UK: Financial Services and Markets Act 2000: Market Abuse

Sections 118 to 137 (Part VIII) of the FSMA set out the market abuse regime.

Market abuse is behaviour which relates to, or has an impact on, investments traded on a market and which does not meet the standard of behaviour reasonably expected of a person in that market because it involves a misuse of information, the creation of a false or misleading impression, or the distortion of the market in the investments.

Market abuse is not a criminal offence. It is conduct which gives rise to a liability to pay a penalty to the FSA, or to be censured by the FSA, or which can be prohibited by the FSA by way of an injunction or be the subject of a restitution order. Many commentators refer to the concept as being a "civil offence".

The fact that market abuse is a civil offence means that there is a lower standard of proof than for a criminal offence. Whether or not a person is guilty of market abuse is determined by the FSA (subject to an appeal to the Financial Services and Markets Act Tribunal) rather than by a Court or a jury. It also means that it can be committed by any person, including a body corporate and any other legal person, rather than just by an individual.

The two similar offences existing prior to the introduction of the FSMA, are the offence of insider dealing under Part V of the Criminal Justice Act 1993 and the offence of making false statements or engaging in false conduct under Section 47 of the FSA 1986. They covered what the FSA described as a "relatively narrow range of very serious misconduct". As a result, the new market abuse regime has been introduced, with a much wider remit in terms of behaviour which it prohibits. In addition, because both of the existing offences are criminal, the standard of proof to be met in order to successfully prosecute for the offence, is the criminal standard. Market abuse carries a lower standard of proof.

The regime is aimed not just at criminal behaviour but at behaviour which undermines confidence in the market and which falls below reasonably expected standards. This is a fundamental shift. It is why the tests applied under the market abuse regime are objective – it is not necessary to show any intention to deceive or manipulate the market or to profit from inside information; it is enough to show that the behaviour falls below the expected standards.

Under Section 119 of the FSMA, the FSA is required to issue a code to provide guidance as to what behaviour amounts to market abuse. This code is the FSA’s Code of Market Conduct and is set out in Chapter 1 of the Market Conduct Source Book in the FSA Handbook. The Code, which is described in further detail below, will be crucial in determining whether particular conduct amounts to market abuse or whether the conduct falls within one of the safe harbours created by the Code.

The FSA has published a short summary of the market abuse regime aimed at unauthorised persons. This is available from the market conduct page of the FSA website (www.fsa.gov.uk/marketconduct).

The new market abuse regime supplements the existing offences of insider dealing and the creation of a false market, it does not replace them.

The provisions in relation to insider dealing are set out in Part V of the Criminal Justice Act 1993 ("CJA 1993") and this continues in force as before. Part V has not been amended by the FSMA. However, there is one important change in relation to enforcement. Under Section 402 of the FSMA, the FSA is now authorised to institute proceedings for an offence under Part V of the CJA 1993.

The regimes for market abuse and insider dealing are quite different in terms of their territorial extent, the investments and activities covered and the tests to be applied. There must be a separate analysis in each case of whether or not the activity constitutes either insider dealing or market abuse or both.

The offence contained in Section 47 of the FSA 1986 for misleading statements and misleading conduct is found in virtually the same form in Section 397 of the FSMA. Again, the important change is that the FSA now has authority under Section 401 of the FSMA to institute proceedings in relation to the Section 397 offence.

The FSA may therefore sometimes have a choice as to whether to prosecute for insider dealing or for the creation of a false market or alternatively to impose a penalty for market abuse (see below on enforcement). Given the rarity of insider dealing/false market charges, and the scarcity of convictions under the old regime, it is highly likely that the FSA will be using its powers under the new market abuse regime in the majority of circumstances. Using the market abuse route will also allow the FSA to impose an appropriate penalty on a firm or company rather than just on an individual.

For behaviour to constitute market abuse under Section 118 of the FSMA it must:

• occur in relation to a qualifying investment on a prescribed market; and
• satisfy one or more of the following conditions:
- involve the misuse of information;
- be likely to give a false or misleading impression;
- be likely to distort the market; and
• fall below the standard expected by a regular user of the market; and
• not fall within a safe harbour created by the FSA’s Code of Market Conduct.

