The Financial Services And Markets Tribunal

“...The City has always had its share of crooks, charlatans and incompetents and although the club was rather good at enabling its members to identify them it was very bad at putting them out of business. Many of them continued to flourish and to rip off those who were not members of the club..." [1] 

Introduction and overview

On 19 March 2008, the London market experienced allegations of abusive conduct by persons disseminating false and misleading information about the liquidity of Halifax Bank of Scotland (HBOS) shares, allowing traders to profit from the short selling in those shares - a practice known as “trashing and cashing. [2] " Allegedly, emails circulating around the financial markets contained rumours that HBOS was struggling to fund its day-to-day business and that an emergency meeting had been called with the Bank of England. A further rumour stated that the Financial Times was writing an exposé of the bank’s liabilities that “would raise the spectre of a run on the bank" [3] At 1pm that day the value of HBOS shares had fallen by around 19% [4] resulting in the Bank of England issuing what was described as an unprecedented denial that HBOS was facing liquidity problems and the UK’s Financial Services Authority (FSA) publishing a warning to the financial industry that it would not tolerate abusive trading and that it had commenced an investigation into potential market abuse and unusual trading patterns, and that if it found any evidence of “trashing and cashing" it would start a probe more deeply, tracking the e-mails, and listening to taped phone calls [5] . The Financial Times reported that on the face of it the negative rumours on 19 March 2008 looked like blatant market abuse, but that despite the FSA’s swift reaction, punishment by press release would not satisfy the regulators critics and that there was an increasing demand for the FSA to ‘flay criminals with the rules.’ [6] The wealth of media coverage and adverse comment about the extreme market conditions of that day, together with the alleged abuse occurring at a time of unprecedented economic conditions served to place the FSA - which has statutory duties to maintain market confidence and reduce financial crime and has as one of its strategic aims to promote efficient, orderly and fair markets [7] - under pressure to get results against abusers of the financial markets [8] . Such pressure acted to highlight that although it might be easy to identify market abuse there is very real difficulty in proving it [9] and that much of the FSA’s market abuse activities although useful for catching the casual insider or abuser do not help in catching organised rings of abusers [10] .

The Financial Services and Markets Act 2000 as amended (which throughout this thesis is described as either the Act or the 2000 Act unless the context otherwise requires) establishes a civil law enforcement regime prohibiting seven distinct market abuse behaviours and allowing for the imposition of financial penalties by the FSA in the event of a person committing Market Abuse. The regime is supported by a civil law enforcement framework allowing for the speedy resolution of enforcement cases, together with a judicial safeguard allowing disputed cases to be referred to the Upper Tribunal (Tax and Chancery) [11] . Since the implementation of the 2000 Act and notwithstanding the market abuse regime there arguably remains a continued threat to the cleanliness of the financial markets [12] . In response the FSA has gradually extended its approach to market abuse enforcement beyond the civil market abuse regime relying on other parts of its rule book as well as an increasing reliance on the use of criminal prosecutions [13] . Criminal prosecutions certainly generate more publicity and the threat of a custodial sentence provides a more credible deterrent than the threat of a financial penalty. Emphasising the appropriateness of criminal prosecutions in cases of Market Abuse Lord Judge CJ in R v McQuoid CA [14] said “prosecution in open and public court will often and perhaps much more so now than in the past, be appropriate."

The essence of market abuse and historical approaches to dealing with abuse in the financial markets.

The very essence of market abuse is the interference in the free working of markets that can involve interference with the supply of, as well as the demand for, a security [15] . Abuse can take place through a wide range of activities and the range can be as wide as perhaps the inventiveness of the prospective abuser. Examples of Market Abuse include Insider Dealing, Market rigging; illegal take up; share price manipulation; fictitious transactions such as washed sales or rollover sales [16] ; and market distortion [17] . Moreover the extent of abuse can vary from the small scale occasioned by a broker and involving only an individual client, to large scale abuse that threatens the very fabric of a securities market [18] . As will be explored in more detail below, abuse in the financial markets has been historically regulated through a combination of the criminal law applied to all users of the financial markets and the regulation of market professionals. Ambiguity surrounding the definition, causes and handling of market abuse has, however, historically protected the abuser from public scrutiny and sanction. M Clarke asserts that it is the structure of the business environment that can provide misconduct with both opportunities and as well as methods for misconduct to be managed. He states, “…business itself, naturally, likes to think of misconduct and certainly crime as exceptional. To do otherwise would be to invite a host of difficulties: public doubt about the integrity of business or even the entire business sector, alarm at the disloyalty of employees or fellow directors, confusion about what are acceptable standards of conduct. It makes much more sense to polarise misconduct into rare flagrant cases demanding action as crime, and the rest as just business…" [19] 

Although the emerging financial crisis of 2007 acted to bring to the surface abusive practices, abuse in financial markets is not a recent phenomenon. For as long as people have been able to make money from trading, there is evidence of persons exploiting markets in order to make money from abusive rather than normative market conduct [20] . There are many notable cases in history of abuse in the market, ranging from the collapse of the South Sea Company [21] (which charts what is possibly the first stock market boom) the unlawful share price manipulation in the Guinness affair in the 1980’s [22] , through to the high profile regulatory enforcement case involving the manipulation of the price of individual shares by CitiGroup Global Markets in 2005 [23] . It has been observed that there are long-established traditions of market control and legal process to prevent market abuse which can perhaps be traced as far back to the Roman Emperor Diocletian and the legal doctrine of ‘Just Price’ [24] . This doctrine held that markets had to be organised in ways in order to be just, thus legitimising interference in the institutional structures of markets to achieve that aim. Such concept of the importance of fairness in the markets remained in place and was used in the 1970’s as a justification for the regulation of insider trading contrary to the counter views of Professor Manne, who argued that Insider Dealing in fact provided benefits for financial markets and just reward for entrepreneurs [25] . The ideology of legitimised interference remains in place today as the corner stone of the State’s control against market abuse. The Common Law offences of engrossing, regrating and forestalling were a product of such ideology, intending to prevent manipulation of markets in essential goods. Gilligan identifies such doctrine of legitimised interference and more formal control of abuse in the UK markets through the emergence in the Middle Ages of the guild system and the control of the professions through restrictive trade practices and the granting of trade monopolies through royal charters [26] . The main commercial towns during the fourteenth century were granted Court of Staple in which merchants judged their own customs, a practice subsequently absorbed into Common Law. Gradually in England the Courts of common law and equity assumed jurisdiction over commercial matters and by the Eighteenth century the process of integrating specialist mercantile expertise into the resolution of disputes emerged when Lord Mansfield empanelled special jurors from the City of London to determine crucial cases on financial, insurance and trading customs [27] .

There is some suggestion that Market Abuse is more prevalent on less developed financial markets. For example data shown in Table 1 to this thesis shows that over 40% of the FSA market abuse disciplinary cases relate to activities on the London Stock Exchanges junior market, AIM [28] . Such a phenomenon is, however not new. Rider stated in 1979 that “...it would perhaps be a fair assumption that insider trading occurs more on less developed securities markets than on those where there is effective market surveillance and attention to proper and accurate timely corporate disclosure..." [29] Gilligan observes that it was the illiquid securities markets of the Eighteenth and Nineteenth Centuries that presented opportunities for market abuse [30] . The Seventeenth Century witnessed the rise of public trading in Company securities, and although providing business with greater opportunities for raising finance, it offered to a wider audience opportunities for profit from short term speculation and thus perhaps gave rise to a growth in short term speculative trading and an increase in market abuse. A Parliamentary enquiry that followed England’s capital markets post boom crisis of 1693-1695 reported into the extent of manipulation in the markets and led to Parliament enacting ‘An Act to Restrain the Number and Practice of Brokers and Stock-Jobbers’ [31] . The Royal Commission reported:

“The pernicious Art of Stock-jobbing hath of late,… wholly perverted the End and Design of Companies and Corporations, erected for the introducing, or carrying on, of Manufacturers,… by selling their shares for much more than they are really worth…"

Unlike the arguments that have existed in defence of the practice of insider dealing [32] , the law has traditionally held as abhorrent market manipulation and has sought to regulate against those that conduct manipulation at the expense of others by focusing on the threat that such conduct has on the market place as a whole. Rider, expressing the view that market confidence is effected by market abuse as it is insider dealing observed, “...It should be emphasised that from the standpoint of investor confidence the mere suspicion that abuses occur or the allegation that the market is unfair is likely to be just as disruptive as proof that abuses have taken place..." [33] Instances of the Crown’s willingness to prosecute abuse in the financial markets is evident from the nineteenth century. In R v De Berenger, [34] De Berenger together with seven others were convicted of a market manipulation. The defendants were accused of “unlawfully contriving false reports, rumours, arts, and contrivances, to induce the subjects of the King to believe that a peace would soon be made ...thereby to occasion without any just or true cause a great increase and rise of the public Government funds and Government securities...with a wicked intention thereby to injure and aggrieve all subjects of the King who should, on the 21 February, purchase or buy any part or parts, share or shares of and in said public Government funds and other Government securities." [35] The manipulation was led by a Captain Alexander Cochraine (later known as Lord Dundonald) together with his Uncle the Hon Cochraine-Johnstone, a stockbroker. For over two years Britain had been at war with France and the Cochrains effected a manipulation of the market by spreading false rumours of Napolean’s death and likely peace with the French. De Berenger masquerading as Col R Du Borough, went to Dover stating that he had just arrived from France where Napolean had been killed in battle and that the Allied Armies held Paris. Simultaneously a Ralph Sandon and two others maintained the news story whilst travelling from Dartford to London. Government funds rose and Lord Dundonald sold at a profit of £139,000 stock he had bought only a week before. [36] 

In more recent times, the UK Government introduced specific legislation criminalising abuse in the financial markets. First introduced in 1939 and subsequently re-enacted in S13 of the Prevention of Fraud (Investments) Act 1958, S47(2) Financial Services Act 1986 and more recently S397 Financial Services and Markets Act 2000, it became an offence to manipulate the market through the reckless or international making or misleading statements. [37] What has become evident, however, is the limited use of such offence when dealing with abuse [38] and although there have been examples of its use in cases such as R v Hipwell (the City Slickers case) [39] in 2005 which concerned share price manipulation (prosecuted under the 1986 Act offence) and the case of R v Rigby and Bailey [40] in 2005 (prosecuted under the 2000 Act offence) concerning false statements to the market in the annual report for AIT plc shares, prosecutions for 'criminal market abuse, often have the appearance of a strategic statement [41] . It was perhaps the 1980’s notorious market abuse prosecutions in the cases of Guinness and Blue Arrow, (which will be explored in more detail below) that led the State and financial regulators to consider that a Civil law method of disposing of market abuse cases would be the panacea for market regulation in the United Kingdom.

