The Department of Energy and Climate Change published a Consultation on 6 August 2014 seeking views on its proposals to introduce new criminal offences for insider dealing in and the manipulation of the wholesale energy markets. This forms part of the UK Government’s continued efforts to ensure the proper functioning of the wholesale energy markets and to strengthen the UK enforcement regime in line with the EU Regulation on Wholesale Energy Markets Integrity and Transparency (“REMIT”), prohibiting insider dealing and market manipulation in respect of the wholesale energy markets.

REMIT refers to the wholesale energy markets as encompassing both commodity and derivative markets, including regulated markets, multilateral trading facilities, over-the-counter transactions and bilateral contracts. As a result, certain trading activity in the wholesale energy markets does not relate to qualifying investments admitted to trading on a prescribed market and therefore does not come within the scope of market abuse in the financial sector.

The Financial Conduct Authority (“FCA”) regulates commodity derivatives, but not the underlying physical markets and has the power to bring enforcement action (both civil and criminal) against traders who breach the regulation on energy derivatives in an FCA regulated market. The majority of trading regarding gas and electricity does not take place on markets regulated by the FCA. If a similar derivative was traded on a platform coming within the scope of REMIT, only the Office of Gas and Electricity Markets (“Ofgem”) currently has the power to enforce civil penalties. The absence of criminal penalties in the energy markets for behaviours almost identical to those subject to criminal penalties in the financial markets creates a risk that wrongdoing is directed towards the energy sector. The Government’s proposals are aimed at addressing the gap between the regulation of the financial and wholesale energy markets.

The new offences also build on investigations on both sides of the Atlantic by the Federal Energy Regulatory Commission, the FCA and Ofgem into conduct regarding the trading of electricity and gas. The UK Competition and Markets Authority (“CMA”) has also recently commented on the potential for the manipulation of prices in thinly traded or opaque energy markets.

Liability for Market Manipulation in the United States

Market manipulation of UK energy markets may also be grounds for actions by United States regulatory agencies. Both the Commodity Futures Trading Commission (“CFTC”) and the Federal Energy Regulatory Commission (“FERC”) have power to investigate and regulate energy market manipulation (the CFTC has exclusive jurisdiction over futures contracts). The CFTC has pursued regulatory enforcement actions arising in connection with markets outside the United States to the extent the alleged manipulation impacted market prices in the United States. FERC’s jurisdictional reach is more limited in nature.

Similar to the proposed energy market offenses, the CFTC has authority to regulate both attempted manipulation and manipulation of energy markets. However, as the proposed offenses currently stand, the market manipulation guidelines for the CFTC are more strict than the FCA and require:

  1. that the accused had the ability to influence market prices;
  2. that  they specifically intended to do so;
  3. that artificial prices existed; and
  4. that the accused caused the artificial prices.   

Attempted manipulation only requires (1) an intent to affect market prices and (2) an overt act in furtherance thereof. Because attempted manipulation is often easier to prove, the CFTC will often pursue regulatory enforcement on that basis. Dechert has experience in such investigations in the United States, and Dechert’s UK team can coordinate effectively with its United States colleagues to provide complete representation in any investigation.

Current Regime for Insider Dealing Offences

Under the financial regulatory regime, the FCA has the power to prosecute individuals in relation to the criminal offences of: (i) insider dealing; and (ii) making false or misleading statements, creating false or misleading impressions, and making false or misleading statements or creating a false or misleading impression in relation to specified benchmarks. An individual found guilty of committing these offences is liable to an unlimited fine and/or a maximum prison term of seven years.

The criminal offences are supplemented by a civil regime for insider dealing and market manipulation that applies to both individuals and corporate entities.

The Electricity and Gas (Market Integrity and Transparency) (Enforcement etc.) Regulations 2013 (the “Regulations”) create a UK civil enforcement regime in accordance with REMIT for insider trading and market manipulation in respect of the wholesale energy markets. The Regulations give Ofgem the power to: (i) require the production of information for the purpose of monitoring compliance with REMIT and investigate suspected breaches; (ii) impose financial penalties; (iii) apply for the payment of restitutionary damages in respect of profits accrued or losses suffered as a result of non-compliance with REMIT requirements; (iv) to apply for injunctions enforcing the provisions of REMIT; and (v) enter premises for the purposes of an investigation. 

Introduction of Criminal Penalties

The FCA and Ofgem undertook an investigation during 2013 into whistleblowing claims alleging that traders had attempted to manipulate the UK’s physical wholesale natural gas market. Although the FCA subsequently reported that it had not identified any evidence to support these claims, Ofgem referred the big six energy companies to the CMA in June 2014 for a full investigation, looking at competition elements such as pricing practices and the profitability of the six largest suppliers.

Criminal penalties are now being introduced as the Government recognises that the threat of civil penalties is not sufficient to deter offending behaviours, highlighting the need to have strong penalties available to Ofgem as soon as possible, given the significant impact that any wrongdoing could have for other market participants and consumers.