Under Section 118(1)(b) of the FSMA, in order to constitute market abuse, the behaviour must fall within at least one of the three conditions set out in sub-section 118(2). These three conditions constitute the three types of behaviour that are regarded as market abuse. They are:

Note that for the purpose of each of these conditions "behaviour" includes action or inaction. It is also not just limited to dealing – it can be any type of behaviour.

In order for behaviour to constitute market abuse, not only must it fall within one of the three types of behaviour set out in Section 118(2) but it must also meet the test set out in 118(1)(c) in relation to the regular market user. It must be behaviour:

A regular user is defined in Section 118 as a reasonable person who regularly deals on the market in investments of the kind in question.

The market abuse regime does not depend on any concept of an intention to mislead or abuse the market. Instead, the test is an objective one – whether the behaviour falls below the standard reasonably expected by a regular user of the particular market. The Code of Market Conduct describes how this test will be applied by the FSA (see below).

Under section 123 of the FSMA, the FSA may take action both against a person who has engaged in market abuse and against a person who has required or encouraged another person to engage in behaviour which would amount to market abuse if the requirer/encourager had carried out the behaviour.

The test of whether or not behaviour constitutes market abuse is objective. No intent is required and there are no specific defences in the FSMA, unlike in the insider dealing regime. However, under Section 123(2) of the FSMA, the FSA may not impose a penalty on a person who has engaged in market abuse if there are reasonable grounds for the FSA to be satisfied that:

1. the person believed on reasonable grounds that the behaviour did not fall within the market abuse offence; or
2. that he took all reasonable precautions and exercised all due diligence to avoid behaving in a way which fell within the market abuse offence.

The market abuse provisions are not restricted to authorised persons. They apply to anybody who engages in the relevant behaviour if it occurs in relation to qualifying investments traded on a market to which Section 118 applies.

Also, it applies even if a person is dealing off market, in contrast to the insider dealing regime which only applies if a person is dealing on market or through a financial intermediary.

The definition of qualifying investments and markets for the purposes of Section 118(3) is set out in The Prescribed Markets and Qualifying Investments Order 2001 (SI 2001/996) (the "Prescribed Markets Order").

A "prescribed market" is defined in the Prescribed Markets Order as any market which is established under the rules of a UK recognised investment exchange ("RIE"). At present the UK RIEs are:

• The London Stock Exchange plc (the main market and AIM);
• LIFFE Administration and Management;
• The London Metal Exchange Limited;
• The International Petroleum Exchange of London Limited;
• OM London Exchange Limited;
• Virt-x plc and Virt-x Exchanges Limited;
• COREDEAL Limited;
• Jiway Limited.

Under the Prescribed Markets Order, all investments traded on these exchanges which are of the type specified for the purposes of section 22 of the FSMA are "qualifying investments" for the purposes of Section 118. These are the investments set out in Part III of The Financial Services and Market Act 2000 Regulated Activities Order (SI 2001/544) and comprise in summary:

• deposits
• rights under a contract of insurance
• shares
• instruments creating or acknowledging indebtedness
• government and other public securities
• instruments giving entitlements to shares, debt securities and gilts
• certificates representing certain securities
• units in a collective investment scheme
• rights under a stakeholder pension scheme
• options
• futures
• contracts for differences etc.
• Lloyd’s syndicate capacity and syndicate membership
• rights under a funeral plan contract
• rights under a regulated mortgage contract
• rights to or interests in specified investments

It is very important to note that the wording of Section 118 means that the scope of the regime is much wider than might originally be thought. This is because it refers to behaviour which occurs "in relation to" qualifying investments. This is a very wide concept. Under Section 118(6) of the FSMA, behaviour is regarded as occurring in relation to qualifying investments if it:

Behaviour which could be regarded as occurring "in relation to" qualifying investments includes for example:

• something whose price or value is expressed by reference to a qualifying investment – for example a bond listed on an overseas exchange which is convertible into shares on an RIE in the UK;
• transactions whose subject matter is a qualifying investment, for example a spread bet on a qualifying investment.

In reality therefore, the regime goes far beyond the concept of qualifying investments traded on the UK RIEs. It covers any other financial products or instruments which are linked to those investments, whether or not those other financial products or instruments are traded on the prescribed markets, or indeed any financial market. In the Code of Market Conduct, this much wider range of financial products or instruments to which the regime could apply is referred to as "relevant products".

