UK: Market Abuse - The New Regime

Last Updated: 9 May 2001
Article by David Wisbey
  • The new Statutory regime for "Market Abuse", is expected to be brought into force by November this year. It will give the Financial Services Authority ("FSA") the power to take action against participants in financial markets who fail to observe the proper standards of behaviour in relation to those markets.
  • The rules suggest that types of behaviour that are not prohibited under the current regime will be subject to FSA control in the future.
  • This article addresses:
    • the types of behaviour covered by the new rules
    • the circumstances in which behaviour will not be attacked (the "safe harbours")
    • defences to the new offences
    • possible penalties for infringement


The new Statutory regime for "Market Abuse" is expected to be brought into force by November this year. It will give the Financial Services Authority ("FSA") the power to take action against participants in financial markets who fail to observe the proper standards of behaviour in relation to those markets.

The new Statutory regime for "Market Abuse" is contained in sections 118-131 of the Financial Services and Markets Act 2000 (the "Act").

The aim of the legislation is to fill the existing gap which exists between, on the one hand, misleading activities which constitute a criminal offence (under s.47 of the Financial Services Act 1986, which is restated in and to be replaced by s.397 of the Act) and the insider dealing laws (under Part V of the Criminal Justice Act 1993) and, on the other, market conduct which falls below acceptable standards, by giving the Financial Services Authority ("FSA") the power to take administrative action against market participants who abuse the market.

The FSA considers that the existing criminal offences cover "a relatively narrow range of very serious misconduct" (para. 2.10 of FSA Consultation paper 59). The burden of proof in criminal cases is so onerous that very few convictions have been secured under these provisions; there were three between 1995 and 1999. In contrast, in civil cases brought by the US Securities and Exchange Commission there were 162 in the same period.

What Is Market Abuse?

Market abuse is defined in section 118 of the Act as behaviour (whether by one person alone or by two or more persons jointly or in concert) which occurs in relation to qualifying investments traded on certain prescribed markets, which satisfies certain conditions (listed below) and which is likely to be regarded by a regular user of that market who is aware of the behaviour as a failure to observe the standard of behaviour reasonably expected of a person in his or their position in relation to the market.

From this definition we can see that there are several factors that need to be looked at to decide whether there has been market abuse.

1) Qualifying Investments.

These are defined in The Financial Services and Markets Act 2000 (Prescribed Markets and Qualifying Investments) Order 2001 (Statutory Instrument 2001 no. 996) as "all investments of a kind specified for the purposes of s.22 of the Act". Qualifying Investments consequently include:

  • deposits;
  • rights under a contract of insurance;
  • shares;
  • instruments creating or acknowledging indebtedness;
  • government securities;
  • instruments giving entitlements to investments;
  • certificates representing certain securities;
  • units in a collective investment scheme;
  • options;
  • futures;
  • contracts for differences;
  • Lloyd's syndicate capacity and syndicate membership;
  • Rights under funeral plan contracts;
  • regulated mortgage contracts; and
  • rights to or interests in investments.

2) Prescribed Markets

The Treasury's Statutory Instrument defines as the prescribed markets "all markets which are established under the rules of a UK recognised investment exchange."

These would be any market established under the following recognised investment exchanges:

  • London Stock Exchange plc;
  • London International Financial Futures Exchange (LIFFE);
  • London Metal Exchange Limited;
  • International Petroleum Exchange of London Limited;
  • OM London Exchange Limited;
  • COREDEAL Limited;
  • virt-x plc; and
  • Jiway Limited.

3) Statutory Conditions

The conditions required to be satisfied for there to be market abuse (effectively the main parts of the offence) are defined in the Act, s.118(2) as where:

  1. the behaviour is based on information which is not generally available to those using the market but which, if available to a regular user of the market, would or would be likely to be regarded by him as relevant when deciding the terms on which transactions in investments of the kind in question should be effected ("misuse of information"); or
  2. the behaviour is likely to give a regular user of the market a false or misleading impression as to the supply of, or demand for, or as to the price or value of, investments of the kind in question ("actions likely to give a false or misleading impression"); or
  3. a regular user of the market would, or would be likely to, regard the behaviour as behaviour which would, or would be likely to, distort the market in investments of the kind in question ("market distortion").

