The Market Abuse (Directive 2003/6/EC) Regulations 2005 transposed the EU Market Abuse Directive (MAD I) into Irish law. As has been widely reported, the current EU market abuse regime is in line for an overhaul. It is anticipated that the implementation of the new proposals may not come into force until 2016.
However, the wide ranging ramifications of these changes, including criminalisation of certain behaviours, means that companies should take account of the proposed new measures now and begin to adapt their governance and compliance structures accordingly. Otherwise they may find themselves subject to significant administrative or criminal sanctions.
The European Commission began a review of MAD I in 2009, the purpose of which was the strengthening and modernising of the EU market abuse framework. Under the review, the Commission considered both the potential for simplification and burden reduction and ensuring greater effectiveness of its market abuse framework in order to respond adequately to any deficiencies that may have arisen (notably during the financial crisis) since the adoption and implementation of MAD I. Following a consultation process, the Commission published proposals to replace MAD I with two pieces of legislation, comprising:
- an EU Regulation on insider dealing and market manipulation (MAR); and
- an EU Directive on criminal sanctions for insider dealing and market manipulation (CSMAD).
Together, these two items of proposed legislation have become known as MAD II.
Although the existing EU market abuse regime was created through a Directive, thus allowing Member States some scope in implementing the Directive into national law, the Commission decided to create MAR through a Regulation as it considers it to be the most appropriate legal instrument to define a revised EU market abuse regime. It believes that MAR's direct applicability will reduce regulatory complexity and offer market participants greater legal certainty. In essence, through MAR, the Commission is seeking to introduce a single European rulebook in the area of market abuse.
On 10 September 2013 the European Parliament announced that it had adopted in plenary session a proposal to repeal MAD I, and to replace it with MAR. However, final legislative adoption of MAR will not occur until there is political agreement within the EU institutions concerning MiFID II (which is the proposed overhaul of the Markets in Financial Instruments Directive, Directive 2004/39/EC). This is due to the fact that aspects of MAR (in particular its scope) depend on the final text of MiFID II, and these will need to be fully aligned. MiFID II is not currently expected to be formally implemented until 2016 at the earliest.
MAR contains some significant changes. Chief among them is the proposed expansion of the definition of “insider information”, changing and broadening it in some specific instances and incorporating a “reasonable investor” test.
While MAR will be introduced by Regulation, it is recognised that criminal sanctions for market abuse are the responsibility of Member States and, therefore, that CSMAD will be introduced through a Directive. Under the Lisbon Treaty, the UK and Ireland are not automatically bound by EU legislative proposals in respect of the area of freedom, security and justice matters. Instead, they are able to decide whether to opt in to any measure on a case-by-case basis. CSMAD falls within this category of legislative proposal. Whereas the UK decided to opt out (at this stage), Ireland has opted in. The Commission assessed existing sanctioning regimes and identified that "current sanctions are lacking in impact and are insufficiently dissuasive, which results in ineffective enforcement of [MAD I]". The Commission has also identified that the current sanction regimes for market abuse applied by Member States do not consistently use the same definition of market abuse offences and are different, allowing offenders to exploit gaps and loopholes. Hence changes were needed.
CSMAD sets out two market abuse offences – insider dealing and market manipulation. It also requires Member States to criminalise behaviour which amounts to inciting, aiding or abetting market abuse. Responding to recent high profile cases concerning manipulation of interest rate benchmarks (such as LIBOR and EURIBOR), such behaviour falls within MAD II’s (and CSMAD’s in particular) scope. Manipulating, or attempting to manipulate, such benchmarks will therefore become a criminal offence.
Companies should be aware that private individuals have sued companies in Ireland for damages for alleged breaches of the existing Irish Market Abuse Regulations (which implemented MAD I). A High Court case involving this issue is awaiting an appeal date in the Irish Supreme Court to determine if such claims are permissible.
Taking all of the above into account, it is clear that these proposals will have serious ramifications for banks, brokerage houses and other large firms participating in the financial markets as criminal liability will be extended to companies held liable for an offence. This will place a burden on all of these market players to ensure that their governance and compliance structures are sufficiently robust. We await with interest further progress on MAD II’s implementation.