The potential width of the financial products to which the regime applies means that great care must be taken in all circumstances to consider whether or not there is any impact on a qualifying investment even if the investments in which a dealing is taking place are not traded on one of the UK RIEs. Section 1.11 of the Code of Market Conduct deals with this issue.

The regime is wider in this respect than insider dealing legislation. Insider dealing applies only to dealings in securities which are traded on one of a list of specified markets (or dealings in rights to such securities). There must have actually been a dealing in those securities (on market or through a financial intermediary) not just any dealing which might have an effect on the price of those securities. However, one key way in which the insider dealing legislation is broader than the market abuse regime is that it catches all securities which are listed within the EEA or dealt in on one of a list of specified markets, which includes OFEX and most of the European stock exchanges. In contrast, a dealing in a share traded on OFEX or on one of those European markets would not be caught by the market abuse regime unless it has an impact on an investment traded on one of the UK RIEs.

Section 118(5) of the FSMA provides that behaviour is to be disregarded for the purposes of the market abuse offence unless it occurs (a) in the United Kingdom; or (b) in relation to qualifying investments traded on a market to which Section 118 applies which is situated in the United Kingdom or which is accessible electronically in the United Kingdom.

Therefore, provided the behaviour occurs in relation to qualifying investments on a market to which Section 118 applies (as described above), it is irrelevant where the person accused of market abuse was at the time or where the behaviour takes place.

This shows the need to take care even if at first sight the transaction appears to have no connection with the UK. An example would be where a person in the US publishes misleading information on an internet site in relation to a company listed in France. If the French company’s shares form part of the FTSE Euro Top 100 index and an option in that index is listed in the UK, then the information could affect the price of that option and therefore fall within the definition of market abuse in Section 118.

Section 119 of the FSMA requires the FSA to produce a code giving guidance on what does and does not amount to market abuse. The Code issued by the FSA pursuant to this section is called the Code of Market Conduct (the "Code").

Although the Code forms part of the FSA Handbook, the Code applies to all persons in relation to market abuse and not just authorised firms.

The Code can be found in Chapter 1 of the Market Conduct Source Book in the FSA Handbook which is available on the FSA website. Paragraphs in the Code are referred to using the prefix "MAR".

The Code is divided into the following sections:

1.1. Application

1.2. The regular user test

1.3. Behaviour

1.4. Misuse of information

1.5. False or misleading impressions

1.6. Distortion

1.7. Statutory exceptions

1.8. Requiring or encouraging

1.9. Relationship with criminal law and other regulatory requirements

1.10. Statement of policy on penalties

1.11 The scope of the market abuse regime

There are three types of statements in the Code. Each paragraph in the Code has next to it an identifying letter to describe which type of statement it is:

C: Behaviour which is to be taken conclusively for the purposes of the Act as not amounting to market abuse i.e. where a safe harbour is provided.

E: A statement of certain behaviour which in the opinion of the FSA amounts to market abuse or a statement which describes factors that, in the opinion of the FSA, ought to be taken in account in determining whether or not behaviour amounts to market abuse.

G: Explanatory guidance in relation to the FSMA and the Code. These provisions do not form part of the Code but constitute guidance made under the FSA’s general power to give guidance as set out in Section 157 of the FSMA.

Under Section 122(1) of the FSMA, if a person behaves in a way which is described in the Code as not amounting to market abuse then that behaviour is to be taken for the purposes of the FSMA as not amounting to market abuse. In relation to other statements made in the Code, Section 122(2) provides that the Code may simply be relied on in terms of indicating whether or not that behaviour should be taken to amount to market abuse. Therefore, with the exception only of the safe harbours which are marked with a "C" in the Code, the Code is not conclusive as to what will constitute market abuse and it is not exhaustive – it just provides examples and guidance. Whether specific behaviour does constitute market abuse is for the FSA to decide on a case by case basis.

The guidance on behaviour constituting misuse of information is set out in Section 1.4 of the Code. The separate offence of requiring or encouraging market abuse is particularly relevant in relation to misuse of information (see below).

The misuse of information head will only apply where there is an actual dealing or arrangement of a deal rather than any other sort of behaviour.