The concept of Tribunal involvement in regulatory decision making is not however new. The State’s intervention in financial regulation through the Prevention of Fraud (Investments) Act 1939, although criminalising market abuse, introduced the requirement for the licensing of those carrying on securities business. Any license granted could be revoked in the event of a criminal offence under the 1939 Act. The intention to revoke such a license gave rise to a right under S6(1) of that Act to refer the matter to a Tribunal of Inquiry. It is unlikely, however, that such Tribunal operated with a great deal of independence from the State. The role and authority of such Tribunal remained in place without amendment under the subsequent Prevention of Fraud (Investments) Act 1958 and latterly a Tribunal independent of the regulatory process was established under Chapter IX of the Financial Services Act 1986 to review referrals of decisions in relation to the granting and revocation of authorisation [42] . That Tribunal and the regulatory structure within which it operated is discussed further below.

The corporate excess of the 1980’s and challenges to market abuse prosecutions.

The Guinness affair

The late 1980’s saw the high profile prosecution of senior executives of Guinness plc together with a number of senior City business men who had been involved in an illegal scheme to support the share price of Guinness plc during its takeover bid for Distillers plc. [43] The prosecution has almost developed a level of infamy as a result of the publicity arising from the sentencing of Saunders, Guinness’ Chief Executive and subsequent Human Rights challenges concerning protection from self incrimination [44] . The original prosecution, however, was based on conduct that was abusive to the market in that the conduct of paying undisclosed indemnities and success fees to purchasers of shares, mislead the market into believing that they were genuine risk taking purchasers and thus created a false market. In fact at the trial a number of Distiller' shareholders gave evidence that the price of the Guinness shares had swayed their decision and they would have acted differently had they known of the payments [45] . Ernest Saunders was initially convicted on two counts of conspiracy to abuse the market contrary to S13(1)(a)(i) of the Prevention of Fraud (Investments) Act 1958, eight counts of false accounting contrary to S17(1)(b) Theft Act 1968 and of two counts of theft. The takeover took place in early 1986 at a time when Guinness plc was in competition with another company, the Argyll Group plc. Guinness' offer to the Distillers' shareholders, included a substantial share exchange element, and accordingly a critical factor for the success of the offer was the prices at which Guinness shares were quoted on the stock exchange. Guinness had established a takeover team and it was the aim of that team to maintain and, if possible, inflate the price of Guinness shares. The Guinness takeover team consisted of Ernest Saunders, Olivier Roux acting as finance director and Thomas Ward an American lawyer also acting as a director of Guinness. The takeover team made arrangements with a number of Guinness share supporters, including Ronson, the chairman of the Heron Group of Companies, Parnes, a stockbroker, and Lyons, a prominent businessman. The supporters purchased a significant number of Guinness shares. During the course of the Distillers takeover bid the Guinness share price rose dramatically on April 11, 1986 to 353 pence, but once the bid had been declared unconditional it fell significantly to 296 pence. It was further alleged that the payments out of Guinness funds were not authorised by the Board and so amounted to theft [46] .

The case of Blue Arrow and County Nat West

With the freeing up of the financial markets following Big Bang [47] came a rising profile of sophisticated and complex abuse in the UK financial markets. Unfortunately for the reputation of regulation in the City much of the more complex abuse proved itself to be challenging to prosecute. Some of that difficulty arose out of the complexity of the offences, such as insider dealing, elsewhere weaknesses were exposed in the ability of both the prosecuting authorities and the Courts to manage complex investigation and trials. With the Blue Arrow prosecutions being a case in point, in the early 1990s much concern and criticism arose regarding the undertaking of lengthy and complex financial crime trials.

Blue Arrow (BA) was a successful recruitment agency business. In 1987 it considered the takeover of an American recruitment agency, Manpower Inc. A lawful takeover plan was developed which enabled a public announcement to be made on 4th August 1987 with news of a bid by BA for the shareholdings in Manpower Inc. The bid was successful and its success was announced on 7th September. The takeover financing plan was however problematic and its conduct was considered to have manipulated the market. Put simply it was alleged that the defendants in the case had rigged the market, by not disclosing that there had been insufficient shareholder appetite for the share allotment and that a complex financing arrangement had been structured in order for shares to be offered for public sale and that in withholding such information the market had been misled into attributing a higher value to the Blue Arrow shares thus creating an appetite for purchasing the shares. The fundamental of this allegation was described by Mr Nicholas Purnell, QC, for the prosecution during the preparatory hearing as being an allegation that there was "an agreement to rig the market" and that ". . . the way in which the market was rigged was to create a situation which enabled the market to trade in the shares of Blue Arrow in ignorance of those steps which had been taken to enable the rights issue to be completed and to enable the market to believe that there were voluntary takers for the shares at the rights issue price or above." [48] 

The prosecution’s case was initially based on two charges. The first against all defendants was of a conspiracy to contravene section 13 of the Prevention of Fraud Investment Act 1958, that is, the fraudulent inducement of persons to invest money. The second charge was of conspiracy to defraud contrary to the common law which related to the taking in the placing and the consequent parcelling of shares and non-disclosure. The two charges between them involved initially fourteen defendants and covered a period of nineteen months.

The trial commenced on 11th February 1991 with the jury retiring to consider its verdict on 11th February 1992 [49] . It was reported that the trial was then the second longest criminal trial in English history [50] . At trial, convictions were secured against Mr Cohen the Deputy Chief Executive of National Westminster Investment Banking and Chief Executive of County Nat West (CNW), Mr Reed the Managing Director of CNW who was in charge of its Corporate Advisory Division, Mr Wells an Executive Director of CNW, Mr Gibbs the head of the Corporate Finance Division of Philips & Drew Securities Limited (P&DSL) a firm of stock brokers a subsidiary of Phillips & Drew Ltd and Mr Stainforth a director in the Corporate Finance Division of Phillips & Drew Ltd.

In allowing the appeals against conviction the Court of Appeal summed up the sense of frustration with the complexity of the trial “The awesome time-scale of the trial, the multiplicity of issues, the distance between evidence, speeches and retirement and not least the two prolonged periods of absence by the jury (amounting to 126 days) could be regarded as combining to destroy a basic assumption. This assumption is that a jury determine guilt or innocence upon evidence which they are able as humans both to comprehend and remember, and upon which they have been addressed at a time when the parties can reasonably expect the speeches to make an impression upon the deliberation (as to which see Landy 72 Cr App Rep 237, 245 by Lawton LJ)..." [51] 

The complexity of this trial together with a later enquiry led to a public reaction that may very well have contributed to the notion that an administrative law system for dealing with abuse in the financial markets was likely to be preferable to the numerous failed attempts to deal with market abusive behaviour. [52] 

Market abuse and the threat from insiders

Insider dealing is a form of market abuse which is now subject to both regulatory and criminal law prohibitions [53] . Opinion regarding the criminality of insider dealing has varied. Historically the need to regulate the practice of insider dealing was not popular and was in effect left to the Common law and the challenges to the fiduciary duties of company directors [54] . The law was made complicated by the case of Percival v Wright (1902) [55] which did not recognise that the UK Common Law provided any hope of civil sanctions against insider dealing in that it was taken to show that directors are permitted to use inside information for their own investment purposes. It was perhaps the growth in the size and value of the securities markets that saw the emergence of a need for regulation of insider practices. Rider and Ashe believe that the major reason for controlling insider dealing is that it adversely affects confidence. [56] For many years a variety of academics and practitioners have put forward views about the consequences of insider dealing and until the 1980’s it was questioned whether the practice needed to be regulated or indeed criminalised at all [57] . There has been significant change, however in such mindset and today insider dealing is not only firmly rooted as a criminal offence but as one that contributes to financial losses to investors [58] . Steps to introduce legislation in the United Kingdom, had however, taken a number of years – up to the end of the World War II the buying and selling of stocks and shares in a company on the basis of information known only to the company or its directors, officers and advisors was considered legitimate and widespread. Between the end of the World War II and the late 1950's it began to be considered unethical to make private profits at the expense of the main body of shareholders. By the 1960's and early 1970's the practice became widespread once more, often using knowledge of a takeover and insider dealing was even described by the Financial Editor of the Sunday Times on 14 February 1973 as the "crime of being something in the City". Insider dealing did not appear as a criminal offence on the UK’s Statute books until 1980 [59] . The incidence of Insider dealing and the City’s attitude to it provides a sense of the overall problem that regulation has in responding to abuse in the financial markets. [60] Gilligan expresses the opinion that the history of insider dealing in the UK illustrates that active damping down processes, such as techniques of neutralisation of moral concern and commercial imperatives, have operated under the passive canopy of a community’s ambivalence towards professional crime. [61] Loss believed that the crucial issue is the threat that Insider dealing poses to the very lifeblood of capital markets – liquidity [62] : “…Although insider trading on undisclosed information may not present a threat of the same magnitude as market manipulation in the sense that the former practice does tend to marginally force the price in the right direction, it constitutes an even more grievous insult to the market in the sense that the very preservation of any capital market depends on liquidity, which rests in turn on investor confidence that current quotations accurately reflect the objective value of his investment…"

Conversely Professor Manne saw insider dealing as beneficial to the market because it militated against drastic swings in the market, massaging it by smoothing trends in share movement. He also saw profits from insider dealing as a legitimate return for entrepreneurial enterprise and that insider dealing only harms short term investors because long term investors are not affected by the eventual plateauing of share prices [63] . Writing in the 1960 and 1970’s Manne, perhaps offered views on insider dealing that were representative of the more simplistic markets in existence at that time. However by the late in 1970’s and challenging Manne’s viewpoint, Rider was able to identify the detrimental impact that Insider Trading had on public confidence in the markets, a view that continues to be firmly held [64] . He stated “...the more acceptable view is that insider trading is in fact a blemish on the face of capitalism. Apart from its detrimental effect on public confidence in the markets, which leads to directly to an undermining of the capitalist system, it denies the individual’s reasonable expectation of fair and equal treatment." [65] Moreover, the Courts have dealt with the practice in a much more precise way, Lord Lane for example has classified Insider Dealing as Cheating [66] and more recently Lord Bingham in R v Staines and Morrisey described the threat from Insider Trading by reference to the need for trading equality in a capitalist society : “...It is a familiar, if not a necessary, feature of capitalist society that there should be a market in publicly quoted securities which permits members of the public, whether corporate or individual, to buy and sell. The integrity of the market depends on equality of knowledge, since fair operation of the market is jeopardised if those who are "in the know" (often called "market insiders") can exploit information for their personal advantage which they have obtained in the course of their professional activities when such information is unavailable to others…" [67] 

Pressures of the Industrial Revolution saw incorporation of the limited liability company emerge as an investment vehicle that could reduce risk. However in some circles incorporation was viewed as being contrary to free market principles as it evaded full personal responsibility for personal business decisions [68] . Despite these concerns, by 1844 the three main pressures for incorporation were: a) the need for large amounts of capital for major projects such as railways; b) the popularity of financial gambling on stocks and shares through the London Stock Exchange; and c) the desire to risk capital without exposing entire personal fortunes [69] . During that early period, there was even concern expressed by some members of the Judiciary with regard to the risks of investing on the Stock Exchange. In 1831 in Rothschild v Brookman [70] Lord Wynford said, “For I believe whenever a man puts his foot into the Stock Exchange, not being a member of that Stock Exchange, his ruin, and the only question is a question of time." In the late nineteenth century, the London Stock Exchange remained largely independent and free from interference from the Courts. [71] Market Manipulation and Insider dealing were accepted as commonplace on the City’s market. Initially, in the Seventeenth and Eighteenth Centuries most trading in the City was in lucrative, high volume dealing of low risk securities such as Government stock. However as the eighteenth century progressed, secondary trading in bill broking and discounting developed.

