Market Abuse Concept in the Context of the EU and UK Legislation Essay

Introduction

The concept of ‘market abuse’ is widely used in the financial sphere because market abuse can significantly influence the reputation of the financial market among investors. In order to guarantee the economic and financial growth, investors are interested in receiving the complete information regarding the business’s progress and capital related to the market. Still, the national market can see the threat of being avoided by investors if there are improper regulations regarding the market abuse. From this point, it is important to define market abuse as the specific behaviour that contributes to creating false impressions and affects investments negatively because of the issues of insider dealing and market manipulation. Thus, insider dealing and market manipulation are usually discussed as the main types of market abuse, but there is a range of other behaviours that should be discussed as this type of the market failure³. As a result, ad hoc publicity is also discussed in the context of market abuse⁴. In this context, market abuse is associated with the behaviour of persons interested in receiving personal advantages from investment and other financial operations.

In order to conclude regarding the integrity of the market and effectiveness of proposed regulations to address the market abuse, it is important to understand what aspects of market abuse are identified as influential for the financial market by the European Commission and by the UK authorities. This paper will present the critical analysis of the concept of ‘market abuse’ and its specific scope in the context of the EU and UK legislation, and it will provide the discussion of the market abuse types important to be determined and addressed with references to different regulations.

Concept of ‘Market Abuse’ in the Context of UK Legislation

The discussion of the concept of ‘market abuse’ in the context of the market failure can be referred to Adam Smith’s views on the principles of the free market and on protection of the right for free decision. According to Smith, it is important to provide strategies and measures that are effective to protect the financial market from the failure, and the main focus is on providing the fair market laws. Such economists and researchers as Gray and Moloney developed Smith’s idea of market failure and concentrated on the necessity of guaranteeing integrity of financial markets. In the context of the United Kingdom, the situation in the market before 2000 demonstrated that there are many signs of the market failure, and existing regulations were not effective to address the problem in terms of controlling insider dealing and market manipulation in order to promote integrity. Although the necessity of new restrictions that could affect the development of financial markets was questionable in relation to the opinions of some economists, the new regulations were proposed for the UK context. Before the year of 2000, equity markets and businesses in the United Kingdom significantly suffered from a range of market failures, including inadequate pricing, issues of insider dealing and market manipulation, and problems with accounting and auditing. The problem was in the fact that many agents in the market chose the strategy of unfair behaviour, and having the opportunity to control the flow of information, they misled investors and persons interested in the value of shares. In order to maintain the integrity within the market and to address the problem of the market abuse, the Financial Services and Markets Act 2000 (FSMA) was adopted with the sections regarding the market abuse.

The FSMA was enacted by the UK Parliament as the regulation to address the issue of market abuse from the perspective of the civil crime and with references to the specific criminal and civil penalties proposed for cases of insider dealing and for other forms of market abuse. According to the definition of ‘market abuse’ provided in section 118 of the Financial Services and Markets Act 2000, market abuse is any behaviour that occurs in relation to “qualifying investments admitted to trading on a prescribed market”, “qualifying investments in respect of which a request for admission to trading on such a market has been made”, and “in the case of subsection (2) or (3) behaviour, investments which are related investments in relation to such qualifying investments”. Herbst and McCaw note that the concept of ‘market abuse’ discussed in the Financial Services and Markets Act 2000 was rather wide, and it covered a range of other procedures in addition to the problem of misusing the unpublished information, the issue of creating false or misleading statements; and the issue of the market distortion.

Cave, Baldwin, and Lodge pay attention to the fact that the important feature of the FSMA is that the law is presented as the civil regulation that can be extended to many individuals and parties, not only to investors or financial intermediaries. For instance, not only insiders can be prohibited regarding the misuse of the corporate information. In this context, the definition of the ‘market abuse’ presented in the Financial Services and Markets Act 2000 and proposed conditions contributed to widening the scope of the market abuse problem and to promoting the market integrity, confidence, and stability. However, the association of civil penalties with the concept of ‘market abuse’ provoked a range of debates regarding the necessity and effectiveness of such penalties to decrease the number of market abuse cases in the United Kingdom. Still, it is possible to state that the UK policymakers proved the necessity of focusing on this aspect while proposing further amendments to the regulation.

The market abuse regulations adopted in the United Kingdom in 2000 were effective to address the range of financial cases before the economic crisis of 2008, when the number of financial scandals increased significantly. As a result, there were signals for revising the current regulation according to new standards and tendencies. Nevertheless, the discussion of the market abuse in the FSMA did not address all the tendencies of the rapidly changing context. The adoption of the Market Abuse Regulation 2014 by the European Commission demonstrated the necessity for revising the FSMA in the United Kingdom, and the Financial Services and Markets Act 2000 Regulations 2014 were published. These regulations demonstrated the intention of the UK government to be in line with the EU laws and visions of market abuse. As a result, upgraded provisions were recommended to determine the scope of the market abuse and associated penalties clearly and to improve the approaches to disclosing price important information and conducting the investment research.

