With effect from 3 July 2016 the Financial Instruments Market Act no longer lays down exhaustive rules on the prohibition of market abuse or its consequences. This does not mean that the market abuse rules have been abolished, but rather that those rules have been replaced by another directly applicable piece of EU legislation: Regulation No. 596/2014 of the European Parliament and of the Council on market abuse.1
This article explores the concept of market abuse and its consequences.
The concept of market abuse and examples
Under the Regulation, market abuse includes unlawful behaviour in the financial markets. This concept is understood to consist of insider dealing, unlawful disclosure of inside information and market manipulation.2
So the Regulation defines the main elements of market abuse, which involves unlawful behaviour in the financial markets.
A key word in the definition of market abuse is inside information, which is taken to mean any information a reasonable investor might use in deciding to buy or sell financial instruments.3
To avoid situations where inside information is used unlawfully, the issuers of financial instruments are required to draw up a list of persons having access to all types of inside information.
Insider dealing involves an unfair advantage being obtained from inside information to the detriment of third parties who are unaware of such information. So persons having access to inside information are prohibited from using that information for buying or selling, whether directly or indirectly, on their own account or another person’s account, the financial instruments to which that information relates.
Similarly, the definition prohibits unlawful disclosure of inside information. Persons having access to inside information are prohibited from disclosing it to any other person (unless such disclosure is made in the normal course of a person’s employment, profession or duties) and from encouraging or inducing another person to buy or sell financial instruments linked to such inside information.
Finally, market abuse can take the form of market manipulation, which usually breaks down into the following groups:
giving false or misleading signals about the supply of, demand for, or price of, a financial instrument;
affecting the price of financial instruments by using fictitious devices or any other form of deception;
spreading information and rumours about the price of a financial instrument;
spreading false or misleading information about pricing benchmarks for financial instruments.
Persons engaged in market abuse, especially after the regulation came into force, is facing extremely severe penalties. Market abuse violations under the Financial Instruments Market Act attract a fine of up to €5 million for individuals, while entities face a fine of up to €15 million or 15% of their total revenue for the last financial year according to their approved financial statements for the last financial year.4
And the EU has made it mandatory for the member states to provide for criminal liability for any acts amounting to market abuse. The Criminal Code, among other things, provides for up to ten years’ imprisonment for market abuse.5
As we can see, the rules on holding inside information and penalties arising from the prohibition of market abuse are quite extensive. Also, persons involved in the financial markets often face problems arising from the complex EU legislation6
in this area.
1 Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC
2 Ibid. paragraph 7 of the preamble
3 Article 7 of the Regulation lays down criteria for inside information.
4 Section 148(17)(9–10) of the Financial Instruments Market Act
5 Section 193.2 of the Criminal Code
6 This legislation is taken to mean not only regulations, directives and rulings but also various guidelines, recommendations etc.