The Code sets out four factors which must be present in order for misuse of information to amount to market abuse:

1. the information must have a material influence on the decision to engage in the dealing or arranging (but it need not be the only reason for dealing or arranging);
2. the information must be information which is not generally available;
3. the information must be likely to be regarded by a regular user as relevant when determining the terms on which transactions in such investments should be effected (this is known as "relevant information"); and
4. the information must relate to matters which the regular user would reasonably expect to be disclosed to users of the particular market.

The Code then sets out in further detail what is meant by each of these tests – such as how to determine which information is to be treated as generally available (for example information that can be obtained through research, analysis or other legitimate means is excluded) and what is meant by "relevant information". Note in particular that although the tests as to what is "relevant information" include whether the information is specific, precise and reliable, they do not include whether the information would have significant effect on the price of securities. The information just has to be relevant when deciding the terms of a deal – so any effect on price would be sufficient.

Safe harbours are provided in relation to activities which might otherwise constitute misuse of information where:

1. The dealing is to comply with a legal (including contractual) obligation which arose before the relevant information was in the person’s possession.
2. The relevant information did not influence a decision to engage in the dealing or arranging in question.
3. There is a Chinese wall.
4. The dealing is based on information only as to a person’s intention to deal or arrange deals in a qualifying investment.
5. There is an acquisition or disposal of an equity stake in a company in the context of a takeover bid, or otherwise, where the dealing is based only on knowledge of the proposed acquisition or, in connection with a takeover bid, any information legitimately obtained by the bidder in relation to the target company.
6. A person agrees to underwrite an issue of securities.

The description of what will constitute the creation of a false or misleading impression is set out in Section 1.5 of the Code.

The behaviour must be "likely" to give a regular user a false or misleading impression, and for this purpose "likely" is described as where there is a real and not fanciful likelihood that the behaviour will have such effect, although the effect need not be more likely than not.

There is no need under the FSMA to show any intent to deceive or recklessness. The test is objective – whether a regular user is likely to be deceived – and whether the behaviour is acceptable is also determined by the objective "regular user" test (as described below).

The dissemination of information which a person could reasonably be expected to know is false or misleading will constitute market abuse if it is disseminated in order to create a false or misleading impression. This does bring back in an element of intent.

However, in relation to those required to submit information through an accepted channel (described as an approved channel of communication in relation to any prescribed market – for example for UK listed companies, the RNS service) the test is a lower one. It is sufficient that the person who submits the information has not taken reasonable care to ensure that it is not false or misleading. No intent to deceive is required.

The final category of market abuse is behaviour which would, or would be likely to, distort the market in investments of the kind in question. This is explained in Section 1.6 of the Code. This element of market abuse is to deal with such things as abusive price positioning and abusive market squeezes.

As in the case of the creation of misleading impression, the phrase "likely" is defined as where there is a real and not fanciful likelihood that the behaviour will have such effect, although the effect need not be more likely than not. The test under the FSMA is an objective one although the Code does then bring back in an element of intent in the way in which it describes what is likely to constitute market abuse for this purpose.

There is a separate offence of requiring or encouraging another person to engage in behaviour which constitutes market abuse. Section 1.8 of the Code of Market Conduct covers this secondary offence.

In order for the offence to apply, it is necessary to show that the behaviour would have amounted to market abuse if carried out by the person who requires or encourages. This introduces a hypothetical situation which may well be difficult to apply to the circumstances. It is not necessary to show that the person who has required or encouraged the market abuse has benefited from the action of the relevant person.

The examples given of this secondary offence by the Code of Market Conduct all relate to the offence of misuse of information, essentially by way of a person disclosing confidential information to another person thereby creating an encouragement to deal. In particular, selective disclosure of information other than for a legitimate purpose and to certain specified people as permitted by market rules, would be treated as requiring or encouraging (see below in relation to how this affects listed companies in particular).

An intermediary’s behaviour will not amount to requiring or encouraging unless he knew or reasonably ought to have known that the originator was engaging in market abuse.

As described above, under Section 118 of the FSMA, in order to constitute market abuse the behaviour must fall below the standards reasonably expected of a regular user of the market. Section 1.2 of the Code of Market Conduct sets out how the FSA will apply the regular user test.