It is reported that the City then was unlikely to complain about higher levels of speculation and over-trading because it brought with it increased commission revenues [72] . The status of the limited liability Company was confirmed and developed in the Joint Stock Companies Act 1856 which provided for legal personality including the right to sue and be sued, to hold and deal with property in the name of the Company and for transferable shares and limited liability. The number of Companies listed on the London Stock Exchange grew rapidly from around 60 in 1885 to 569 in 1907 to over 8000 by 2009 [73] In 1937 the Bodkin committee described the LSE thus [74] “The Stock Exchange is a voluntary organisation governed by its own rules…The law does not in any way control or regulate the constitution of the exchange." The City’s financial exchanges have and do continue to discipline their members for abusive practices that threaten the legitimacy of the markets. For example in 1999 ABN AMRO (Equities) UK Ltd , a London Stock Exchange member, was fined £250,000 by the Exchange after taking an order from one of its clients with instructions to move the price of the security [75] . In Chapter 8 of this thesis the value of Exchange based disciplinary action will be further considered.

City Institutions’ establishment in 1968 of the City Code on Takeovers and Mergers and the UK Takeover Panel [76] followed a protracted response to identified increases in abuse in the market - which largely followed increase in corporate takeover activity – and the threat of statutory regulation. [77] The Panel’s role in setting out standards of conduct to be observed during takeover activity, included obligations that prohibited insider dealing was supported by civil sanctions available to the Panel including public and private censures, reference to the then Department of Trade concerning a person’s suitability to hold a license, reference to the relevant professional body and suspension or delisting by the Stock Exchange of a quoted security. [78] From its inception however, the Panel responded clearly and decisively to the practice of insider dealing. However it is important to note that, the sanctions available to the Panel were exercised only in its role as a self regulatory agency and arguably it was the disciplinary powers exercised by other professional bodies requiring observance with the Code that had a greater deterrent effect. By way of example in the matter of Norbury Insulation in 1971 [79] the Panel identified that insider dealing had taken place and censured both the broker involved and the insider. It was however the impact of the censure that had the greater effect, with the insider resigning from the board of the company and the broker being suspended by the Stock Exchange for 6 months.

In 1973 The Stock Exchange and the Takeover Panel issued a joint statement calling for criminal sanctions against insider dealing. A number of subsequent attempts to pass legislation through Parliament were aborted, but on 23 June 1980, sections 69-73, Part V of the Companies Act 1980 came into force and made insider dealing a criminal offence in certain specified circumstances. These provisions were subsequently consolidated as the Company Securities (Insider Dealing) Act 1985, and amended by the Financial Services Act 1986. With the ultimate criminalisation of insider dealing, but prior to the FSA assuming its regulatory responsibilities in 2001, bodies such as the Serious Fraud Office and the Department of Trade and Industry had lead responsibility for pursuing insider dealing investigations and prosecutions in the United Kingdom.

Subsequently the UK financial market has grown considerably and following the revolution in the City of London referred to a “Big Bang" [80] the UK Government became increasingly concerned that formal protection from abuse was necessary to protect the reputation of the UK markets. Prior to the Financial Services and Markets Act 2000, the regulatory authorities, most notably the Securities and Investments Board (SIB) the designated agency under the former Financial Services Act 1986 and the Self Regulatory Organisation, the Securities and Futures Authority (SFA) used the legal remedies then available in the best way they could as regulatory tools to deal with abuse in the UK financial markets. However, the City regulators faced criticism that too few of those abusing the market through insider dealing were being investigated and prosecuted. Gilligan asserts that the scandals in the UK financial services sector are vivid proof that some high status offenders may not have sufficient enforcement resources or priorities directed towards them and that structural features of the industry may make prosecution unlikely in many cases. [81] In 1998, Howard Davies then Chairman and Chief Executive of the FSA observed: “I think that we have to recognise, sadly, that the City’s image is not all it might be. There have been too many ‘accidents’ for that to be so… Putting all these together might suggest that the City was constantly riven with scandal. And of course those who watch these affairs closely will be aware that in this lengthy list of scandals, relatively few of the participants have been brought to book. There have been some prosecutions, certainly… But the record in the heavily contested serious fraud trial has, frankly, not been good. And remarkably few prosecutions have been brought for insider trading. There is a common perception, which is hard to dismiss, that City crime is simply not punished on the same basis as other forms of theft." [82] 

Gilligan comments that an explanation why many white collar offenders escape punishment is because that by comparison to conventional offences the effects and harm caused by white collar crime is often diffused over a long period of time so that many people do not recognise its occurrence and that white collar crime is largely impersonal with the offender/ victim relationship being distanced. [83] Indeed in the not too distant past, City professionals even boasted of the ease at which they could support insider dealing and resist regulatory scrutiny [84] :

“My clients know the surveillance people will not get through me. If they come to me with a piece of information and they want to deal on it they do so with the understanding that if anyone asks any questions, such as why they bought the stock, they reply that their broker advised them to buy it…The surveillance people can ring me up, they can turn up on my doorstep as they do nowadays, and all they will learn is that I told so-and so to buy the stock because it looked undervalued – so undervalued that someone came and bid for the company a week later…" As an illustration of the extent to which the criminal law was used to deal with insider dealing, in the United Kingdom between 1980 and 1998 there were just twenty two convictions for insider dealing [85] and a number of examples of failed attempts to prosecute [86] , many of which had run into difficulties with the procedural aspect of the prosecution and the admissibility of evidence [87] . Nevertheless it was widely accepted that there was a significant level of insider dealing in the United Kingdom. Indeed the Treasury Trade and Industry Committee was of the view that insider dealing contrary to the spirit of the law was taking place and was going unpunished [88] . While some notable victories have been achieved in the UK – for example, the City Slickers prosecution by the DTI [89] and the FSA’s recent conviction of Malcolm Calvert [90] , overall, successful prosecutions of insider dealing has been sparse.

Big bang and the failings of the financial services act 1986

The 1980’s liberation of the UK’s securities markets, demanded a more sophisticated approach to financial regulation and the Financial Services Act 1986 (the 1986 Act) created a regulatory system that became known as Statute backed self regulation. [91] A designated agency, the Securities and Investment Board Limited (SIB) [92] held primary responsibility for regulation of those persons carrying on investment business in the United Kingdom. Under the 1986 Act no person was allowed to carry on investment business in the UK without being either an ‘authorised person’ or an ‘exempted person’. In addition to directly authorising, SIB was also responsible for recognising Self Regulating Organisations (SROs) that had responsibility for the regulation of particular sectors of the market. As a consequence the 1986 Act set out a complex arrangement for authorization with some persons deemed as authorised, others obtaining authorisation directly from the SIB and others being authorized by virtue of membership of a relevant SRO.

Schedule 2 to the 1986 Act required, inter alias that the rules of an SRO ‘must be such as to secure that its members were fit and proper persons to carry on investment business; so far as they relate to the admission and expulsion of members are fair and reasonable and provide adequate provision for appeals; the carrying on of investment business must be such as afford an adequate level of protection for the investing public.’ The regulation of Market Abuse, however, largely remained a matter for the criminal law,

The 1986 Act through the establishment of the Financial Services Tribunal introduced the makings of a framework to hold to account SIB’s authorisation and disciplinary activities [93] . Ss96-101 in establishing the structure and jurisdiction of such Tribunal, gave rights of referral in relation to matters concerning actions that SIB could in theory take against market professionals following market abusive conduct such as the revocation of authorisation under S34, prohibition under S59(4) and SIB’s right to impose a public censure under S60(2). Although the Financial Services Tribunal could be viewed as a forerunner to the Financial Services and Markets Tribunal, its jurisdiction was investigative rather than adjudicative [94] with the function of setting out is opinions on a case referred to it rather than reaching a decision on case [95] . The consequences of it operating as an investigative body, was that the Tribunal was not limited to considering the specific grounds relied on by the SIB in the notices it had served but was able to take into account other matters which have arisen out of its investigation of the case referred to it. [96] Although operating from 1988, the Financial Services Tribunal’s experience was minimal, dealing only with cases where SIB had refused or revoked authorisation. It is thus difficult to identify the extent to which such Tribunal contributed to SIBs accountability or indeed added to the jurisprudence of market abuse enforcement during that period. Furthermore, although not in isolation a deficiency of the Tribunal, the 1986 Act neither gave SIB or the Tribunal power to impose any form of civil penalty [97] . Such statistic, however probably reflects both the relative simplicity of the SIB’s disciplinary powers under the 1986 Act as well as the majority of the front line conduct of business regulation between 1988 and 1997 being conducted by the SRO’s. As a consequence of the SRO’s involvement it is apparent that any contentious market practitioner enforcement cases would have fallen to be dealt with within the relevant SROs’ internal disciplinary procedures.

The SROs were required to have in place adequate arrangements for effective monitoring and enforcement of compliance with its rules and with the Statement of Principles. [98] The Securities and Futures Authority [99] regulated firms conducting securities and futures business, and although it was not the only SRO required to handle the regulation of abusive conduct by market professionals, it arguably had the most significant exposure to those persons operating businesses on the UK securities and derivatives markets. Those rules set out standards of conduct together with mechanisms for enforcing those rules against its members. [100] The SIB Principles were adopted by the SFA with two of them having particular relevance to transactions that were in abuse of the market. Principle 1 related to “Integrity" and provided that “A firm should observe high standards of integrity and fair dealing."Principle 3 related to “Market Practice" providing: ‘A firm should observe high standards of market conduct. It should also, to the extent endorsed for the purpose of this Principle, comply with any code or standard as in force from time to time and as it applies to the firm either according to its terms or by rulings made under it.’ The SROs which were required to meet certain standards under the 1986 Act included an involvement of disciplinary and appeals panels in their enforcement and disciplinary procedures [101] .

