The new EU Market Abuse Regulation (596/2014, known as MAR) came into force on 3 July 2016. Although issuers and firms need to update their compliance procedures, systems and training to comply with MAR, this article considers MAR from an enforcement angle. For background information on the new regime see our briefing note, here.
MAR replaces the Market Abuse Directive and will lead to greater harmonisation in relation to market abuse across the EU. MAR is a regulation, so it is directly effective in UK law. However, both HM Treasury and the FCA have been working to ensure that UK law and regulation are compatible with MAR. As a result, there have been some significant changes to the FCA Handbook. In general, the FCA has adopted a "signposting" approach, rather than copying out MAR; this is intended to avoid the risk of misinterpretation by directing firms to the text of MAR itself (as the primary source).
The key changes as a result of MAR are:
- MAD applied to any financial instrument admitted to trading on a regulated market in a member state, or for which a request for admission to trading on such a market had been made. It applied regardless of whether the transaction took place on a regulated market. "Financial instrument" and "regulated market" were defined terms. MAR has a wider scope and also covers financial instruments traded or admitted to trading on a multilateral trading facility (MTF) or for which a request for admission to trading has been made; financial instruments traded on an organised trading facility (OTF); and financial instruments not covered by the foregoing, the price or value of which depends on or has an effect on the price or value of the foregoing financial instruments, including credit default swaps and contracts for difference. Certain provisions of MAR also apply to emission allowances, emission allowance market participants, spot commodity contracts and benchmarks.
- MAR is intended to be compatible with MiFID II (the recast Markets in Financial Instruments Directive II). The implementation date for MiFID II has been extended to 3 January 2018. As a result, references in MAR to MiFID II should be read as references to MiFID I until MiFID II's implementation and so MAR will not take effect in relation to financial instruments traded on an OTF, SME growth markets, emissions allowances and auctioned products based on them until MiFID II has been implemented.
- The definition of inside information will not change significantly as a result of MAR, but MAR imposes more onerous obligations in relation to inside information, which may lead issuers to review and reduce their insider lists. It will be essential to ensure that the point at which information becomes inside information is correctly identified and that a consistent approach is taken by an issuer and its advisers.
- The FCA will no longer be able to issue binding rules on issues which are within the scope of MAR. Rules and evidential provisions in the FCA Handbook are therefore being amended so that they form guidance only.
- The Code of Market Conduct (which assists in determining whether behaviour is market abuse)("CoMC") is highly regarded by the UK financial services sector. As a result, although the FCA is removing incompatible provisions, the CoMC will continue as guidance. It will be known as MAR 1.
As part of its consultation on the implementation of MAR, the FCA also received responses suggesting that additional guidance on certain areas is required (e.g. how "phishing" and "smoking" should be understood in the context of market manipulation). The FCA is considering how to take these suggestions forward. Further changes to the FCA Handbook may also be required if the European Securities and Markets Authority issues further guidance.
MAR is accompanied by the Directive on Criminal Sanctions for Market Abuse ("CSMAD"), which introduces minimum criminal penalties for market abuse. The UK has opted out of CSMAD and so the existing UK criminal penalties (which exceed the minimum in CSMAD) will remain in place. CSMAD will, however, be relevant to UK firms operating in other member states or engaging in trading from the UK which might be caught by the regime in other member states.
The FCA has recently succeeded in obtaining convictions for insider dealing in Operation Tabernula, including the longest ever sentence obtained in an FCA insider dealing case (four and a half years). This brings the FCA's total number of convictions for insider dealing to 30.
Looking ahead, market abuse remains an enforcement priority for the FCA, both in terms of conduct which amounts to market abuse, and systems and controls to prevent and identify suspected market abuse. The civil penalties which the FCA can impose include fines and restrictions on taking on new business, so the penalties can be severe. The FCA has said that it will focus on emerging forms of market abuse, such as spoofing, and so firms should consider their systems and controls in this area.