The regular user test is described in the Code as determining whether "a hypothetical reasonable person, familiar with the market in question, would regard the behaviour as acceptable in the light of all the relevant circumstances". The following key features are important:

• The fact that behaviour conforms with standards that are generally accepted by users of the market does not necessarily mean that the behaviour cannot be market abuse – this is just a relevant factor;
• The standard of behaviour will be tested against the particular market and investments concerned;
• The position of the person in question and the standards of behaviour expected of that person in light of that person’s experience, level of skill and standard of knowledge will also be relevant;
• The question of a person’s intention can be relevant to determine whether or not the behaviour falls short of that expected by the regular user;
• If the behaviour occurs on an overseas market but has an impact on a prescribed market, then the local rules and practices will be a factor to consider, but will not be conclusive.

When a listed company is acting as a market participant in relation to securities other than its own, it will have to consider the same issues in relation to market abuse as any other market participant would. For example, whether it has any confidential information which might result in the transaction being regarded as a misuse of information in relation to other securities or whether a particular dealing or action might constitute the creation of a misleading impression or a distortion of the market.

In relation to a listed company’s own confidential information and as regards its own release of information to the market, the Code of Market Conduct puts it, and therefore necessarily its directors, in a different position to other market participants. In relation to misuse of information, the Code imposes a more stringent set of requirements, and a lower threshold to cross as regards what constitutes market abuse, than for other market participants. So, the fact that there are safe harbours for listed companies in relation to compliance with the Listing Rules, should not lead listed companies and their directors into a false sense of security that their position is better than other market participants – in fact they have more stringent tests imposed on them.

Specifically, the two circumstances described in the Code, in which the listed company or its directors could be guilty of market abuse in relation to information about the company’s own securities, are:

1. If a listed company releases official information through an "accepted channel" (e.g. the Regulatory News Service) and that information is false or misleading and the company or its directors have failed to take reasonable care when issuing the information, then the listed company may be guilty of market abuse by creating a false or misleading impression.
2. If a listed company discloses its own confidential information to persons other than those described in the Code of Market Conduct (which essentially follows the limited range of people that can be told of confidential information under the Listing Rules before a Chapter 9 announcement is required of impending developments) and otherwise than for a legitimate purpose and subject to a confidentially restriction, then, if that information is relevant information for the purposes of the Code of Market Conduct, the listed company could be guilty of encouraging market abuse by way of the misuse of information.

If a listed company is guilty of either of these two types of behaviour, then it would also almost inevitably have breached the requirements in Chapter 9 of the Listing Rules in relation to the disclosure of price sensitive information. Looking at it another way, a failure to comply with Chapter 9 of the Listing Rules is also now likely to constitute market abuse. This is something that the directors must now take into account when they are complying with the Chapter 9 obligations. For example, disclosure of price sensitive information to analysts during analysts’ meetings has always been thought of in the context of whether or not that disclosure constitutes a breach of the requirement not to selectively disclose price sensitive information under Chapter 9. Now, it could also constitute market abuse by way of disclosure of confidential information other than to persons falling into the limited categories described in the Code. Another example would be selective leaks about a potential transaction to the press. A further example is that when companies are considering whether or not to issue a profits warning, they will have to consider whether failing to do so could constitute market abuse by the creation of a false or misleading impression as well as whether it would be in breach of the Listing Rules.

The UKLA Guidance Manual has a section on the interaction between the Listing Rules and the market abuse regime when conduct may be a breach of both. In these circumstances, the Guidance Manual states that the FSA will consider whether further action under the Listing Rules or under the market abuse regime appears appropriate. Any statutory notice received from the FSA would make it clear whether action is being taken against the relevant person under the market abuse regime or in relation to a breach of the Listing Rules.

Certain Listing Rules have been given safe harbour status in the Code of Market Conduct. These are listed in the Annex to the Code of Market Conduct.

These safe harbours are created very much just to prevent market abuse arising as a result of behaviour which is expressly required or permitted by the Listing Rules. For example, disclosure of information to persons permitted under paragraph 9.5 or the delay of the announcement of a rights issue take up pursuant to paragraph 9.10. It is only to the extent that the behaviour complies with the Listing Rules that a safe harbour is given – this does not mean that the behaviour could not constitute market abuse in some other respects.

