsible for authorizing and regulating financial services companies in the UK. The main objectives of FSA: market confidence; public awareness; financial stability; consumer protection; the reduction of financial crime. The regulation of insider dealing under these objectives is consistent with the market confidence, financial stability and the reduction of financial crime. FSMA gave the FSA new powers, a wide range of rule making and responsibilities such as to take action to prevent market abuse and to prosecute insider dealing. It can take actions for breaches of the FSA's Principles for Business. The following Principles for Business permits the FSA to impose a wide range of sanctions as penalties, banning individuals from the industry and removing authorised activities: integrity principle; skill, care and diligence; management and control; financial prudence; market conduct; customers' interests; communications with clients; conflicts of interest; customers: relationships of trust; clients' assets; relations with regulators (the official website of FSA).
Under FSMA 119, the FSA is required to produce a Code of Market Conduct, indicating behaviour amounting to market abuse.
The Market Abuse Directive (MAD) came into force in the UK on 1 July 2005 through the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005 and through changes to FSA rules (MAD). It is a common approach among EU member states. In 2005 it presented a Code of Market Conduct, which contains the standards that should be observed by anyone who uses the UK's financial markets in the UK or overseas. The Code brings transparency to all market users and everyone should be able to understand what standards are required when dealing on UK markets. As a result, insider dealing is one of the seven types of behaviour that constitutes market abuse under the MAD.
These legislative changes provided FSA with the gteater flexibility and ability to choose between criminal or civil proceedings in relation to insider dealing. The complex nature of insider dealing cases requires the FSA to work with the agencies such the Serious Organised Crime Agency, City of London Police and other crime detection agencies.
Criminal Cases for insider dealing since 1981 to 2010: total Cases number is 26, 15 of them are the cases regarding the offences being a financial adviser or acting on information from an adviser, only two cases considered as a 'rings'.
Civil Cases for Market Abuse since 2003 to 2010: total number of Cases is 37, 19 of them are regarding insider dealing. The largest case was the one of Shell. The result of his 'unprecedented misconduct' in relation to misstatements of its proved reserves was the fine of £17 million (Barnes, Paul (2010): Insider dealing and market abuse: the UKs record on enforcement).
'Ethics' means a set of moral principles and values which represent the main basis of 'Ethical behaviour'. Ethical behaviour in the financial services industry is critical. Good ethical behaviour or high ethical standards can make the financial services industry credible and attract new investors. So, the public trust is the key element of successful financial services industry. The CFA institute provides the Code of Ethics and Standards of Professional Conduct which teach market participants how to maintain good ethical behaviour in practise because in this industry where every day people handle other people's money the opportunities to be unethical arise every day (H.Kent Baker, CFA, 'Good Ethics: an overview', 1994).
1.Insider Trading - sp4, Jan 1988, Ailsa Röell, Mervyn Allister King
2. Barnes, Paul, 'Insider dealing and market abuse: the UKs record on enforcement'. MPRA Paper No. 25585 (October 2010). Available at - http://mpra.ub.uni-muenchen.de/25585/
Abbas Lakha QC , Matthew Banham, 1 April 2010 'The FSA and insider dealing'
(Abbas Lakha QC, Matthew Banham 'The FSA and insider dealing' April 2010).
5. INSIDER DEALING AND MARKET ABUSE:
THE FINANCIAL SERVICES AND MARKETS ACT 2000, ESRC Centre for Business Research, University of Cambridge, Working Paper No. 222, Kern Alexander, December 2001.
Good Ethics: An Overview
H. Kent Baker, CFA
AIMR Conference Proceedings, April 1994, Vol. 1994, No. 4:1-7.
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