Following a three month public consultation, the Treasury has recently made the Financial Services and Markets Act (Market Abuse) Regulations 2008 ("Regulations") which extend the date that the two super-equivalent provisions of the UK market abuse regime, also referred to as "sunset clauses", expire to 31 December 2009.

When implementing the Market Abuse Directive ("MAD") in July 2005, the Treasury elected to retain the then existing restrictions on market abuse that were beyond the scope of MAD (ie the two super-equivalent provisions) but made them subject to a "sunset clause" whereby those provisions would expire. The two super-equivalent provisions were given a sunset date of 30 June 2008. The Treasury committed to review the efficacy of the super-equivalent provisions around that time to determine whether or not their retention as part of the UK market abuse regime was justified. If the retention of the two super-equivalent provisions was justified the sunset date could be extended or they could be amended so that they would not expire.

The consultation took place between February to May 2008. For the purposes of the consultation, the Treasury released a consultation paper which considered, among other things, the differences between the current market abuse regime and the requirements under MAD and the use and market impact of the super-equivalent provisions to date.

The UK market abuse regime

The UK market abuse regime is set out in section 118 of the Financial Services and Markets Act 2000 ("FSMA") and the Code of Market Conduct. Section 118 of FSMA sets out five types of behaviour that amount to market abuse and also reflects the requirements of MAD. In addition, section 118 of FSMA includes two other types of behaviour which are super-equivalent to the requirements of MAD. These behaviours are set out in the two super-equivalent provisions and relate to:

  • the misuse of information (section 118(4) of FSMA); and
  • behaviour that is likely to give rise to a false or misleading impression or to market distortion (section 118(8) of FSMA).

With regard to the above mentioned two super-equivalent provisions the consultation paper set out five key differences:

  • RINGA: MAD uses the concept of inside information; however, the super-equivalent misuse of information provision uses the concept of "relevant information not generally available". Because this concept is wider than that of inside information it will apply to a wider set of information.
  • Definition of Investments: MAD only applies to certain types of investments. The consultation paper noted that the pace of innovation and the increased complexity of capital markets may have resulted in certain definitions used in MAD being out-of-date. For example, it is not clear whether or not MAD relates to credit default swaps.
  • Positive Action: MAD requires some positive action to be taken (eg dealing or disseminating information). However, the failure to take action can also have a detrimental impact on the market (eg when required regulatory disclosures are not made resulting in false or misleading impressions being given). The two super-equivalent provisions arguably capture both actions and failures to take action.
  • Insiders: Sections 118(2) and 118(3) of FSMA only apply if the relevant person falls within the definition of an "insider". A person will be an insider by virtue of how he or she obtained inside information or because he or she knew or could reasonably be expected to know that the information held by him or her was inside information. Demonstrating this may be difficult where relevant inside information has been disseminated through several persons before arriving in the hands of the ultimate dealer. However, the super-equivalent misuse of information provision does not require proof of how the relevant inside information was obtained; it need only be shown that it was "relevant information not generally available" and that a regular user of the market would regard or would be likely to regard it as relevant.
  • Market Coverage: There are differences between the markets that are covered by the two super-equivalent provisions and the markets that are covered by MAD. Whereas the two super equivalent provisions relate to UK recognised investment exchanges and the PLUS markets, MAD also relates to EU regulated markets as well as UK recognised investment exchanges and the PLUS markets. Therefore, the two super-equivalent provisions apply to a narrower range of exchanges and markets than those covered by MAD.

Market effect of the super-equivalent provisions

The consultation paper also discussed whether the super-equivalent provisions have had any effect in deterring market abuse. This was hard to measure given that the FSA has not brought a successful enforcement action under the two super-equivalent provisions to date. Although the consultation paper noted that this could be seen as evidence that MAD requirements alone were comprehensive enough to cover all types of behaviour that amount to market abuse it concluded that this was unlikely as market abuse cases have been considered by the FSA under both super-equivalent provisions but those cases have not been not further pursued for evidentiary reasons. Furthermore, the consultation paper noted that the FSA has indicated that it will be making greater use of its enforcement powers to deal with insider dealing and market abuse, and it is possible that there may be cases in the future based on either, or both, of the two super-equivalent provisions.

Extension of sunset date

The consultation paper recommended, and the majority of responses to the consultation supported, a short term extension of the sunset date of the super-equivalent provisions to 31 December 2009 pending the outcome of the 2008 European Commission review of MAD. This approach is sensible given that the European Commission review of MAD may lead to changes in MAD. If the Treasury had allowed the super-equivalent provisions to expire or entrenched the super-equivalent provisions indefinitely, it is possible that the UK would have to go through two sets of changes to its market abuse regime in order to implement MAD. Making two sets of changes in a relatively short timeframe would have been disruptive and possibly unnecessary. The Treasury's decision is therefore welcomed.

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