One key respect in which no safe harbour is given is in relation to compliance with the Model Code on Directors’ Dealings. Just because a director falls within one of the exemptions in the Model Code on Directors’ Dealings, and is thus permitted to deal pursuant to the Model Code, does not mean that the dealing cannot constitute market abuse or insider dealing. The same applies to a purchase of own shares at a time permitted by the Model Code. The question of whether the dealing could constitute market abuse or insider dealing must be separately considered in each case.

Section 120 of the FSMA provides that, in its Code of Market Conduct issued under Section 119, the FSA may include provisions to the effect that certain behaviour conforming with the Takeover Code does not amount to market abuse.

The safe harbour provisions in relation to the Takeover Code and the SARs are set out in Section 1.7 of the Code of Market Conduct. The Annex to the Code sets out the specific provisions in the Takeover Code for which a safe harbour is provided. These provisions relate to disclosure of information, standards of care, timing of announcements, documentation, dealings and contents of announcements.

The effect of the safe harbours is that to the extent that a specific provision in the Takeover Code listed in the Annex expressly requires or permits particular behaviour, then that behaviour will not constitute market abuse (provided that it is also in conformity with the general principles of the Takeover Code). The notes which form part of the Takeover Code are treated as being part of the relevant rule for these purposes.

The safe harbours in Section 1.7 only relate to behaviour constituting market abuse as a result of a creation of false or misleading impression or distortion; they do not give any safe harbour in relation to behaviour based on misuse of information.

It is only that part or feature of the behaviour that is in compliance with the Takeover Code, that is relevant for the safe harbour. There is no safe harbour to the extent that the behaviour constitutes market abuse in any other respect. The example given in the Code of Market Conduct is that a person may embark on a stake building exercise which complies with the SARs and so falls within a safe harbour, but that if the person dealing has confidential information and is therefore guilty of misuse of information, that behaviour would constitute market abuse.

If none of the specific safe harbours applies, then just because a person complies with the Takeover Code, that itself will not be sufficient to demonstrate that behaviour does not amount to market abuse for the purposes of the regular user test (see above). It will just be "relevant" to a regular user’s assessment of whether or not that person’s behaviour has fallen below reasonably expected standards.

The list of safe harbours has been agreed as a result of discussions between the FSA and the Takeover Panel. The FSA will consult with the Takeover Panel in relation to every question of whether or not market abuse has been committed in relation to a transaction covered by the Code. The Code of Market Conduct says that the FSA will attach considerable weight to the views of the Takeover Panel in interpreting and applying the Takeover Code and the SARs in the context of market abuse. The ultimate arbiter will however be the FSA.

There is also a specific safe harbour in Section 1.7 of the Code in relation to stabilisation activities conforming with the price stabilisation rules made under Section 144(1) and 144(3) of the FSMA.

The FSA has put all of its information about market abuse in one area on the FSA website. This is at www.fsa.gov.uk/marketconduct. This section includes the FSA factsheet on market abuse and the Code of Market Conduct.

The website will also include copies of the FSA newsletter about the market abuse regime and market conduct generally which is called the "Market Watch Newsletter". This will explain issues that have arisen in relation to market abuse and will also include a frequently asked questions section. It will be important to check whether any particular points have been dealt with in this newsletter when considering a market abuse issue.

Any further general guidance issued by the FSA in relation to market abuse will also be found in this area of the website.

As the Code of Market Conduct is not exhaustive, and is for general guidance only, the Code specifically provides that a person can seek specific guidance from the FSA in respect of proposed behaviour. This is known as seeking "individual guidance".

The FSA has stated that it will seek to provide sufficient certainty to market participants when they are deciding whether or not their behaviour amounts to market abuse by providing individual guidance to market participants on the application of the Code to particular situations.

The FSA anticipates a significant demand for guidance in the early stages of the new regime and anticipates providing individual guidance in both written and oral form.

Details on how to seek guidance are set out in Chapter 9 of the Supervision Manual in the FSA Handbook. This says that those requesting guidance from the FSA will be required to provide the FSA with sufficient information and time to enable them to give guidance. Requests should be made to the Markets and Exchange Division of the FSA. The FSA has said that whilst it will endeavour to respond quickly and substantively to requests, such requests must be reasonable in nature. For example, persons requesting guidance must have made bona fide efforts to analyse the issue before approaching the FSA. In deciding whether a request is reasonable or not the FSA will give consideration to the nature of the request and to the resources of the company or firm making it.