Proposed Insider Dealing Offence

The proposed insider dealing offence will be committed by either a person or a company if they:

  • use inside information to acquire or dispose of wholesale energy products to which that information relates, either on their own account or on behalf of others - i.e. dealing;
  • disclose inside information except in the normal course of his duties – i.e. disclosing; or
  • use inside information when recommending that another person acquire or dispose of wholesale energy products, or when inducing them to deal in wholesale energy products i.e. encouraging another to deal.  

Inside information would be defined as information which:

  • relates directly or indirectly to one or more wholesale energy products;
  • is specific or precise;
  • has not been made public; and
  • would be likely to significantly affect the prices of those wholesale energy products if it were made public.  

The offences are intended to cover both intentional and reckless behaviour. The law of England and Wales defines recklessness as meaning that a person or company has foreseen that a particular action may result in harm and has proceeded regardless of the potential risks.

Corporate Liability

In contrast to the criminal offence of insider dealing in the financial sector which can only be committed by a natural person, it is proposed that a company could also commit an offence under the proposed insider dealing offence for energy markets. This is consistent with the insider trading prohibition under REMIT, which extends to both natural and legal persons. The normal identification principle regarding corporate liability would apply - this is where “the acts and state of mind” of those who represent the directing mind of the company will be imputed to the company. The leading case in this area restricts the application of this principle to the actions of the Board of Directors, the Managing Director and perhaps other superior officers who carry out management functions and speak and act on behalf of the company.

The combination of recklessness and the identification principle means that instances of insider dealing that are not obviously intentional but ought to have been expected by members of senior management representing the directing mind of the company could lead to the conviction of the company. The Government believes that the possibility of a criminal prosecution for reckless insider dealing will act as a clear and powerful incentive to those organisations that could potentially profit from such activity to put in place appropriate policies and procedures.

Proposed Market Manipulation Offence

It is proposed that an offence of energy market manipulation will have been committed if a person:

  • makes a false or misleading statement;
  • conceals a fact; or
  • creates a misleading impression  

which is liable to induce another person to take certain actions relating to a wholesale energy product or the rights it confers.

In line with the proposed insider dealing offence, the Government is proposing that the offence could be committed either recklessly or intentionally. The Government is also proposing that the prohibition on market manipulation covers the acts of attempting to manipulate the wholesale energy markets and the manipulation of benchmarks. The identification principle will also apply in this instance.

Territorial Scope and Penalties

Both proposed offences require a UK nexus, i.e. that the prohibited activities or the effects of such activities take place in the UK. The Government proposes that any of the following would be sufficient to justify prosecuting an offence in the UK:

  • Acquiring or disposing of a REMIT product where:
    • the defendant is in the UK or is registered with a UK energy regulator;
    • the gas or electricity being traded originates in, is for delivery in, or transits through the UK; or
    • the transaction takes place in the UK (for instance, on a trading platform based in the UK or is subject to a jurisdiction clause in favour of a UK legal jurisdiction).  
  • Disclosure of price sensitive information about a REMIT product where:
    • the gas or electricity being traded originates in, is for delivery in, or transits through the UK;
    • the defendant disseminating is in the UK, or is registered with a UK energy regulator; or
    • the defendant is outside the UK but the alleged recipient of the dissemination is in the UK.  
  • Recommending or inducing another person to acquire or dispose of a REMIT product where:
    • the defendant person recommending or inducing is in the UK, or is registered with a UK energy regulator;
    • the defendant is outside the UK but the alleged recipient of the recommendation or inducement is in the UK;
    • the subject matter gas or electricity originates in, is for delivery in or transits through the UK; or
    • the transaction takes place in the UK (for instance, on a trading platform based in the UK or is subject to a jurisdiction clause in favour of a UK legal jurisdiction).  

A REMIT product is defined as including: (i) contracts for the supply of electricity or natural gas where delivery is in the EU; (ii) derivatives relating to electricity or natural gas produced, traded or delivered in the EU; (iii) contracts relating to the transportation of electricity or natural gas in the EU; and (iv) derivatives relating to the transportation of electricity or natural gas in the EU. The Government is proposing that in alignment with the territorial scope of REMIT, activity that occurs offshore, but within the UK’s jurisdiction would also be capable of coming within the scope of the new criminal penalties regime.

It is the Government’s objective to introduce criminal penalties as soon as possible and it is therefore proposing to use the European Communities Act 1972 (the “ECA”) to put in place the criminal penalties regime. However, although the ECA would permit the new criminal offences to be in place by early 2015, it would restrict the penalty for such offences to a maximum of two years’ imprisonment. As mentioned, similar conduct in the financial sector carries a harsher penalty with a maximum sentence of seven years available for insider dealing under the Criminal Justice Act 1993.

The Government recognises that there may be a potential for continuing market risk as a result of the discrepancy in penalties, and aims to keep the relationship between the different markets under review.

Next Steps

The consultation period will close on 30 September 2014 and the Government is proposing the introduction of the new criminal penalties regime by March 2015.


The Government is proposing that Ofgem’s powers to monitor transactions and investigate potential breaches would draw on those set out in REMIT, however, it remains to be seen how the offences and enforcement of such penalties will operate in practice. In light of the potential for both individuals and companies to be held accountable under the proposed new criminal regime, businesses should ensure that appropriate policies and procedures are put in place to address the risks of insider dealing and market manipulation.