Concept of ‘Market Abuse’ in the Context of EU Legislation

The Financial Services and Markets Act 2000 adopted in the United Kingdom was discussed by the European Commission as the basis for developing the EU regulation regarding the issue of market abuse. The 2003 Market Abuse Directive proposed by the European Commission as the main European Union’s regulation in the sphere determined the scope for the concept of ‘market abuse’ in terms of using confidential and misleading information by actors of the financial market. The two main types of market abuse were identified as insider dealing and market manipulation. In addition to insider dealing, the concept of ad hoc publicity was also identified. Thus, Arora focuses on the idea that insider dealing is often one of the most important causes that influence parties of the financial market because they become vulnerable while not possessing or knowing the privileged information. As a result, investors begin to avoid the market because insider dealing can be discussed as the evidence to state that the observed financial market is inappropriate and needs further improvements regarding governance and regulations. In its turn, market manipulation is associated with unfair actions of parties when the focus is shifted to misleading statements and to significant price changes that violate the stability of the whole financial system. In this context, the market abuse regulations are developed to protect investors and companies as well as the market from affecting confidence and stability.

The 2003 Market Abuse Directive was developed as the strong regulation covering the majority of financial instruments typical for the European Union’s financial market. It was important to make investors confident regarding the accountability and integrity of the EU financial market. However, the rise of scandals in the financial sphere in Europe provoked updating the used legislative framework, and the 2014 Market Abuse Regulation was proposed as the improved variant of the previously used legislation. In this context, the main focus was on reviewing the scope for market abuse and on reformulating the definitions for the market abuse types. The necessity of establishing the 2014 Market Abuse Directive was supported with the need for addressing the changes observed in the modern financial market in terms of criminalisation.

Thus, the ineffectiveness of the regulation to address the cases of insider dealing and market manipulation when persons misused the non-traditional technologies that were aimed to protect the financial information or manipulated financial instruments demonstrated the need for reviewing the scope and responsibilities. More debates were associated with reflecting a range of criminal sanctions for insider dealing, ad hoc publicity, and market manipulation in the regulations while following the example of the United Kingdom’s regulations adopted in 2000. In spite of the fact that this criminalisation was under debate, the overall approach to discussing the concept of market abuse in the European context was evaluated as effective because much attention was paid to widening the scope of issues addressed with the help of the newly proposed regulations in 2014. From this perspective, the policymakers from the European Commission focused on proposing the procedures and regulations that could affect the situation in the economic and financial markets as a whole. That is why, much attention was paid to declaring and establishing the legislation directly oriented to coping with insider dealing issues and market manipulation of different types.

Analysis of the ‘Market Abuse’ Concept and Types in the EU and UK Legislation

The regulations and directives followed in the United Kingdom and European Union before 2014 can be discussed as rather effective in the context of the financial market development typical for the 2000s. However, the era of 2010s required the review of the market abuse concept, and its evolution resulted in accentuated criminalisation, in widening the scope for market abuse, in reviewing the definitions and aspects of insider dealing and market manipulation, and in determining the procedures associated with misusing the inside information. From this point, the changes in evaluating the concept of market abuse by the European Commission and the UK authorities should be discussed with the focus on changes observed in defining such types of market abuse as insider dealing and market manipulation.

Insider Dealing

Insider dealing is observed when insiders or stakeholders use financial instruments to receive personal advantages and to disclose the financial information or to use the information that is not available to investors. The 2003 Market Abuse Directive that influenced the further amendments in the FSMA in the United Kingdom stated regarding the issue of insider dealing that persons possessing inside information are prohibited to use or disclose that information. However, that formulation did not include persons indirectly connected with the companies and using the closed information for their own benefits. Furthermore, the used definition of the inside information was also ineffective to identify all types of corporate information that can be used to harm shareholders. As a result, the definition of insider dealing was improved to address different types of transactions and financial instruments. The improved definition was presented in the 2014 Market Abuse Regulation. As a consequence, the European approach to discussing insider dealing changed, and now it was more correlated with the definition followed in the United Kingdom.

Discussing insider dealing and market manipulation, it is possible to state that broadened possibilities for civil penalties and investigations are effective steps toward addressing the issue of market abuse in the European Union. Conceicao and Singh note that wide restrictions regarding the activities of persons that are not directly connected with the company but involved in market manipulation are important because the possibilities for developing financial scandals reduce. The evolution of discussing the concept of insider dealing led to expanding the parties which can be prohibited, including not only persons but also firms as legal persons and financial market intermediaries.

Ad Hoc Publicity

Ad hoc publicity is another type of market abuse that has the features similar to the components of insider dealing. However, although both mechanisms are associated with the use of inside information, there are significant differences between them. According to the principle of ad hoc publicity, issuers are often obliged to provide different types of inside financial information. In this context, ad hoc publicity serves to prevent possible insider dealing when all the required information is revealed. From this point, ad hoc publicity should be regarded as the form of the public disclosure. If the issuer chooses to publish a lot of financial information, there are fewer opportunities for insider dealing. However, it is important to note that this approach is effective only when the information directly related to the issuer is revealed. The focus of the European Commission and the UK authorities on the principle of ad hoc publicity can be explained with references to the attempt to protect the other types of confidential information. The presence of both insider dealing regulation and ad hoc publicity principle is important to guarantee the credibility of the directives and regulations proposed by the EU and the United Kingdom.