The Regulatory system created by the 1986 Act together with the regime for the regulation of Banks under the Banking Act 1987 became subject to much criticism and a series of financial failures in the 1990s, including the collapse of Barings Bank, and criticism in the Bank of England’s supervision of BCCI led to a momentum for change [102] . Particular criticism was focused toward the lack of any real operative objectives for SIB with the only reference in the 1986 Act being for the protection of investors in S114 (9) (b). [103] This criticism hit market regulation following the forced closure of the property futures market of the London Futures and Options Exchange (FOX) in 1991. FOX had inflated its trading volumes, paying one of its members to engage in “dummy trades" and losing several hundred thousand pounds trading on its own account. However SIB was not in a position to investigate exchanges and had to rely on a review by FOX of its own operations and by FOX’s SRO the Securities and Futures Authority, which took limited action by fining five brokers amounts between £60,000 and £80,000 [104] . The SRO’s enforcement and disciplinary arrangements suffered from a constant barrage of criticism which can in part be viewed as a fair observation of the inherent failings of a system of self regulation but equally the reaction to challenge from a financial industry that had hitherto not been subject to any meaningful form of robust regulation. A series of cases, although not relating directly to market abuse, serve to illustrate the criticism that existed at the time. The Securities and Futures Authority, often the frontline SRO for market abuse given its role in regulating securities trading institutions, faced criticism in the press for failing to appropriately deal with the senior management of Barings Bank following that organisation’s demise after the Nick Leeson affair [105] . Merely one month later, however the SFA was criticised in the same newspaper for operating an over enthusiastic approach to enforcement in relation to a small stock broker Derivative Securities and its managing director Bruce Barnfield (although the newspaper comment implicitly compliments the actions of the SFA’s disciplinary tribunal in dismissing a number of charges) who had been subject to a two year investigation into a share placing and capital adequacy requirements. Ultimately the majority of the SFA’s disciplinary charges were dropped, notwithstanding that by the time the matter was dealt with by the SFA’s disciplinary tribunal, Derivative Securities had ceased trading, with one reported view of the case being that “...the SFA was seeking punitive fines to meet some of the costs of its two year investigation." [106] Concern about the SRO’s style of enforcement continued to be aired and in 1997 following the Governments proposal to establish within the FSA the powers of a single regulatory agency, the growing robust enforcement tactics adopted by the SROs was translated to an expression of alarm about the threat from the concentration of enforcement power in one agency. The tactics used by the Investment Management Regulatory Organisation (IMRO) in relation its investigation into the Peter Young and Morgan Grenfell affair of 1996 [107] were reported as bullying and intimidating of those that it considered had breached its rules by using the threat of ever increasing legal costs to force people to settle disciplinary cases [108] . Although IMRO’s internal disciplinary arrangements included a disciplinary appeals process the financial industry did not consider that offered much protection as IMRO’s disciplinary tribunal was perceived as not being independent [109] .

Financial services act 1986 and regulatory action against abuse in the markets.

Although S47 of the 1986 Act continued to provide for a criminal offence applicable to market abuse [110] , SRO disciplinary focus was toward the question of whether abusive conduct impacted a person’s fitness to be authorized, leading to the SROs dealing with concerns about abusive market practices by authorised persons under their administrative rules rather than before the Criminal Courts. The Statutory self regulatory regime created by the 1986 Act thus gave rise to a formal recognition of Civil Law remedies in a Statutory setting for enforcement against market related to abuse [111] . In part, it is arguable that the emergence of such civil law remedies arose because of the challenges that existed in successfully prosecuting cases of market abuse and where the SROs considered that administrative disciplinary proceedings, providing the threat of removal of a market practitioner’s authorization, led to a greater deterrent for those conducting investment business. However, although the SRO’s disciplinary systems were designed to ensure that the regulator’s disciplinary decision making could be reviewed, parties did openly challenge before the Courts, SRO decision making. One such case that found its way to the Court of appeal concerned the abusive practices of a trader at JP Morgan in the United Kingdom. R v Securities and Futures Authority ex parte Fleurose [112] concerned a judicial review of the decision of the Disciplinary Appeal Tribunal of the Securities and Futures Authority. Bertrand Fleurose the applicant, was employed at all material times material by JP Morgan Securities Limited (JPM) as a Senior Cash Arbitrage Trader. JPM had entered into an option transaction which obliged it to make a payment to the counter-party if both the FTSE 100 Index and the S & P 500 Index were higher at the end of the month than at the beginning. By the end of November 28, the last trading day of that month, the FTSE 100 was closer to the level 4842.3 at which payment would have to be made by JPM. The FTSE 100 closes at 4.30 pm, at 4.10 pm, the FTSE 100 index stood at 4856.56 points, and at 4.29 pm, 4869.856. During the last six seconds of trading, the Index dropped by 38.08 points to below the option strike price and thus JPM was relieved of its obligation to pay approximately £475,500.

Fleurose operated what was called a Trader Front End machine which was linked into the London Stock Exchange Electronic Trading System [113] , and it was alleged that on 28 November 1997, he along with his manager manipulated the FTSE 100 Index in order to ensure that JPM did not have to make the option contract. In the eight minutes before the market closed, Fleurose entered into the machine in waves offers to sell 35000 shares in each of the five companies which then headed the list of stocks in the FTSE 100. As a result, sales were effected to the value of £11,247,525. Sales in the last six seconds resulted from sell orders which had been entered at prices well below the then market levels. The sudden fall in the Index just before close of business was immediately investigated by the London Stock Exchange, which concluded that it had stemmed from substantial sales by JPM in the market during the last ten minutes. This was a breach of the provisions of paragraph 2.10 of the London Stock Exchange Rules [114] and resulted in the Exchange imposing a financial penalty on JPM of £350,000. Although Mr Fleurose was not a member of the London Stock Exchange he was subject to the jurisdiction of the SFA which commenced disciplinary proceedings against him and his manager. The SFA Disciplinary Tribunal concluded that the manager's sole intention in ordering the sales entered by Fleurose was to drive the Index down. It found that the charges of misconduct against the manager had been proved, and that he was no longer a fit and proper person to be registered by the SFA. Subsequently the SFA Disciplinary Tribunal considered the charges of misconduct against Fleurose. The Tribunal however refused to declare that he was unfit to retain his registration but considered that it was more appropriate to impose an order of suspension and to make a contribution towards the SFA's costs. Fleurose appealed the findings on the two charges against him, and the SFA appealed the decision that the applicant was not unfit to be a registered person. The appeals were heard separately by the SFA’s Disciplinary Appeal Tribunal, which dismissed both Fleurose’s and SFA’s appeals.

The Fleurose appeal provides an insight to the approach to regulatory proceedings under the 1986 Act and perhaps some of the advantages for regulatory agencies dealing with matters of market abuse as a breach of rules. In classifying regulatory proceedings as civil rather than criminal, the regulator is able to take advantage of less strict evidential standards, an advantage still pertaining today. The Judicial review application and subsequent appeal was made on issues concerning the SFA’s disciplinary arrangement’s compliance with various provisions of the European Convention on Human Rights. It is submitted that overall, the appeal was concerned with whether regulatory proceedings are criminal proceedings for the purpose of Article 6 of the Convention and if so that various protections would ensue as set out by Article 6. [115] It raised arguments about whether there was a protection from self incrimination in regulatory proceedings, and whether Fleurose’s right to a fair trial under Art. 6 had been infringed by the admission into evidence of answers given by him that he had submitted had been given under compulsion in response to questioning by the London Stock Exchange and before the disciplinary tribunal. The Court of Appeal held that that the proceedings instituted by the SFA against Fleurose had not involved the determination of a criminal charge [116] , but had involved the determination of civil rights for the purposes of Art.6, in that Fleurose had been under no legal compulsion to answer such questions. The Court of Appeal held that in civil proceedings, the issue of admissibility of evidence was a matter of discretion for the disciplinary tribunal of first instance and there was no basis on which to exclude evidence where no previous objection had been made to its inclusion. [117] Notwithstanding the significance of the decision for regulatory proceedings against market professionals (as will be illustrated in Chapter 6), the determining criteria used by the Court of Appeal in Fleurose might not be applicable for the UK Market Abuse regime introduced by the Financial Services and Markets Act 2000, thus creating complications for a desired enforcement regime based on civil standards of law.

Market abuse enforcement under in a brave new world of regulation: the financial services and markets act 2000

Following the criticism of the regulatory regime under the 1986 Act, the new Labour Government in 1997 soon set about reforming the UK’s system of financial regulation with a move away from self regulation and the establishment of a single regulatory agency (The Financial Services Authority). [118] A working party including representatives of the nine regulatory bodies whose functions were to be brought together and chaired by the then SIB Chairman Sir Andrew Large reported to the Chancellor of the Chequer on the preparatory requirements for the new regulator. The report highlighting the need for the regulator to be accountable stated, “ [the regulator]… will take into account the continuing need- especially given its size and scope – to ensure that it is responsive to the concerns of those affected by its activities. This implies continued emphasis on high levels of accountability…" [119] Following considerable parliamentary time and a complicated period of regulatory transition, The Financial Services and Markets Act 2000 Act came into force from 31 November 2001 and set out the structure and legal basis for financial regulation in the United Kingdom. The 2000 Act provides for an interwoven web of accountability arrangements [120] , and a statutory mechanism for accountability by legal review by the Upper Tribunal (Tax and Chancery) [121] , of the FSA’s decision making. [122] It is worth highlighting at this juncture, however that the driving force behind all of the FSA’s regulatory activity, including its work on Market Abuse, are its Statutory Objectives set out in S2 (2) and particularised in Ss 3-6 of the 2000 Act, which include objectives to reduce financial crime in the financial markets and maintain confidence in the markets. [123] It is without doubt that these objectives have had an impact on the way that the FSA has strategically determined to enforce the Market Abuse regime. During the preparation for the new regulatory regime the Chancellor of the Exchequer said, "The objectives we set will give the new regulator a clear sense of its priorities. And will provide a benchmark against which the performance of the regulator can be measured. They will form the basis of the regulator's annual report to me" [124] 

The view remained that Insider Dealing was a fundamentally unfair practice damaging the liquidity of securities market and leading to significant harm to individual investors, national industries and international markets [125] , and demanded a speedy regulatory response. In response to growing criticism that UK regulation did not adequately deal with abuse in the UK’s financial markets [126] , Parliament enacted into through The Financial Services and Markets Act 2000 a civil law based Market Abuse regime. The Market Abuse regime which will be explored in detail in Chapter 2 was innovative in that it introduced in S118 sets of prohibited behaviours supported by a code of market conduct required under S119 to provide a description of behaviours that the FSA would not treat as abusive and guidance on those behaviours that it does so consider. [127] The regime’s application to conduct by authorised persons, as well as members of the public using the financial markets coupled with statutory power for the FSA to investigate instances of alleged abuse, take civil enforcement action against those found to have abused the market (including the imposition of unlimited financial penalties, the confiscation of profit and for persons conducting investment business, the threat of prohibition from the market), [128] took market abuse regulation into a new juridical dimension. It was considered that a civil law system for dealing with abuse such as a lower standard of evidential proof, a jury not being required, the ability to settle, a quicker process with non-custodial outcomes [129] and the ability to have a specialist Tribunal for difficult issues of fact and law would overcome many of the prosecutorial challenges experiences in the complex abuse cases of the 1980 and 1990s. [130] 

The UK’s financial services regulatory regime has, however been controversial from its inception and the FSA’s capacity as designer of standards of market behaviour and, enforcement agency has presented Human Rights law challenges. [131] It is to a large extent the Tribunal’s role in the Market Abuse regime that contributes to the accountability of the FSA as the de facto standard setter of acceptable market behaviour as well as the market abuse enforcement regimes compliance with human rights law.