The FSA was obliged under s.119 of the Act to issue a code, which has recently been published in final form, giving guidance as to these conditions and therefore what will amount to market abuse (the "Code"). It is not an exhaustive list of all types of behaviour that will amount to market abuse and it remains subject to the FSA's right to alter or replace it after appropriate consultation. It is also subject to possible consequential amendments to take into account the final form of statutory instruments made by the Treasury, but the FSA does not expect these to alter the Code significantly.

The Code is available from the FSA's website at

4) Safe Harbours

The Act provides for two types of safe harbour. This is behaviour that, in the opinion of the FSA, does not amount to market abuse.

The first relates to behaviour which is described in the Code as not amounting to market abuse.

The other form of safe harbour relates to behaviour which conforms with an FSA rule where that rule includes a provision to the effect that behaviour conforming with that rule does not amount to market abuse. These include price stabilising rules, rules relating to Chinese Walls and certain of the Listing Rules.

It should be noted that compliance with rules of the Takeover Code or the Listing Rules will not of itself provide a safe harbour unless the behaviour has itself been decreed a safe harbour in the manner described above. Compliance will, however, be taken into account in assessing the behaviour in question.

5) Regular User Test

The regime is based on the effects of the behaviour and as far as possible has avoided the necessity for intention for the act to amount to market abuse. It is not a strict liability offence, however, since there is a requirement that even where the other conditions are met for the action (or inaction) to amount to market abuse, it is only market abuse where the behaviour falls below the standard reasonably expected from a user of the particular market. The regular user is a hypothetical, reasonable person whose judgement of behaviour is impartial and objective. He is familiar with the market in question and understands that standards will vary across markets. The FSA is keen to point out that the regular user is not the FSA itself.

The Code states that the test is an objective one and will take into account all the circumstances of the behaviour, including the characteristics, investments traded on, users of and rules and regulations of the market in question and the position in the market of the person carrying out the behaviour.

6) Defences

Defences go to the root of whether a penalty can be imposed rather than whether market abuse has occurred.

Under s.123(2) of the Act, the FSA may not impose a penalty on a person if there are reasonable grounds for it to be satisfied that the person believed, on reasonable grounds, that his behaviour did not amount to market abuse or that he took all reasonable precautions and exercised all due diligence to avoid engaging in market abuse.


Under ss. 123, 381 and 383 of the Act the FSA will have the following powers:

  • investigation of the suspected abuse;
  • have a hearing by the Regulatory Decision Committee;
  • impose an unlimited civil fine;
  • make a public statement;
  • apply to the courts for an injunction;
  • require a person to account for profits made or losses avoided as a result of the market abuse; and
  • require the payment of compensation to victims.

Further Offence Of Requiring Or Encouraging Market Abuse

There is to be a further offence of requiring or encouraging another person to engage in behaviour which would be market abuse if the encouragor had carried out the behaviour - s.123(1)(b) of the Act.

This could be relevant to corporate finance advice and legal advice. Consequently, advisers will need to be very careful as to the facts on which they give advice. The Code provides for instances where this offence will not be applicable, for example, giving advice on the acquisition or disposal of an equity or non-equity stake during a takeover bid.

Scope Of The Legislation Outside The UK

The provisions relating to market abuse are not limited to conduct within the UK. Behaviour which occurs outside the UK can constitute market abuse if it relates to qualifying investments which are traded on one of the prescribed markets. Compliance with local standards will not necessarily be a defence.


When the market abuse provisions are given effect, anyone involved in a prescribed market will need to consider the impact of the new regime and act accordingly, or risk being subject to the new powers of the FSA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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