UK: Market Abuse and The Media

Article by Grania Baird and Richard Shillito

Introduction
The Financial Services and Markets Act 2000 ("FSMA") which came into force on 1 December 2001 involved radical reform of the regulation of the financial services industry in the UK. The Financial Services Authority ("FSA") became the single central authority for financial market supervision and regulation within the UK and was given extensive rule making, investigation and enforcement powers.

Most significantly, the FSMA created a new market-abuse regime, a civil regime which supplements rather than replaces the existing criminal regimes for insider dealing and market manipulation and is designed to catch those market-abusers who have not been caught by existing legislation. The FSA investigation, which has led to confrontation with five national press organisations including the FT, over disclosure of sources, (see Media Bulletin, September 2002) arises from the criminal regime set up by the FSMA. The investigation is said to be into a potentially serious case of insider dealing/market manipulation offences under the Criminal Justice Act 1993 and/ or what is now s 397(3) of the FSMA. It is not alleged that the press has committed any offence. The FSA says it requires documents from the press for the purpose of tracking down the alleged market manipulator. This has led to a dispute about the extent to which the press is protected by the provisions of s 10 Contempt of Court Act 1981 from having to do anything which might disclose their source. The regime is not limited to investment professionals; it can apply to both authorised and unauthorised persons, including journalists.

The potentially very wide application of the market-abuse regime was not generally recognised by the media. As a result there was little or no lobbying during the drafting process to secure exemptions or "safe harbours" for journalists. More attention is now being paid to the Market-abuse Directive, an EU proposal designed to harmonise market-abuse provisions Europe-wide.

This article explains the offences created by the market-abuse regime and considers their potential impact on the media.

The market abuse- regime
In order for behaviour to constitute market abuse, it must:

• occur in relation to a qualifying investment traded on a prescribed market;
• 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;

- fall below the standard reasonably expected by a regular user of the market; and

- not fall within a safe harbour.

The first element – misuse of information
Behaviour will be a misuse of information where it is based on material information, the information is not generally available to those using the market, the information is investment relevant and relates to matters which a regular user of the market would reasonably expect to be disclosed to other users in the market.

The Code of Market Conduct ("the Code" or "MAR"), published by the FSA, gives helpful guidance on what information is considered to be generally available. This will include information which has to be disclosed through an accepted channel for dissemination or otherwise under the rules of a prescribed market. Information will also be generally available if it is contained in records which are open to the public for inspection, it has otherwise been made public or it can be obtained through observation. (In each of these cases the fact that significant numbers of market users may not have obtained the information is irrelevant – the fact that it is available is sufficient.)

Misuse of information, the first element of market abuse, could occur for example where a journalist deals in the shares of a company ahead of the publication of an article he or she has written containing a recommendation to buy, sell or hold shares in the company.

This aspect was discussed in the FSA’s consultation paper CP59, prompted by the controversy surrounding the Mirror’s "Sharewatch" column. The FSA recognised that journalists could come within the first element of market abuse. However the FSA did not then provide examples of behaviour it may regard as unacceptable. The FSA’s approach is that such behaviour is best dealt with by promoting public awareness of what to bear in mind when deciding whether or not to act on the basis of journalists’ recommendations.

There are provisions in the PCC Code, at Clause 14, requiring journalists to disclose interests to their editor or financial editor, not to profit from financial information, and not to deal in shares about which they have written or intend to write. Enhanced disclosure requirements were also published in the PCC Best Practice Guidelines1. It appears that the FSA is likely to leave this issue largely to press self regulation. But that does not preclude the FSA from investigating and using its powers if it decides to do so.

The second element – false or misleading impressions
The Code identifies two general instances of behaviour creating a false or misleading impression; artificial transactions and disseminating information. The Code envisages two situations where behaviour involving dissemination of information, the category of most relevance to journalists, can amount to market abuse:

• dissemination of incorrect information;
• dissemination through an accepted channel without care.

In relation to the first situation, market abuse may occur where a person knows or could reasonably be expected to know that the information is false or misleading and disseminates the information to create a false or misleading impression. An article by a journalist satisfying these criteria may therefore constitute market abuse. It is important to remember however that the journalist would have to have the purpose of creating a false or misleading impression to commit market abuse.

In respect of the second situation, there is no purpose test. A person may commit market abuse where he or she disseminates information through an accepted channel for dissemination, without reasonable care having been taken to ensure that it was not false or misleading. During the consultation process the FSA explained that an accepted channel for dissemination of information will be one operated by a recognised investment exchange or otherwise, which disseminates information which listed companies are obliged to disclose (for example the regulatory news service provided by the London Stock Exchange). Information relating to a company’s financial position disseminated through a regulatory news service, where the provider did not check the information and which subsequently created a false or misleading impression as to the price of the company’s shares, could potentially amount to market abuse.

This aspect of market abuse is most likely to affect the primary providers of information, for example the company itself, its financial advisers, or its public relations advisers. Secondary information providers such as Bloomberg, other commercial news services or other newspapers are unlikely to be caught.

The third element – market distortion
In relation to the third element, the Code says that to constitute market abuse the behaviour must be such that a regular user would, or would be likely to, regard it as behaviour which would or would be likely to distort the market of the investment. As with false and misleading impressions, there must be a real likelihood that the behaviour would have such an effect.

The Code attempts to identify categories of distorting behaviour amounting to market abuse, such as abusive squeezes and price positioning. This element is aimed principally at those who are active in the markets such as traders, fund managers, and stockbrokers for example. It is therefore difficult to see how journalists could be caught.

The regular user test
The regular user test is a key part of the market-abuse regime. In order to amount to market abuse, behaviour must be within one of the three elements and be likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe standards of behaviour expected of a regular user of the market.