The challenge for accountability in a civil based market abuse regime

The FSA’s occasional paper 23 [132] into the controls over inside information in relation to public takeovers highlighted the extent of possible market abuse including the threat of trading on price sensitive information in the UK financial markets and no doubt led to concerns about the FSA’s ability to meet its Statutory Objectives. This is evident from the various FSA publications about its increased resolve for dealing with Market Abuse. In announcing the results of the Authority’s work, Sally Dewar, FSA Director of Markets, said:

"Combating market abuse is one of the FSA's top priorities and we are committed to working in partnership with the industry to reduce the incidence of market abuse on the UK's markets" [133] .

The flexibility of civil law based enforcement regimes such as that contained in the Financial Services and Markets Act 2000, although providing the significant benefits of simplified prosecution and speed of resolution, demands a level of accountability if the FSA is not to be criticised for the adequacy of performance of their enforcement powers as well as the veracity and proportionality with which such powers are exercised. The criticism of prior regulatory regimes discussed earlier in this Chapter illustrate how regulation can so often be misdirected through a lack of clear objectives, but equally the unfettered powers of a regulator can so often be misguided and if we are to avoid a regulator enforcement action equivalent to the Blue Arrow trial, it is important that a robust accountability mechanism exists. The issue of accountability is compounded given the duality of the FSA’s role as law maker (in setting rules including the S119 Code of Market Conduct), and enforcement powers each in relation to the rules it has established. Introducing the Financial Services and Markets Bill, Howard Davies observed: “It is clearly intended to create a one-stop arrangement for regulation and to provide both flexibility and accountability." [134] 

In the context of Market Abuse enforcement and particularly in relation to the impact that such cases can have on the individual concerned and the wider regulated community, chapter 7 of this thesis will show that Tribunal has the capacity to act as a significant check on the FSA’s enforcement powers and to ensure that the FSA discharges its enforcement powers in a just and appropriate standard and in appropriate cases make recommendations as to the FSA’s regulating provisions or procedures. [135] 

This thesis will further show that the impact of the Tribunal’s decisions can be significant, for example following its decisions in the matter of Legal and General Assurance Society Ltd v the FSA [136] criticism of the FSA’s enforcement process led to the FSA making significant changes to its internal enforcement process. It will be shown, however that the Tribunal’s positioning within an enforcement structure that requires the FSA to first make administrative decisions and then only hear cases if the person against whom the decision is made choosing to refer the matter to the Tribunal, limits significantly the Tribunal’s jurisprudential contribution to those enforcement cases that have been determined without a Tribunal reference.

Concluding remarks

The impact of the global financial crisis which emerged in 2008 resulted in the failure or near failure of some of the United Kingdom’s largest banks and significant criticism of the FSA’s role in the approach to supervision and regulation. At the time of writing the United Kingdom’s coalition government is proposing a radical overhaul of the domestic financial services regulatory landscape, creating a ‘twin peaks’ model of regulation. [137] The proposed changes will from 2012 see the abolition of the FSA with the transfer of its current prudential banking supervision to a prudential agency within the Bank of England. Regulation of business conduct affecting consumer and market protection will be allocated to a new Consumer Protection and Markets Authority (CPMA). [138] The detail of how these new agencies will operate however is largely unclear although given the European Union influence over financial markets (which will be considered in more depth in Chapter 2) it is unlikely that the Government’s regulatory proposals will alter the fundamental elements of the Market Abuse regime. What remains unclear, however is the extent to which the new CPMA will take responsibility for Market Abuse enforcement and indeed whether it will have access to the wide range of civil law and criminal enforcement remedies currently enjoyed by the FSA [139] . There is a suggestion that the enforcement of market conduct may be transferred to the Takeover Panel or to a single economic crime agency, consolidating the roles of the Serious Fraud Office and certain powers of the Office of Fair Trading which may if such agency takes prime responsibility for the prosecution of Insider Dealing and Market Abuse, result in the fragmentation of civil and criminal enforcement. This issue will be revisited in Chapters 8 and 9.

The following Chapter will consider the legal framework of the UK’s civil law Market Abuse regime and the role the FSA’s conduct rules and high level principles have in securing compliance with standards of acceptable market practice.

CHAPTER 2: THE MARKET ABUSE REGIME IN THE UNITED KINGDOM

“Market Abuse, which consists of insider dealing and market manipulation, arises in circumstances where investors have been unreasonably disadvantaged by others. It prevents full and proper market transparency and undermines market integrity and investor confidence" [140] 

The UK’s civil law Market Abuse regime is provided in Part 8 of The Financial Services and Markets Act 2000 [141] . As discussed in Chapter 1, the objective of the regime was to fill a perceived regulatory gap arising from the conclusion that the legacy regulators [142] did not have adequate powers to punish market participants whose conduct fell below acceptable standards, but where such conduct stopped short of being serious enough to warrant criminal prosecution. Indeed as discussed in Chapter 1 there was a widespread belief that criminal prosecution was no longer the sole appropriate way of dealing with market misconduct. [143] The regime was first introduced as a constituent element of the 2000 Act, although subsequent amendments made in order to implement the provisions of the EU European Market Abuse and Insider Dealing Directive [144] (the Directive), substantially changed the regime from 1 July 2005 [145] . The regime now relies on a complex interplay between: the statutory definition of seven behaviours that are considered by law to amount to market abuse; a required FSA code of conduct recognised by S119 of the Act, (referred to throughout this thesis as MAR [146] ) containing such provisions as the FSA considers gives guidance on whether or not behaviours amounts to market abuse; and the FSA’s regulatory activities undertaken to meet its Statutory Objectives and in particular those of market confidence and the reduction of financial crime [147] . The analysis in this chapter will show that it is the combination of the FSA’s express views on what constitutes market abuse and its central role in the enforcement of the regime that raises an administrative law dynamic necessitating appropriate legal methods to ensure that those accused of market abuse may have their case heard by an independent tribunal.

At a theoretical level market abuse is a simple concept relating to any activity that abuses the financial markets for a person’s benefit. Indeed the EU Market Abuse and Insider Dealing Directive [148] description of Market Abuse is a simple one, “Market Abuse consists of insider trading and market manipulation" [149] and even for those academics that have questioned the need to regulate against Insider dealing, the threat to the market from abuse had been uncontroversial. [150] This thesis shows, however, that Market Abuse regulation extends beyond the specific market abuse prohibitions contained in Ss118 of the Act with those prohibited behaviours working alongside the criminal law and the general regulatory obligations for authorised persons. Indeed the enforcement powers within Part 8 of the Act provide only some of the tools at the FSA’s disposal in controlling improper market behaviour and whilst the technical provisions of the regime can be criticised for their inherent ambiguity, the FSA’s wider and arguably more powerful weapons in its market abuse armoury are open to far greater ambiguity [151] . It is the existence of such scope for ambiguity that exposes the FSA to challenge before the Tribunal.

Overview of the market abuse regime

Defining the Abuser and their market

Although the seven statutory prohibited behaviours are the cornerstones of the Market Abuse regime, the regime departs from the other substantive provisions of the Act through its application to any person, whether or not that person is authorised to conduct investment business. It is such extended application that has served to shape the protections that Parliament considered necessary to build into the regime’s enforcement mechanisms.

S118 (1) [152] , makes provision for the regimes scope in terms of: the persons, investments and markets affected. In essence the regime applies to the seven types of behaviour by persons whether alone, two or more jointly or persons acting in concert, in relation to investments deemed by regulation as qualifying investments which are traded, admitted to trading or where a request has been made for trading admission on a prescribed market. S118 (1) provides that the defined abusive behaviour is the trigger for determining whether or not market abuse has occurred, without there being any requirement that the person or persons involved in the behaviour are otherwise authorised to conduct investment business. This wide application of the regime extends the FSA’s enforcement role to members of the general public using the financial markets, whether on a single occasion, as a routine personal trader or where they are conducting an investment business. Appendix Table 2 of this thesis shows that of the [46 ] market abuse related cases to date, [ 23 ] have been against members of the public [153] . Indeed the regime does not distinguish between persons that have particular experience in financial markets or those that are mere novices. Despite this wide coverage, as shown in Chapter 3, the FSA draws no distinction between the sanctions it apples to regulated persons and the general public.

Despite the regime applying to both regulated persons and the general public, the combination of the provisions in S118 (1) (a) and S118 A (1), limits its application to certain qualifying investments and activities taking place on prescribed markets situated or operating in the United Kingdom. S118 does however extend the application of qualifying investments so that for all the behaviours it includes qualifying investments for which a request for admission to trading on a prescribed market has been made [154] and with regard to the two Insider Dealing behaviours, investments which are related to such qualifying investments [155] . A related investment is defined in S130A (3) as being “...an investment whose price or value depends on the price or value of the qualifying investment."

The investments specified under the Act as Qualifying Investments [156] are both wide and fairly uncontroversial, largely encompassing investments classified as regulated investments under Schedule 1 to the Act, although an important element of the expansion of the regime by the Directive [157] is that qualifying investments now encompass both financial and commodity derivatives [158] . For the purpose of S118, Qualifying Investments include traditional transferable securities such as shares and corporate bonds; units in a collective investment scheme; money market instruments; financial futures contracts; forward interest rate agreements; interest rate, currency and equity swaps; options to acquire or dispose of the above (including currency and interest rate options); and derivatives on commodities [159] .

