Part Viii: Penalties for Market Abuse
222.This Part confers power on the Authority to impose penalties for market abuse or to publish a public statement that someone has engaged in market abuse. The Act sets out the kinds of behaviour which will constitute market abuse and places a duty on the Authority to produce a code which will help to determine whether particular behaviour amounts to market abuse. This code will carry evidential weight, and in certain circumstances will provide a defence, or “safe harbour”, against allegations of abuse. This Part also gives the Treasury the power to prescribe the coverage of the regime by specifying both the markets and the investments traded on those markets to which it applies. It sets out the procedures the Authority must follow when proposing to impose a penalty. It also confers a right to refer a decision to impose a penalty to the Tribunal.
Section 118: Market abuse
223.This section sets out the behaviour which constitutes market abuse. It also confers on the Treasury an order-making power to specify which markets and which investments come within the scope of this section.
224.Subsections (1) and (2) set out the conditions which must be satisfied before behaviour can be regarded as market abuse (and a penalty possibly imposed or statement published). In order to be abuse the behaviour must:
take place in relation to qualifying investments traded on a market to which the section applies;
be behaviour of a particular kind, as set out in subsection (2); and
be behaviour which is likely to be regarded by a regular user of the market as a failure on the part of the person (A) engaged in the behaviour to observe the standards which the regular user would reasonably expect of a person in A’s position. The regular user of the market is defined in subsection (10) to be a reasonable person who regularly deals on the market. He is intended to represent the distillation of the standards expected by those who regularly use the market.
225.There are three kinds of behaviour set out in subsection (2). Broadly speaking, these are that the behaviour is based on information not generally available to the rest of the market; that the behaviour is likely to give the regular market user a false or misleading impression; or that the regular user would be likely to regard the behaviour as behaviour which would distort the market.
226.Subsection (6)(a) brings behaviour which takes place in relation to the subject matter of investments within the definition of behaviour which can be caught by these provisions. This means that, for example, behaviour in relation to a precious metal which affects the price of a futures contract in the metal can potentially be caught by these provisions if it is behaviour which falls within all of the tests set out above. Subsection (6)(b) also brings investments within the regime which are not themselves qualifying investments for the purposes of this section, but which are derivatives of a qualifying investment (for example options on options); or whose price or value is expressed by reference to the price or value of qualifying investments, for example spread bets. Subsection (8) allows the Authority to provide that behaviour conforming with a particular rule or rules does not amount to market abuse.
Section 119: The code
227.This section places a duty on the Authority to prepare and issue a code which will allow it to set out the kinds of behaviour which, in its opinion, amount or do not amount to market abuse. The purpose of this code is to give guidance as to whether or not behaviour is abusive.
228.Subsection (2) makes clear that the code may describe behaviour which, in the opinion of the Authority, either does or does not amount to abuse. (Section 122 provides that a statement in the code that a particular type of behaviour is not an abuse is conclusive evidence of this fact.) It may also set out factors which, in the Authority’s opinion, should be taken into account when determining whether an abuse has occurred. An example of such factors might be an individual’s expertise or the fact that someone holds a position of particular responsibility. Subsections (6) to (8) place the Authority under a duty to publish the code (including any amended or replacement version under subsections (4) and (5)). The Authority must consult on its proposed code, or on proposed alterations or replacements under section 121.
Section 120: Provisions included in the Authority’s code by reference to the City Code
229.This section enables the Authority to include in the code produced by it under section 119 “safe-harbours” from proceedings for market abuse for behaviour in conformity with the City Code on Takeovers and Mergers produced by the Panel on Takeovers and Mergers. If the Authority includes any such provisions, then behaviour which complies with those provisions does not amount to market abuse (as a result of section 122(1). The approval of the Treasury is required under subsection (2) before it can do so.
230.In considering whether market abuse has taken place, subsection (3) requires the Authority to keep itself informed as to the way in which the Panel interprets and administers the relevant provisions of the City Code.
Section 122: Effect of the code
231.Subsection (1) provides a safe harbour, by making it clear that if a person undertakes any behaviour which the code currently in force specifically states does not amount to market abuse, then he cannot be taken for the purposes of the Act to have abused the market. Subsection (2) makes clear that in other circumstances the code may be relied upon insofar as it indicates that the behaviour in question does or does not amount to market abuse.
Section 123: Power to impose penalties in cases of market abuse
232.This section allows the Authority to impose a monetary penalty on any person, whether an authorised person or not, who has engaged in market abuse or has required or encouraged another to engage in market abuse. Subsection (3) allows the Authority, as an alternative to imposing a penalty, to publish a public statement that a person has engaged in market abuse or has required or encouraged another person to do so. Subsection (2) provides that the Authority cannot impose a penalty or make a statement where a person has reasonable grounds for believing his behaviour did not constitute market abuse or that he was not requiring or encouraging another to engage in market abuse, or where the person concerned took all reasonable precautions and exercised all due diligence to avoid doing such things. The procedures for taking action under this section are set out in sections 126 and 127.
Section 124: Statement of policy
233.This section places a duty on the Authority to prepare and publish a statement of its policy in respect of penalties under section 123. The Authority will be able to set out in this document the circumstances in which it might impose a penalty and factors it will take into account in deciding what level of penalty to impose.
234.Subsection (2) requires that the Authority’s policy for determining the amount of a penalty must take into account the effect and seriousness of the behaviour, whether or not it was deliberate or reckless and whether the person who engaged in the abuse was an individual. The Authority may also take into account other matters it considers appropriate. The Authority must consult on the initial version of the statement and on any subsequent changes as provided for in section 125. Subsection (3) requires the Authority to include in the statement an indication of when the Authority is to expected to regard a person as benefiting from section 123(2). Subsection (6) makes clear that the Authority must then have regard to a statement issued under this section when using its powers.
Section 128: Suspension of investigations
235.This section allows the Authority to direct a recognised investment exchange or recognised clearing house not to conduct an inquiry or to stop any inquiry it is already undertaking where the Authority is, or is considering, carrying out an investigation itself, or imposing a penalty on a person for market abuse.
Section 129: Power of court to impose penalty in cases of market abuse
236.This section allows the Authority to apply to the court to impose a penalty for market abuse where the court is considering whether to grant an injunction under section 381 or order restitution under section 383 in a case of market abuse.
Section 130: Guidance
237.This section allows the Treasury, with the approval of the Attorney General and the Secretary of State, if the need arises, to issue guidance to the relevant prosecuting authorities (as set out in subsection (3)). The purpose of this guidance would be to help those authorities in deciding whether a case should be subject to criminal prosecution, or the imposition of penalties under the market abuse provisions, in the area of overlap between these provisions and the criminal offences of insider dealing (in the Criminal Justice Act 1993) and misleading statements and practices (in section 397). Subsection (5) confers a power on the Lord Advocate to issue equivalent guidance in relation to Scotland, where there are different arrangements for prosecution of offences.