The regular user is someone who regularly deals on the market in investments of the kind in question and he will take into account compliance with rules of a recognised investment exchange and other rules or codes of conduct in deciding whether behaviour falls short of reasonably expected standards. It appears that the PCC Code would be included and so this should provide comfort to journalists acting in accordance with the PCC and/or other media codes of conduct. However compliance with such codes and rules will not always be acceptable. This lack of certainty is unhelpful. The FSA has however said that, in circumstances where a person has complied with a code of conduct but the FSA still considers there has been market abuse, its standard response is likely to be to offer guidance rather than to pursue enforcement action.

The code of market conduct and the concept of safe harbours
The Code contains three types of material:

• descriptions of behaviour that, in the opinion of the FSA, amounts to market abuse;
• descriptions of behaviour that, in the opinion of the FSA, does not amount to market abuse;
• factors that, in the opinion of the FSA, are to be taken into account in determining whether or not behaviour amounts to market abuse.

The point of the Code is to describe the FSA’s view of the three tests of market abuse and the operation of the regular-user test. The Code gives guidance. It is not a comprehensive list of all behaviour that does or does not amount to market abuse.

If the Code says that specified behaviour does not amount to market abuse, described as "safe harbours", that is definitive and a person can be certain that this behaviour does not amount to market abuse.

Aside from safe harbours which are definitive, the other provisions of the Code may be taken into account in deciding whether or not behaviour amounts to market abuse, but are not definitive.

The FSA has accepted that the parameters of what the regular user will consider acceptable will only come with practical experience. Ultimately, the Financial Services and Markets Tribunal will decide the standards that the regular user expects. However until there have been published cases, there is considerable uncertainty.

Enforcement and penalties
The stated purpose of the FSA in enforcing the market-abuse regime is to protect the prescribed markets from any damage to their efficiency caused by manipulation of markets or misuse of information, to ensure high standards of market conduct and to maintain confidence in the financial system.

The FSA has a general power to impose financial penalties and issue public censures under sections 205 and 206 of the FSMA. It has not published a tariff of penalties and there is no upper limit on the level of penalty which may be imposed. The FSA also has powers to apply for injunctions and make restitution orders.

Not all cases involving market abuse will warrant enforcement action. The FSA will take into account the nature and seriousness of the behaviour. As to the level of any penalty to be imposed, it will take into account whether the behaviour was reckless or deliberate and the seriousness of its effect.

The FSA and the media
Given the very wide application of the market-abuse regime, participants in the media, particularly financial journalists, certainly have the potential to commit market abuse. This is particularly so given that the regime does not always require knowledge, intent or recklessness on the part of alleged abusers for market abuse to be committed (although for some elements purpose is implied or required). Instead, the effect of abusive behaviour is measured by the markets and other market participants. Human error on the part of journalists, without any element of intent, may still be caught. The FSA has said that the regime is about the adverse impact on the integrity and efficient operation of the market not the moral culpability of the players, and this could be so even without individual intent. The wide application and serious consequences of breach of the market-abuse regime which, although a civil offence, exposes the person to potentially unlimited fines, has caused considerable concern.

Recently the press and media have become more aware of the potential impact of the market-abuse regime on them. In November 2002, a conference on financial reporting was hosted by The Guardian and attended by representatives from The Guardian, The Financial Times, The Independent, Reuters and The Times. The potential application of financial services regulation to the press in the area of financial reporting was debated. The question is, however, although there is potential for the media to be caught, is this just a theoretical possibility or a real problem?

The FSA has made some statements which illustrate its approach to the media to date, for example:

• that the financial markets rely on the important role played by the press in reporting and analysing information from companies or other issuers of information;
• that use of the press to disseminate false or misleading information for the purposes of manipulating the price of investments threatens to undermine confidence in the accuracy of press reporting, thus damaging market confidence.

These assertions do not exclude the press from the market-abuse regime. Where the press are found to have satisfied the criteria for any of the three elements, then potentially they will be guilty of market abuse. In CP59 the FSA stated that the position of journalists in relation to the three main types of market abuse is generally no different from that of any other market participant who engages in market abuse. It was only in relation to share dealing in the context of an article where the FSA gave a more considered view on the position of journalists and has said it considers press self-regulation to be the most appropriate approach to this issue.

When questioned at the recent conference an FSA representative said that the FSA is not looking to regulate journalists as a prime target; it is concentrating on key market participants. However he did say that the market-abuse regime is available to ensure that the press is not misused.

The market-abuse regime is something of which the media industry needs to be aware. There is currently no safe harbour for journalism. Comfort can be taken from the FSA statements about its main targets and approach. In addition, Howard Davies, the FSA’s current CEO, has said that the FSA does not wish to pursue technical or inadvertent infringements of the marketabuse regime. The aim of the FSA is to prioritise and investigate only those cases which are material and significant and to adopt a proportionate response in such cases. It is likely therefore that companies and market players who abuse the market will be targeted rather than any inadvertent breaches by journalists.

As with any new regime we will have to wait to see how the FSA applies the market-abuse regime in practice, in particular how it treats the press, and there will be greater certainty when we have the benefit of some reported cases. Howard Davies has so far been reluctant to use the FSA’s extensive powers and has adopted a proportionate approach to regulation. However, he has recently announced his forthcoming departure. Although journalists can come within the regime, in practice they are unlikely to do so. Perhaps a more worrying issue is that where there are grounds for investigation the FSA could potentially use the regime and its powers to require evidence, including requiring the disclosure of sources in relation to a potential case of market abuse.

This new regime is something which the media need to be aware of, but its likely impact will probably be indirect (if at all) and legal advice should be sought where necessary.