HM Treasury has by order prescribed certain markets for the purpose of s118 (1), including UK recognised exchanges such as the London Stock Exchange including AIM, the PLUS market, the London Metals Exchange, and certain EU regulated markets such as the Intercontinental Exchange (ICE) [160] . S118A (1) reveals an interplay between the location of the Prescribed Market and where the abusive behaviour occurs. This interplay necessarily reflects the global nature of modern electronic markets and the ease at which trading can now take place in one jurisdiction in relation to investments traded on an overseas market. The consequence of Prescribed Markets was raised as a preliminary issue before the Tribunal in the matter of Philippe Jabre v Financial Services Authority [161] where it was held that for the purpose of the regime’s jurisdiction what must be satisfied is that the qualifying investment generally is traded on a Prescribed Market rather than the individual securities being the subject of the alleged abuse.

The nature of the Market Abuse behaviours

The cornerstones of the market abuse regime are the seven descriptions of behaviour set out in S118 of the Act as amended, [162] which can appropriately be ordered into three sub-groups covering Insider Dealing, Market Manipulation and Distortion [163] . Dr Edward Swan, asserts that the seven behaviours are actually detailed descriptions of behaviour that constitutes patterns of either insider trading or market abuse. [164] Whilst such an assertion is accepted its approach is simplistic not reflecting the qualifying affect of the Code of Market Conduct required under S119 of the Act, which sets out conduct that is deemed by the FSA to constitute market abuse and those that will not [165] . The impact of the Code of Market Conduct (MAR) is considered in further detail later in this chapter.

Insider dealing

The first three types of behaviour described by the Act arise in the context of Insider Dealing and appear in S118 (2) – (4) [166] . The first two of these behaviours are drawn from the EU Market Abuse framework Directive and relate to insiders dealing on the basis of or disclosing insider information. Although, S130A (3) of the 2000 Act defines behaviour as including action or inaction, it is difficult to see how the Insider Dealing provisions within the Act can be proven absent positive actions on the part of the insider. Supporting this assertion Swan opines [167] that the nature of insider trading is that it leaves a relatively clear paper record of the transactions that constituted the transaction in question and he suggests that it is for this reason and that it is nearly impossible for an “insider" to hide the evidence of improper dealing that it is not that difficult for FSA to assemble clear proof that an insider has engaged in or assisted improper trading. In support of this Table 4 of this thesis shows that of the [42] successful FSA cases decided under provisions of the Market Abuse regime [168] [27] relate to the Insider dealing behaviour. [169] 

Abuse and Dealing

A critical element of the insider dealing behaviour is the presence of actual dealing or an attempt deal and its interplay with qualifying investment or related investment being dealt and the insider information [170] . Such insider behaviour does not however, prohibit per se a person from being in possession of insider information and thus insider dealing behaviour does not occur if a person in possession of inside information does not deal or attempt to deal, or deals in an investment that is not in any way related to the inside information. The prohibition on Insider Dealing contains no objective element and thus there is no necessity to show that that the Insider intended to deal on the inside information. The question of whether such objectivity was intended to be present in Article 2 of the Directive was considered by the European Court of Justice in Spector Photo Group NV v Commissie voor het Bank-, Financie- en Assurantiewezen (CBFA) (2009) [171] which concluded that the question of whether a person has infringed the prohibition on insider dealing must be analysed in light of the purpose of the Directive which is to protect the integrity of the financial markets. The Court held that the prohibition against insider dealing in Article 2 creates a presumption that a person in possession of inside information that acquires or dispose of financial instruments to which the information relates has “used the information" in accordance with the meaning of the Article [172] . In its judgment the Court confirmed the application of the 18th Recital of the Directive that the Competent Authority of the Member State should consider what a normal and reasonable person would know or should have known in the circumstances. It would thus be open (which the Court confirmed) for a defendant to rebut such a presumption and in so doing the defendant should be able to place reliance on relevant regulatory guidance. In the UK such guidance is provided by the FSA in the code of market conduct (MAR), which provides in section 1.3 descriptions of behaviour the FSA considers not to constitute insider dealing. Of considerable complexity, however are situations where an insider, in possession of information seeks to rebut the presumption by showing that they would have dealt in the qualifying investment notwithstanding the inside information [173] . These situations may arise where a person has a pre-existing trading programme or uses trading technology buying or selling shares for them automatically. Although the FSA at MAR 1.3.3 set out factors that might show that a decision to deal made before becoming in possession of inside information does not constitute insider dealing, those provisions are not conclusive leaving any defendant with the evidential challenge of showing that they did not use the inside information.

A definition of “dealing" is provided in S130A of the Act and shows that dealing covers not only the direct acquisition and disposal of investments but also both personal and agency trading, indirect dealing and any options to deal. This definition can have a number of consequences and extends the insider dealing behaviour beyond the simple scenario of a person that trades for themselves. A stockbroker in possession of inside information that uses that information by placing an order to purchase shares will be insider dealing for the purpose of S118 (2) and indeed will be treated as insider dealing along with their client where they are told of the insider information by the client for whom they are trading. An example of FSA market Abuse action for insider dealing can be found in the matter of Brian Taylor [174] , a private retail investor who regularly dealt in the shares of Amerisur Resources Plc “Amerisur" (then named Chaco Resources Plc) an oil and gas exploration company with shares admitted to trading on the Alternative Investment Market of the London Stock Exchange. ("AIM"). Blue Oar Securities Plc ("Blue Oar") acted as broker for Amerisur in a share placing which was to be announced to the market on 24 May 2007. On 23 May 2007, Blue Oar contacted Taylor making him an insider in relation to the placing. In the course of this conversation, Blue Oar advised Taylor that the placing price was 6 pence, that the placing would be announced the next day and that Taylor was not permitted to speak to anyone about the placing until it was announced to the market the next day. After receiving the inside information, Taylor sold 150,000 Amerisur shares at 9.095pence at 9.46am on 23 May 2007. Taylor then purchased 500,000 shares in the placing at 6 pence. Following the announcement of the placing on 24 May 2007 the price of Amerisur’s shares fell to 7.5 pence. These transactions realised a profit for Taylor of £4,642.50.

Abuse and Disclosure

The second behaviour known as Insider Disclosure is defined by S118 (3) of the Act as behaviour where ‘...an insider discloses inside information to another person otherwise than in the proper course of the exercise of his employment, profession or duties.’ The critical elements of this behaviour are first, the presence of a disclosure and second, that it is not made in the proper course of employment or professional dutues The apparent difference between the disclosure behaviour and the dealing behaviour previously considered is the absence of any requirement for the recipient to deal or attempt to deal in a qualifying investment. It is the act of the insider’s disclosure that is prohibited. The condition subsequent to the disclosure however is the linkage between the disclosure and the exercise of the insider’s employment, duties or profession. Situations involving insiders such as company directors or those discharging managerial responsibilities in the issuers of qualifying investments would be prohibited from passing on insider information in a social context. The more complex issue, however, is the question of when a disclosure might be made in the proper course of the exercise of employment, profession or duties? S131A deals with certain protected disclosures [175] , the fundamentals of the provision in S131A hint that permitted disclosures in S118 (3) are likely to be those that are either specifically required by or supported by law of regulation. This notion of exception through lawful compliance is further supported by S118A (5) which in essence provides that a disclosure made to conform with a rule does not amount to market abuse. MAR sets out certain disclosure behaviours that conclusively do not amount to market abuse and each of these can be classified under the heading of lawful compliance. For example the FSA states at MAR 1.4.1(3) that a disclosure made to a Government Department for the purpose of fulfilling a legal or regulatory obligation is not an abusive disclosure. It has to be questioned, however, whether there can be other occasions when a lawful disclosure can be made in a commercial setting otherwise to satisfy a legal or regulatory obligation. The FSA does, consider at MAR 1.4.5 (2) (c) that certain commercial arrangements might allow for a lawful disclosure provided that the disclosure is accompanied by a requirement of confidentiality upon the person receiving the disclosure and is reasonable to satisfy a variety of legitimate commercial activities. In this regard the FSA include as examples disclosures for the purpose of facilitating or seeking or giving advice about a transaction or takeover bid. In these circumstances it will be important for the recipient of the insider information to understand that whilst the disclosure behaviour, is unlikely to be considered as abusive, at the point of disclosure they become insiders of inside information and subject to the S118 behaviours including the prohibition of their dealing on that information.

The Insider and Inside Information

Both the insider dealing and disclosure behaviours rely on the defined terms of “Insider" and “Inside Information" It is clear on the face of the described behaviours that these terms are both critical elements necessary to prove that one of the behaviours has taken place. The statutory definition of Insider is set out in S118B [176] which classifies insiders under two broad categories: First those persons which can be referred to as the “position of trust insider" being persons with such proximity to the inside information that they are assumed to have been entrusted with it and thus are prohibited from using for personal gain. This would include company executives and senior managers having access to inside information because of their employment or a solicitor or accountant receiving inside information during their professional work.

Secondly it covers those that can be referred to as the “inappropriate recipient insider" being persons that have acquired the information either through criminal activities or by other means when they should have reasonably known that it was inside information. Dealing by this type of insider can be seen in the in the FSA case against Mr Bertie Hatcher [177] who received share tips in advance of corporate announcements from Malcolm Calvert a retired Stockbroker on the understanding that he would retain 1/3rd of any net profits made from trades and pass on 2/3rds to Calvert. Between 24 April 2003 and 8 March 2005 six trades were made resulting in a total profit of £280,491.

Inside information and general availability

The definition of Insider Information provided in S118C [178] first distinguishes between information regarding qualifying or related investments which are not commodity derivatives and those that are commodity derivatives and secondly provides a supplementary definition in relation to persons charged with the execution of orders. The essence of each of the insider information definitions is that the information must be of a precise nature, must not be generally available and must relate directly or indirectly to the issuer of the qualifying investment, the qualifying investment itself or the commodity derivatives as the case may be. [179] It is the question of precision and general availability of the information that is crucial for identifying whether information is insider information. Although the meaning of the phrase “generally available" is not defined, and at first glance would seem unambiguous, the dichotomy between formally released information and public opinion, belief or rumour can lead to challenges to the question of whether information is or is not generally available. In MAR the FSA list [180] a number of factors that in its opinion determine whether information is generally available including whether the information is otherwise generally available including through the internet, or some other publication or is derived from information which has been made public; whether information can be obtained by observation by members of the public without infringing obligations of privacy or property and the extent to which information can be obtained by analysing or developing information that is generally available. Generally, issuers of qualifying investments are under a duty to disclose to the market without delay, any information that is likely to effect the price of the investment thus ensuring that that financial markets factor in that information when providing contemporary investment prices [181] . It might therefore be reasonable to assume that only information formally released to the markets for the purpose of S118 C can ever be considered as generally available. In practical terms, however that will not be the case as a considerable element of investment pricing is determined by external and environmental matters often beyond the control of the investment issuer and upon which many base their investment decisions. There will certainly be occasions where such externalities are in the public domain before the issuer has time to formally notify the market and thus would suggest that the general public test is wider that formally released information.

