Background

In March 2006 the FSA first published the findings from its Occasional Paper on measuring the cleanliness of the UK financial markets. That project suggested that in 2004, 32.4 per cent of public takeover announcements were preceded by an informed price movement suggesting possible insider dealing.

An updated measurement was repeated in March 2007 which showed that for 2005, 23.7 per cent of public takeover announcements were preceded by an informed price movement. This period covered the first six months of the enhanced market abuse regime introduced by the Market Abuse Directive (MAD).

Thematic review

In 2006 the FSA commenced its review to increase its understanding of how information is controlled and to tighten the flow of information. Led by the FSA’sMarkets Division and undertaken in consultation with the panel on takeover and mergers the FSA held detailed discussions with the key parties to deals where there was an information leak.

The parties interviewed by the FSA review team included –debt and equity providers, issuers, PR firms, printers, legal and corporate advisers. The FSA met with the various deal teams to work through the chronology of the deal and review IT and hard-copy security systems. An important part of the review was the adequacy of insider lists. The FSA looked at ways to reduce the number of insiders.

Findings from the review

The review found that there are three main categories of leak:

  • Accidental leak where staff inadvertently allow information to leak.
  • Intentional leak to the media for strategic positioning by offereesand offerors.
  • Intentional leaks for market misconduct purposes to include insider dealing.

The review found many good examples in place to help firms protect inside information. However there were areas for improvement. Summary areas of improvement:FSA review on inside information“Mills & Reeve is widely regarded as the premier law firm in EastAnglia.”Chambers UK 2007

  • Firms who the FSA spoke with were confident that leaks did not originate from their firm. However, the FSA felt it reasonable to conclude that parties to M&A deals were perhaps too complacent that their internal procedures were sufficiently robust.
  • Few firms had a formalised policy on how to undertake an internal review following the discovery of leakage.
  • The number of insiders at many firms was significant (for example the FSA found that for one deal alone they were almost 200 insiders). Firms perhaps need to be more rigorous in deciding who is actually an insider.
  • IT controls could be improved.??Non-regulated (for example accountants and solicitors) and non-professional firms (for example printers and couriers) had limited market abuse training. ??When engaging a third party (for example printers) regulated firms perhaps placed too much alliance upon confidentiality letters/agreements rather than actually checking that third parties had adequate policies to counter the risk of leakage.
  • Most non-regulated/non-professional firms did not monitor personal account dealing by employees.
  • The use of code words in isolation could be largely ineffective.

Next steps

The FSA wishes to conduct a second phase of this review and hopes to have substantive findings by the end of the year. In terms of the improvements identified by this Review, the FSA intends to engage with both the regulated and non-regulated sectors.

Regulated firms

The FSA intends to discuss good practice points with firms via the ongoing supervisory relationship. It also plans to host roundtable discussions with large investment houses and relevant trade associations.

Non-regulated firms

The FSA will seek to work with the industry to consider ways to share good practice points identified by this review and are considering a voluntary statement of good practice to be used as a basis to demonstrate high professional standards and controls for handling inside information.