CISI – Financial Products, Markets & Services Topic – Financial Services Regulation and Professional Integrity Lesson: 8.3 Insider Dealing and Market Abuse

Transparency International Corruption Index 2015 Source: http://www.transparency.org/

Financial services is the least trusted industry globally Trust in Industries, 2013 vs 2014 Source: 2014 Edelman Trust Barometer Survey +2 +2 +1 -1 +2 +1

What is insider dealing? “When confidential, price-sensitive knowledge and data is used to provide an unfair advantage when buying and selling securities” FT.com, 2016

Insider Dealing Timeline 23 June 1980, The Companies Act 1980 came into force and made insider dealing a criminal offence in certain specified circumstances. The relevant act is now The Criminal Justice Act 1993 Up to the end of World War II the buying and selling of stocks and shares in a company on the basis of information known only to the company or its directors, officers and advisers was considered legitimate and was widespread. The Stock Exchange and the Takeover Panel issued a joint statement calling for criminal sanctions for insider dealing. By the late 1950s it began to be considered unethical to make private profits at the expense of the main body of shareholders. The practice became widespread once more, often using inside knowledge of a take over. 1945 Late 1950’s 1960’s and early 1970’s 1973 1980-1993

The Criminal Justice Act 1993 The Act made insider dealing a criminal offence (punishable by a fine and/or jail term). It defines... What is deemed to be inside information Who is deemed to be an insider The situations that give rise to the offence of insider dealing Information relating to particular securities or a particular issuer of securities and which: A person in possession of price sensitive information and knows it that it is inside information from an inside source. They may have: An insider acquires or disposes of price-affected securities while in possession of unpublished, price-sensitive information. Is specific or precise Has not been made public Gained it through being a director, employee or shareholder of the security issuer Encouraging another person to deal in price-affected securities. If it were made public, would be likely to have a significant effect on the price of the securities Disclosure of the information to another person (other than those permitted to know it). Gained it by virtue of his employment, office or profession e.g. company auditors Information is public when it is: Published e.g. Co. Results Derived from accessible information e.g. Analysis of accounts or press releases Acquisition of disposal must occur on a regulated market or through a professional intermediary. Sourced it from either of the above, either directly or indirectly

The Criminal Justice Act 1993 The instruments covered by the law are described as securities. This includes: Shares Bonds (Including Gilts or those issued by a company or public sector body) Warrants (Similar to an option, normally based on equities) Depositary receipts Options (To acquire or dispose of securities) Futures (To acquire or dispose of securities) Contracts for differences (Based on securities, interest rates or indices) Not included: Commodities Units/Shares in Unit Trusts, OEICs and SICAVs

price of the investment Market Abuse The offence of market abuse was introduced by the Financial Services and Markets Act 2000. It was subsequently amended by the Market Abuse Directive of 2005. Market abuse relates to behaviour by a person or group of people working together in relation to qualifying investments, on a prescribed market that satisfies one of the following three conditions: The behaviour is based on information that is generally not available to those using the market The behaviour is likely to give a false or misleading impression of the investment’s … The behaviour is likely to distort the market in the investment And if it were available, it would have an impact on the price of the investment Supply Demand Value In a nutshell, market abuse is what a regular user of the market would view as a failure to observe the standards of behaviour normally expected in the market

Market Abuse – qualifying investments HM Treasury has defined the “qualifying investments” and “prescribed markets” as the investments traded on any of the UK’s exchanges