Introduction

On 12 June 2014, Chancellor of the Exchequer, George Osborne MP, delivered the annual Mansion House speech in which he set out a number of regulatory issues to be addressed by the Government. Among the proposals, he announced that the UK Government will extend the new powers introduced to regulate LIBOR so as to cover further major benchmarks. He also announced that the Government will introduce new domestic criminal offences for market abuse, rather than opt in to the new EU Directive on criminal sanctions.

Extension of new powers over major financial benchmarks

Section 91 of the Financial Services Act 2012 made it a criminal offence to make false or misleading statements in relation to benchmarks. This includes engaging in conduct which creates a false or misleading impression in connection with the setting of a relevant benchmark. A ‘relevant benchmark’ is one specified by the UK Treasury and currently only includes LIBOR. The Chancellor announced that this will be extended to cover foreign exchange, commodity, fixed income and other markets. A full list of benchmarks to be covered will be published and available for consultation by this autumn and the new regime will be in place by the end of the year.

George Osborne’s announcement comes in the wake of a number of scandals that have hit major global financial benchmarks in recent years. In particular, George Osborne referenced the revelations about the manipulation of LIBOR that had undermined the integrity of the financial services market, both in the UK and internationally. More recently, a major UK bank received a multi-million pound fine for failures in its internal controls that enabled one its traders to manipulate the London gold fix. The trader was fined and banned from performing regulated activities.

The Government is understandably anxious about further scandals in London’s financial markets, due to the importance of this sector to the UK’s economy. For example, London is home to 40% of the £3 trillion a day global foreign exchange (“forex”) business; 45% of over-the-counter derivatives trading and 70% of the international bonds market. Allegations of abuse in these markets damage confidence and risk market participants shifting their trading to rival financial centres like New York. However, experts have warned that over-regulation should be avoided as this would also shift market activity elsewhere.

George Osborne said that the new regulations were being brought in pre-emptively, “[l]et us not wait for the next wave of scandals in financial markets to hit us before we respond.” However, the next wave appears to already be close to crashing against the shore. The Financial Conduct Authority (FCA) is currently investigating allegations that there were attempts to manipulate benchmark foreign exchange rates in London, and is due to report back early next year. More than 40 currency dealers around the world have been fired or suspended in relation to claims of forex market manipulation. As any new rules will not apply retrospectively they will not be of assistance to any prosecutions of historical abuses.

George Osborne announced that the Treasury, the Bank of England and the FCA will conduct a comprehensive review of the UK’s fixed income, currency and commodity markets. They will also determine which benchmarks will fall under the extended powers. The review, titled “The Fair and Effective Markets Review” is to be chaired by the new Deputy Governor of the Bank of England, Minouche Shafik, who previously acted as the Deputy Managing Director of the International Monetary Fund. Minouche Shafik will be joined by Martin Wheatley (Chief Executive of the FCA) and Charles Roxburgh (Director General of Financial Services at the Treasury). A panel of market practitioners, chaired by Elizabeth Corley, chief executive of Allianz Global Investors, will be established to ensure that the Review works closely with industry. The Review will produce its report in a year’s time.

Opt-out of European Union rules

On 14 April 2014, the Council of the EU adopted a new Regulation on market abuse and a Directive on criminal sanctions for market abuse which are set to replace the existing Market Abuse Directive. The rules introduce various new measures aimed at combating insider trading and market abuse including the introduction of a new framework for the disclosure of inside information by listed companies, an extension of the scope of market abuse to cover abuse on electronic trading platforms and new criminal sanctions for manipulation of benchmarks such as LIBOR and EURIBOR. Under the EU Directive, the manipulation of financial benchmarks will become a criminal offence with a minimum four year imprisonment term.

The UK and Denmark have exercised their right to opt-out of EU rules that involve criminal penalties and will not be implementing the Directive, which must otherwise be implemented in EU member states by 2016. George Osborne explained that the Government will “introduce tough new domestic criminal offences for market abuse, rather than opt in to European rules we do not think suitable or sufficient for our needs”. The Fair and Effective Markets Review will recommend new criminal sanctions which meet the needs of London. The Treasury said the new UK rules would be as tough, if not tougher than the upcoming EU laws.

However, the proposed criminal sanctions announced by George Osborne have not yet been released in any form of draft legislation. With the next UK general elections taking place in May 2015, a question remains as to when the announced measures will be passed into law.