The FSA is to set up a special COMC helpline (number not yet available) which will need to be used by everyone seeking individual guidance on market abuse –even if the caller is an authorised firm (who would normally refer matters to their "line supervisor" at the FSA). The FSA has currently said that this helpline will only be available from 8.00 am to 6.00 pm.

Demand for individual guidance must be on a named basis – if a third party is calling on behalf of a client, then it must name that client. A person can call up for general advice on the Code which is not for a particular client or matter but this will not be binding.

In order for individual guidance to be formally binding on the FSA, the FSA must give that guidance in writing (which could be by email). Alternatively, if a caller does not want to have written guidance, or needs an urgent response, say that afternoon, it can seek oral guidance from the FSA. Oral guidance is not technically binding on the FSA. However, the FSA may tape calls in which it gives oral guidance, for example, if the matter is particularly complicated or new, and the tape will be evidential in terms of what was said by the FSA.

The FSA has said that it will also issue further general guidance in relation to the Code. This will often be on matters where it is getting frequent questions about the same point. However, what is not clear, is whether this will be by way of amendments to the Code rather than by way of a stand alone document. The FSA has to take care that the Code itself does not become outdated and contradicted by subsequent guidance. Again, any further guidance of this sort or any amendments to the Code, will appear in the market conduct section on the FSA website.

Under the FSMA, the sanctions available to the FSA for market abuse against any person (including for this purpose a legal person such as a company or partnership as well as an individual) are:

• An unlimited fine (Sections 123 and 129)
• A public censure (Section 123(3))
• A restitution order (Sections 383 and 384)
• An injunction/freezing order (Section 381)

Note that under Section 131 of the FSMA the imposition of a penalty for market abuse does not make any transaction void or unenforceable.

The procedure for the imposition of a penalty is that the FSA must issue a warning notice stating the proposed amount of the penalty or proposed censure statement (Section 126). This is then followed by a decision notice if the FSA decides to take action (Section 127). The person accused of market abuse can refer the matter to the Financial Services and Markets Tribunal by way of an appeal (Section 127(4)).

The FSA’s statement of its policy on the imposition of penalties for market abuse (required to be issued pursuant to Section 124 of the FSMA) is set out in Section 14 of the FSA’s Enforcement Manual, which is part of the FSA Handbook. The Enforcement Manual sets out the factors that the FSA will take into account to determine whether to take action in market abuse cases, whether it should impose a financial penalty or alternatively issue a public censure and what factors will determine the level of any financial penalty.

Under Sections 401 and 402 of the FSMA, the FSA is given a new power to commence criminal proceedings for insider dealing or creation of a false market under Section 397 of the Act. Chapter 15 of The Enforcement Manual sets out the FSA’s approach in deciding whether to prosecute. This will essentially involve it following the principles of the Code for Crown Prosecutors which will require it to apply both an evidential and public interest test in deciding whether or not to prosecute.

There is a specific section in the Enforcement Manual on the factors that the FSA will take into account in deciding to commence a criminal prosecution for market misconduct (whether under the insider dealing legislation or for breach of Section 397 of the FSMA) rather than impose a sanction for market abuse.

Importantly, the Enforcement Manual specifically states that it is the FSA’s policy not to impose a sanction for market abuse where a person is being prosecuted for market misconduct (i.e. insider dealing or Section 397) or has been convicted or acquitted of market misconduct in a criminal prosecution arising from substantially the same allegations. Also, it states that it is the FSA’s policy not to commence a prosecution for market misconduct where the FSA has brought or is seeking to bring disciplinary proceedings for market abuse arising from substantially the same allegations. In other words, the FSA is saying that it will choose which route to take at the stage at which proceedings commence – it will not pursue both options.

The behaviour may also be a breach by an authorised firm of specific FSA Rules. The FSA may therefore take action in relation to the particular behaviour both for market abuse and in relation to the breach of the rules – whether by the same individual or by other individuals in the organisation who did not, for example, establish the correct procedures which might otherwise have prevented market abuse.

"© Herbert Smith 2002

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