The need for precision in the information

S118C (5) provides a definition for when information is precise first by reference to what might be referred to as a ‘reality indicator’, that is that the information is precise if it indicates the existence of circumstances or events that have occurred or might reasonably be expected to come into existence or occur [182] and secondly by reference to what might be referred to as a ‘probability indicator’, that is that the information is specific enough to enable a conclusion to be drawn as to its possible effect on the price of the qualifying investments or related investments [183] . Both the non-commodity derivates inside information definition at S118 C (2) and the execution of orders definition at S118 C (4) additionally define inside information by reference to where if it were generally available it is likely to have a significant effect on the price of the qualifying or related investment in question. S118 C (6) provides some assistance in determining whether a significant effect can occur by linking the inside information and the basis of investing by introducing a reasonable investor test, stating that ‘Information which a reasonable investor would be likely to use as part of the basis of his investment decisions is information which, if it were generally available, would be likely to have a significant effect on the price of qualifying investments or of related investments.’

Given the nature and complexity of financial markets, one must question the extent to which the law can provide certainty that the inside information will have an impact on the price of the investment and the Act thus only provides that if the information were made public it would be likely to have a significant effect on the price. Actual price sensitivity, is not however the single determining factor. It can be seen from the definition in S118C (6) that rather than actual price sensitivity it is the extent to which the information might be used by a reasonable investor, as part of the basis of their investment decisions. By categorising inside information in this way the 2000 Act shifts the statutory definition away from a demand for proof of actual price sensitivity to the impact that information has on themotivation for investing. It is submitted that that such definition is meant to address information which will have a significant effect on the price, presumably not intending to subject the regime to trading on inside information that might only have a minor or moderate effect on the price of the security. This distinction between levels of price, presents a challenge for those routine traders exposed to inside information, as to whether they should only have to concern themselves with how they handle information that can reasonably be expected to have a significant price impact. From a practical stand point insiders will be only concerned that the inside information might have any effect on the price of the security rather than a significant one. FSA enforcement decisions reveal, however, that its view is that the critical issue is the impact that the information has on a reasonable investor’s decision to invest, rather than the actual significance of a price movement that is important. In 2008, Woolworths Group plc [184] was fined by the FSA for a failure to publish to the market on a timely basis information about a variation to an agreement entered into between a Woolworth subsidiary and Tesco plc for the supply of entertainment products such as Compact Disks. The variation resulted in a reduction of over 10% of Woolworths’ anticipated profits for the following financial year (2006/07). Pointing to the provision in S118C that information ‘would, if generally available, be likely to have a significant effect’, Woolworths argued that the remaining section 118C should be viewed as a set of factors to take into account rather than an exclusive test to apply in identifying whether there has been a breach of the rules. Woolworths argued that the facts should point very clearly to the information in question being “inside information" and having had a significant effect on the share price, before a finding of market abuse is made. The FSA’s view was however different, finding that the test for the significant effect on the price must be assessed against the reasonable investor test in section 118C(6) only. The FSA’s view is maintained in its case against two traders, Parry and Moran, for abuse in the debt market [185] . In the case the traders argued that there was only a small change in the price of the securities, the securities were not price sensitive and that as new issues happened all the time and information of such type should not and in their case did not have a significant effect on the price. The FSA conclusion, however was that the new bond issue being double in size than the previous issue was material information likely to increase liquidity in the secondary market and thus the information (containing the message that more bond issues were coming) was likely to affect a reasonable investor’s decision to invest. [186] 

The commodity derivatives insider information definition differs in that it does not rely on the objective significant price effect requirement, instead recognising at S118C (3) (c) that there are differences between information that is important to commodity derivatives markets and markets of other qualifying or relevant investments. It deals with that distinction through a test of whether users of the markets on which the derivatives are traded would expect to receive the information in accordance with any accepted market practices on those markets [187] . Pursuant to S118 C (7) such market user expectation arises in relation to accepted market practices which routinely makes the information available to users of those markets or requires the information to be disclosed in accordance with any statutory provision, market rules, or contracts or customs on the relevant underlying commodity market or commodity derivatives market. S 130 defines accepted market practices in terms of a dual test of an objective market expectation given regulatory approval – it provides that practices that are reasonably expected in the financial markets in question and accepted by the FSA or in the case of a market in another EEA state, the competent authority of that state. Guidance on what might constitute relevant market practice is provided by the FSA in MAR 1 Annex 2, by way of a non-exhaustive list of factors to be taken into account when assessing whether to accept a particular market practice, which include the legitimacy of practice, the impact that the practice may have on the market and the extent to which the market itself might be regulated and whether any other competent authority has conducted an investigation into whether the practice breached market rules. Confirming the essential element of legitimacy the FSA confirms in MAR that The level of transparency of the relevant market practice to the whole market; the degree to which the relevant practice takes into account the trading mechanism of the relevant market and enables market participants to react properly and in a timely manner to the new market situation created by that practice; [188] .

Market behaviour and misusing information

The third behaviour again relating to information not generally available to the market is specific to the United Kingdom and subject to what has become known as a sunset clause [189] in that it will cease to have effect from 31 December 2011 [190] . The behaviour which it is submitted acts as a safety net provision for the first two insider behaviours goes beyond the minimum requirements of the EU Market abuse framework directive and relies on the UK’s objective test of the regular market user [191] . It is submitted that the behaviour is positioned as an outcome based rather than a defined activity based behaviour, in that it focuses on the effect that the behaviour is likely to have as opposed to behavioural elements of the abuse. S118 (4) departs from the insider dealing and disclosure behaviours in that it is not dependent on the presence of either an insider or inside information, dealing or a disclosure. It can be viewed as a more broadly based conduct and market standards behaviour, arising when the following five constituent parts are met: first the behaviour (which can be both action or inaction [192] ) is based on information; second, that information must not be generally available to those using the market [193] ; third if the information had been available to a regular user of the market, it would have been likely to be regarded as relevant when deciding the terms on which transactions in qualifying investments; fourth, the behaviour is viewed by the regular market user as a failure to observe a reasonably expected standard of behaviour; and five that expected standard of behaviour would be expected of a person in the position of the person concerned with the behaviour in relation to that market concerned.

When the behaviour is broken down in this way it can be seen there is an overarching reliance on an objective standard applied by the regular market user, defined in S130A (3) as a reasonable person who regularly deals on that market in investments of the kind in question. Such objective approach gives rise to a much wider test than the standard market practice test appearing in other of the market abuse behaviours [194] . Although as suggested by the FSA in its guidance at 1.2.21G of MAR there remain subjective features for the behaviours applying the regular market user test in respect of the individual markets concerned [195] . The language of S119, however, suggest that the code in MAR is only to express the FSA’s opinions and is not intended to supplement the law with binding provisions and standards. It is therefore legitimate to question whether the FSA or any regulator can either assume the role of the regular market user by seeking to impose its opinions on market participants. Dr Edward Swan (although in the context of the pre EU market abuse directive regime), pointedly asks where is the regular user meant to seek guidance to form the basis of his objective judgement [196] Originally such question was answered by the FSA stating that it was it that would decide which standards the regular user should apply. [197] Such a regulatory approach means that the standard that market participants had to meet was whether their behaviour satisfied the FSA’s concerns rather than satisfying the hypothetical regular user test. It was this very approach by the FSA that led to the market abuse warning notice against Paul Davidson which was rejected following referral to the Financial Services and Markets Tribunal [198] . It may be in the context of this case that FSA’s current Code of Market Conduct has moved away from such previously detailed assessment of the regular market now setting out factors it considers determine appropriate standards of behaviour. [199] 

Market Manipulation

There exists a further three types of behaviour associated with the manipulation of the markets through the use of transactions, deception or fictitious devices and the dissemination of information.

Transaction Manipulation

S118 (5) describes behaviour effecting transactions or orders to trade otherwise than for legitimate reasons and in conformity with accepted market practices [200] . This behaviour is sub-divided between: those transactions that creates a false or misleading impression as to the supply or demand for or price of the qualifying investment and; those transactions that secure the price of qualifying investments at an abnormal or artificial level. The complexity of the operation of trading systems on financial markets makes fertile ground for persons placing orders, solely for the purpose of giving the impression that investments are in greater or lesser demand and thus affecting their value. Indeed markets specialising in small capitalised securities where the liquidity and normal market size of those investments find that the value of certain traded investments is particularly sensitive to a relatively low level of orders or flow of information. Traders are often able to exploit the normal market size of such investments to their advantage. Although relating to pre-Market Abuse Directive behaviours, it was transaction manipulation of such type that was at the centre of the FSA’s enforcement case against Simon Eagle, [201] where a series of ‘rollover’ [202] transactions were entered into on a public trading system for the purpose of giving the impression of high trading activity leading to an increase in the price of the investment. In MAR at 1.6.2E the FSA provides an indication of those factors that in its opinion constitute a transaction involving a misleading impression and include reference to practices involving wash trades, that is where a sale or purchase of a qualifying investment takes place where there is no change in beneficial interest or market risk, or where the transfer of beneficial interest or market risk is only between parties acting in concert or collusion, other than for legitimate reasons [203] .

In the same way that transactional activity can be used to create an impression about the demand for or price of an investment, it can also be used to secure an abnormal or artificial investment price. The central point to the behaviour in S118 (5) (b) is the extent to which the transaction in question secures the price and thus underlying this behaviour is the artificial movement of the price of investments through the control of transaction volumes. The FSA sets out at 1.6.10E of MAR factors that it considers should be taken into account such as whether the price volatility range for the investment is normal for the period in question and whether the person has successively increased or decreased his bid, offer or price for the investment concerned. A common price positioning tactic is that of the abusive squeeze where a person with influence over the supply or demand for an investment, holds a position in that investment and engages in behaviour for the purpose of affecting the price at which others have to trade in the investment. Once again it is the legitimacy of the person’s behaviour which is critical as so called squeezes in the market which are not in themselves abusive, can occur often as a natural outcome of supply and demand [204] .