Market Manipulation

Market manipulation is a type of the market abuse when it is possible to influence the mechanism related to price-setting in the market or to use the misleading and false information in the market to gain benefits. Market manipulation is also referred to transactions based on the false or misleading information and to the dissemination of facts that can be advantageous for the certain party of the financial market. In order to address the problem of the market distortion and manipulation of the false financial information, the regulation regarding the market manipulation was proposed by the European Commission as the part of the market abuse legislation in 2003. Experience of the following years has shown that it was necessary to clarify the definition of market manipulation. In fact, the clarification meant the attempts to broaden the scope of actions discussed as market manipulation. More improvements were proposed for using sanctions to prevent the progress of market abuse in the European countries. These changes were reflected in the 2014 Market Abuse Regulation and in the Financial Services and Markets Act 2000 Regulations 2014. Thus, the regulations on market manipulation were formulated in order to prevent the use of false statements and other strategies to mislead the shareholders.

The Development of the ‘Market Abuse’ Concept and Its Scope

The evolution of the market abuse concept and its scope is directly associated with changes in the economic and financial situation in Europe during and after the period of financial crisis. The modern financial market is advanced, and there are more ways for the market abuse in this context because of the aspects of the market development. As a result, to determine the restrictions that are correlated with the changes in the market, it is necessary to improve the regulations, as it was observed in 2014. The evolution of the market abuse concept in 2014 was a result of combining the European Union and United Kingdom’s approaches to formulating the new effective concept in terms of definition and proposed sanctions to address the issue. If the improvements of the European Union’s approach to the discussion of the market abuse resulted in clarifying the aspects of insider dealing, ad hoc publicity, and market manipulation, the changes in the regulations in the context of the United Kingdom resulted in formulating the definitions for seven behaviours that can be discussed as market abuse according to the Financial Services and Markets Act 2000 Regulations 2014. Consequently, the UK definition of market abuse is wider, and it provokes a range of debates regarding the appropriateness of using wider or clearer definitions to assist the associated prohibitions.

It was important to reconsider the whole system associated with the approach to discussing the market abuse and its role in influencing the financial market and systems in Europe and in the United Kingdom. Thus, Bamford focuses on the idea that the policymakers tried to use all the resources in order to make the new regulations strict and efficient and to attract more investors to markets. If investors are not attracted to the market, there are chances for the market failure and for the overall loss of the national market. It is often rather difficult to detect a range of abusive transactions and violations that can directly affect the stability of the financial market. As a result, any attempts that are made by policymakers in order to determine the barriers for the effective function of the financial market can be discussed as progressive and potentially successful. The policymakers referred to the experience of the financial crisis in order to improve the vision of the market abuse in the European countries because the crisis revealed that many companies can become victims of the market abuse associated with spreading the price-sensitive information.

It is important to pay attention to the fact that the level of integrity in capital markets directly depends on the effectiveness of the proposed legislation and a range of regulations designed to address the issues of insider dealing, ad hoc publicity, and market manipulation. The main purpose of determining the market abuse scope effectively is the orientation to providing the principles of stability, integrity, and confidence with the focus on practices of fair dealing in the European Union and United Kingdom’s financial markets. Gray pays attention to the fact that the new market abuse offences were designed to prohibit unfair dealing and market manipulation for any person who had the opportunity to use the confidential corporate information or distort the market. In addition, by defining the market abuse more widely, the UK authorities receive the opportunity to protect the whole financial market from previously observed violations and the market abuse issues.

Conclusion

Market abuse in forms of insider dealing, ad hoc publicity, and market manipulation can be discussed as a threat to the stability of modern financial markets not only in the context of the United Kingdom but also in the countries of the European Union. In order to respond to this problem, the UK authorities and the European Commission focused on reviewing the followed regulations regarding the concept of market abuse and paid more attention to promoting the idea of integrity in the financial markets. The legislation and improvements addressing the issue of market abuse that were adopted in 2014 demonstrated the ways of rethinking the concept in the legal terms and the ways of addressing a range of regulatory gaps that appeared as the reaction to the rapidly developed economic and financial markets.

While analysing the approach of the UK authorities and the European Commission to discussing the market abuse concept and its specific scope, it is important to mention that the aim of the improved legislation adopted in 2014 was to address the problem of sanctions and responsibilities for parties violating the regulations regarding insider dealing and market manipulation; to broaden the scope of activities and behaviours discussed as market abuse actions; and to clarify aspects of the market abuse definition. Nevertheless, the most important fact is that the proposed regulations were developed to guarantee focusing on integrity in the UK and European financial markets. As a result, the concept of market abuse is directly associated with the idea of the market stability and integrity.

It is almost impossible to state that the changed approach to discussing the market abuse can lead to immediate positive outcomes for the financial markets of the European Union and United Kingdom, but the first effective steps associated with reviewing the legislation in 2014 are important to support the idea that the issue of the market abuse should be discussed with references to the wide scope because it influencing the integrity of the national and European financial market systems.

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