The FCA has released consultation paper CP15/35 on the revised market abuse regime “Policy proposals and Handbook changes related to the implementation of the Market Abuse Regulation (2014/596/EU)”.
The current UK market abuse regime is largely centred around the 2003 Market Abuse Directive (MAD) with UK ‘bolt-ons’ that were based upon the then existing UK regime. This was permissible as the purpose of MAD was to set out minimum standards for a market abuse regime. One example of a ‘bolt-on’ is that whilst MAD included financial instruments admitted to trading on a regulated market, the UK regime extended this to include instruments traded on a prescribed market which would capture not only, say, the London Stock Exchange Main Market (a ‘regulated market’) but also the Alternative Investment Market (which is not a ‘regulated market’ but rather an ‘exchange-regulated’ market). From a UK perspective, the Code of Market Conduct capturing the behaviours that amount to ‘market abuse’, which was drawn up by the then FSA under s119 of FSMA, can be found in MAR 1 of the Handbook.
The new market abuse regime, most of which will apply from 3 July 2016, derives from the Market Abuse Regulation 596/2014 (EU MAR).
Market abuse in EU MAR is defined in terms of Article 14 (‘Prohibition of insider dealing and of unlawful disclosure of inside information’) and Article 15 (‘Prohibition of market manipulation’).
Amongst the changes this brings in is that, in addition to regulated markets, it will extend the scope to capture financial instruments traded on, or admitted to trading on, a Multilateral Trading Facility (MTF) and also to those traded on an Organised Trading Facility (OTF) (it will also include those investments, such as contracts for difference, whose price or value is referenced to such instruments). Certain spot commodity contracts will also be drawn into the regime where the behaviour etc. could have an effect on the price or value of such financial instruments. Reference should be made to Article 2 (‘Scope’) of EU MAR for further details. For the avoidance of doubt, EU MAR will apply to all these instruments regardless of whether or not the transaction etc. in question is actually traded on a regulated market, MTF or OTF.
Being a Regulation, rather than a Directive, means that the new requirements will be directly binding in all Member States without the need to introduce new rules in the Handbook. Having said that, changes to the Handbook will need to be made but only for the purposes of:
- removing any provisions in the Handbook where EU MAR contains an equivalent provision (a ‘signpost’ will be added to direct firms to the relevant EU MAR article)
- removing (or amending) any provisions that are not compatible with EU MAR.
Effectively this will mean moving away from the Handbook as containing the market abuse regime towards EU MAR directly. Indeed, firms should be aware that CP15/35 tells us “… the Handbook should not be regarded as the source of all provisions relating to market abuse” and instead firms will need to “… be aware of, and will need to comply with, all of EU MAR (including implementing measures) and any relevant guidelines from July 2016”.
CP15/35 reminds us that whilst EU MAR is substantially based upon MAD 2003, there are a number of provisions which are new such as the requirements surrounding ‘market soundings’ (Article 11) which are not specifically covered in the Handbook.
As might be expected, the biggest change to the Handbook will be MAR, but there will also be consequential changes to other parts including COBS, SUP, and DTR.
MAR 1 is to be revised in its entirety. MAR 1.8 (‘Market Abuse (dissemination)’) is a (short) example of MAR as a whole going forward in that it reflects removal of a provision, a provision that is replaced by a ‘signpost’ (e.g. MAR 1.8.3) and a new provision being added (e.g. MAR 1.8.5). Whilst looking at MAR, note that MAR 1.3.5 – which sets out the FCA’s opinion (‘evidential provision’) that if inside information is held behind an effective Chinese wall then that indicates that a decision to deal by an organisation is not on the basis of inside information – is deleted as this stance is incompatible with EU MAR.
Corresponding deletions to MAR 1.10.2 and SYSC 10.2.2(4) (‘Chinese walls’) are also made. This does not remove the concept of, or need for, a Chinese wall in itself but instead removes the provision that conforming to certain behaviour does not amount to market abuse.
COBS 12.4 concerns the disclosures that need to be made when preparing or disseminating research recommendations. The majority of COBS 12.4 as we know it will either be removed, replaced with a signpost or amended. Minor changes are also proposed for COBS 11.7 (‘Personal account dealing’) and COBS 11.8 (‘Recording telephone conversations and electronic communications’), although these are changes of terminology rather than of substance.
SUP 15.10 (‘Reporting suspicious transactions (market abuse)’) will receive similar treatment with signposting etc. as appropriate. Please note that SUP 15.10.7 will be amended (‘conformed’) to reflect the fact that all notifications of suspicious transactions must (only) be made via electronic means (details of the automated system to be used is yet to be confirmed) – currently notifications by mail, telephone, fax and email are all acceptable methods of making such notifications. Note that the reporting requirements extend to suspicious transactions and orders (STORs) to ensure that suspicious orders that may not have been executed e.g. where an instruction to trade is not acted upon are also captured – see Article 16 and recital (41).
DTR amendments will also need to be implemented, affecting DTR 1 – DTR 3, and will be generally relevant to issuers incorporated in the UK or to issuers whose financial instruments are admitted to trading on a UK regulated market. Interestingly, the only elements of EU MAR where the UK genuinely has discretion (as in where there are alternative options) and which the FCA is consulting on (Chapter 2 of CP15/35) is in respect of obligations on issuers and emission allowance market participants, relating to public disclosure of inside information (Article 17) and the notification threshold of persons discharging managerial responsibilities (Article 19).
Elsewhere changes will be made to LR as well as consequential changes to areas such as APER, GEN etc. – the draft changes can be found in Appendix 1 of CP15/35.
The consultation period ends 4 February 2016.
Although the revised market abuse regime will come about by way of a Regulation, there is also an associated Directive (2014/57) – the Criminal Sanctions for Market Abuse Directive (CSMAD). The purpose of CSMAD is to set minimum rules for criminal sanctions for insider dealing, unlawful disclosure of inside information and for market manipulation (collectively ‘market abuse’ under EU MAR – see above). On the other hand, the Directive also sets maximum penalties e.g. two years’ imprisonment for unlawful disclosure of inside information. The UK (and Denmark) has opted out of CSMAD – technically the UK will not participate in the adoption of the Directive (as noted in the 2014 Mansion House speech where the Chancellor of the Exchequer confirmed that tough new criminal offences for market abuse would be introduced “rather than opt into European rules we do not think suitable or sufficient for our needs”) – see recital (29) of CSMAD. As such market abuse in the UK will still be covered under the existing domestic regime.
As mentioned above, EU MAR will apply from 3 July 2016. However, those provisions dependent on MiFID 2 e.g. references to OTFs will not apply until 3 January 2017, being the date that MiFID 2 applies (although please see article “MiFID 2 Wobble” concerning a possible delay in the implementation of MiFID 2).