Transaction manipulation and Legitimate reasons

Throughout MAR a number of the descriptors of abusive behaviour carry the proviso that the behaviour is abusive other than where the behaviour is for legitimate reasons. Market complexity, however, does mean that many seemingly inappropriate trading activities are undertaken for legitimate and valid reasons and conform to long-held accepted market practices. In this context it is fair to say that the FSA face difficulties in distinguishing between legitimate and illegitimate trading. A simple example is evident in the market practice of stock borrowing often used to legitimately support short selling of investments. The FSA has used its guidance in MAR at 1.6.3G to express an opinion that ‘for the avoidance of doubt a stock lending/borrowing or repo/reverse repo transaction, or another transaction involving the provision of collateral, do not constitute a wash trade under MAR 1.6.2E (2).’ Once again the FSA uses MAR at 1.6.6 E to provide indicators of behaviours that it considers is for legitimate reasons, including matters such as: if the transaction is pursuant to a prior legal or regulatory obligation owed to a third party; and if the transaction complied with the rules of the relevant prescribed markets about how transactions are to be executed in a proper way (for example, rules on reporting and executing cross-transactions).

Under the post directive market abuse regime, the central concept of fairness in the financial markets is continued and arguably links to the legitimate reasons requirement for example in respect of market manipulation the Directive, although giving three specific core definitions, provides at Article 1.2 that market manipulation can consist of any conduct creating “unfair trading conditions" Moreover, the directive expressly demands flexibility in the way Market Abuse is to be determined to ensure that regulators application of the regime keeps pace with new and innovative trading practices. It provides at Article 1(2) (c), ‘The definitions of market manipulation shall be adapted so as to ensure that new patterns of activity that in practice constitute market manipulation can be included’ Although the FSA deleted much of the guidance on the regular user test in MAR 1.2 discussed above, the revised code at MAR 1.6.6E makes clear that the FSA still expect market participants to conduct their affairs in a way that does not prejudice the fair and efficient operation of market or unreasonably disadvantage investors.

Deception or fictitious devices

Whereas the behaviour previously discussed is dependent on a market transaction to create a false impression or investment price, abusive activity can occur through the control of the market by the prior release of misleading information. S118 (6) describes such behaviour as that which consists of the ‘... effecting, or participating in effecting, transactions or orders to trade which employ fictitious devices or any other form of deception or contrivance’ and use the word device in the sense of a scheme or arrangements rather than meaning any form of mechanical equipment or technology. Although as we will see from the example below there can be considerable overlap between the fictitious devices behaviour and the sixth behaviour of misleading information (which is described below), the fictitious devices behaviour can occur in situations were accurate information is released to the market but in a way that disguises its impact on the future price or value of an investment. At MAR 1.7.2 (1), the FSA opines that it is abusive for a person to express an opinion in the market that effects the price of an investment also held by that person if he were not to simultaneously disclose his conflict of interest in the investment in a proper and effective way. Although in relation to pre Directive behaviours, the FSA’s Final Notice against Indigo Capital LLC and Robert Johan Henri Bonnier [205] , illustrates the impact of misleading information. Mr Bonnier made twelve Notifications of beneficial ownership under S202 and 212 of the Companies Act 1985 to Regus that were materially inaccurate. Although Indigo Capital was establishing an interest in Regus through the acquisition of Contracts for Differences, the notifications stated that ICL had purchased ordinary shares giving the impression that ICL's holding of Regus shares was continually increasing, although ICL’s actual shareholding was continually decreasing during that period. The FSA considered that the behaviour of Mr Bonnier amounted to market abuse under the original section 118(2)(b) of the 2000 Act which, in the FSA's view, was or was likely to be to give a false or misleading impression to the regular user as to the supply of or the demand for Regus shares, in circumstances where Mr Bonnier knew or could reasonably be expected to have known of such likelihood.

Many investors have become wary of so called ‘pump and dump’ or ‘trash and cash’ schemes, [206] both of which link the publication of misleading information about an investment to the market to a prior long or short position taken in that same investment by the person releasing the information. Indeed as discussed in Chapter 1 it was concern about a possible link between hedge funds short-selling of shares in financial companies and market rumours that affected the price of those company shares that lead to an FSA investigation in 2008 about possible market abuse. The circumstances leading to this investigation in the context of market abuse behaviours is discussed in further detail below. The FSA recognises abusive nature of such schemes and list them at MAR 1.7.2E (3) and (4) as behaviours which in its opinion amount to market abuse through manipulating devices.

Dissemination of information

Unlike S118 (6), the behaviour at S118(7) focuses on the dissemination of information. In this sense the behaviour might be viewed more as supplementing the insider disclosure behaviour at S118(3) but arising where the information disseminated gives a false or misleading impression about a qualifying or related investment. In this behaviour rather than the person disseminating the information being an insider the person must know or be reasonably expected to know that the information was false or misleading as discussed in Chapter 1. The relevance of this type of behaviour became apparent in the London market on 19 March 2008 when HBOS [207] shares was rocked by what some reported as frenzied high-volume trading on negative rumours about HBOS liquidity.

The effect of the rumour was to destabilise the market in HBOS shares and at one point during early trading HBOS share prices were down 19%. [208] These rumours were developed off the prevailing market concerning the liquidity of banks at the outset of the global financial crisis and including the demise of US Investment bank, Bear Sterns the week before and the demise of Northern Rock some six months previously. The practice of rumour mongering for profit can create significant profit potential, but is also reliant on accepted market practice and investment instruments to legitimise it [209] . Both of these trading practices rely on the dissemination of rumour about an individual security, market sector or market conditions, accompanied by the taking of a position to enable the rumour monger to profit. The market rumours on the 19 March would have been reliant on short selling, which in legitimate form, revolves around speculation that share process will fall and is often engineered by a trader selling into the market shares they have borrowed and keeping the proceeds of that sale on deposit [210] . Subsequently if the price of the shares falls the trader will use the proceeds of the original sale to buy new shares at the lower price, thus allowing the borrowed shares to be returned to their owner. That process, of course is speculative and legitimate traders can make or lose significant sums depending on movements in the market. The abuser of the market, will however, seek to preserve their short position by spreading false information aimed at causing the price of the security they have borrowed to drop, thus ensuring that they make a profit. As reported in the Evening Standard [211] “...This gang isn’t trying to invest for the long term in solid businesses, they want to make a turn –in one day, one hour or one minute..." The level of modern financial innovation, however, has lead to the availability of a number of financial instruments that facilitate the short-sale meaning that it is no longer necessary for the trader to borrow directly their target security. For example, they can buy a traded option giving them the right to sell a share at a fixed price of they can arrange a contract for difference which obliges them to pay the difference between an agreed price and the market price at some future date. In the context of S118(7) Market Abuse, the behaviour is focused on the dissemination of the false rumour rather than the financial instrument and as shown in the events of 19 March it was the rumours about HBOS that lead to the rapid market decline. The difficulty, however, is the need to separate market rumour from the abusive dissemination of, information which gives, or is likely to give, a false or misleading impression. The Financial Times commented that rumour has always played a part in volatile markets, particularly during bear markets and periods of low trading volumes when small deals can move prices sharply [212] . Identifying abusive behaviour as a result of a false impression, however, is complicated by the complexity of the market itself. Those traders responsible initially for the creation and dissemination of the rumour, are squarely within S118(7), but what of those that trade on the back of market rumours they receive and go on to cause the rumour to be transmitted? S118(7) prohibits such behaviour where the person disseminating the information giving the false impression ‘knew or could reasonably be expected to have known that the information was false or misleading.’ [213] Financial markets thrive on a web of information, much of which is derived from transparent and legitimate sources like financial analyst reports. Other information circulates the market unofficially being derived from either individual’s interpretation of analyst or issuing company’s reports, interpretation of external events of the market movement itself. It is easy to understand how initial false information on 19 March 2008 could spread around the financial market, particularly given the market conditions for banking stocks that had developed since the emergence of the credit crisis. In such volatile conditions, no bank could be beyond suspicion and once the short sellers had begun to sell shares, the market-makers began to cut HBOS share prices, attracting the attention of others market users. The market makers forwarded the rumours they had heard and before long, activity akin to panic developed. In these circumstances one has to question the extent to which the traders could reasonably know that the information they were transmitting was false and thus whether it was abusive to disseminate such rumour? Commentators during the HBOS market conditions questioned whether the FSA was only concerned about false rumours rather than those that which turn out later to be true. Neil Collins of the Evening Standard observed that dealing on the back of rumour is what market-making is all about and that speculation which involves buying shares is all part and parcel of the constant rumour-mill that is the stock market [214] .

It is important to note that the false impression behaviour in S118(7) requires no linkage with an intention to trade in the affected securitises. It is the falsity of the information in the dissemination that is regarded as abusive as opposed to any profit made or loss avoided as a result. The test for abusive behaviour is whether the disseminator of the false information either knew the information was false or misleading or could reasonably be expected to know. There has to be a difference between what is false or misleading and what is someone’s interpretation or opinion, no matter how ill informed. Misleading infers a degree or intention or recklessness, whether as a result of a deliberate act or inaction and thus one has to question the extent to which an incorrectly held opinion give rise to a false or misleading impression?

Misleading behaviour and Distortion

S118 to the 2000 Act concludes with a behaviour arising in the context of distortion. Distortion arose in the FSA enforcement case against Henry Cameron [215] the Chief Executive of a company named Sabir Energy Ltd, failed to inform the market of payments to a shareholder prior to entering into other advanced payments with that person that were in breach of the AIM rules and that created a misleading impression. S118 (8) is a further United Kingdom specific behaviour going beyond the minimum requirements of the Directive and again relying on the UK’s objective test of the regular market user [216] . The behaviour is positioned as an outcome based rather than defined activity based behaviour [217] and is in the context of being a safety-net provision, relating by exception to behaviours that do not fall within the manipulation behaviours in Ss118 (5) – (7). Unlike the information based behaviour at S118(5) which is considered above, S118 (8) deals with behaviour arising in two alternative ways, first where it gives a regular user of the market a false or misleading impression as to the supply of, demand for or price or value of, qualifying or related investment, or secondly where a regular user of the market regards or is likely to regard the behaviour as that which would distort or would be likely to distort, the market in such an investment. In either alternative however, S118 (8) (b) requires that the regular user regards the behaviour as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position in relation to the market [218] . The question of what might constitute a misleading impression or distortion not otherwise falling within S118 (5) (6) and (7) is not helped by the guidance given by the FSA at MAR 1.9 which resemble Manipulating devices behaviour notwithstanding that the misleading impression and distortion behaviours arise only where S118 (6) does not apply. [219] Arguably, however these examples can be relevant if it is assumed that the person involved in the behaviour was not also involved in a transaction, that is they were committing the behaviour to bolster or suppress an investment price in the market generally.

The question of a subjective element in Market Abuse behaviour

None of the provisions outlined above provide any indication that for market abuse behaviour to be committed there is a requirement for the presence of any subjective or mental element such as intention or recklessness. Indeed the provisions in S123 entitling the FSA to impose a penalty of publically censure a person engaged in market abuse, save where the person believed on reasonable grounds that his behaviour did not constitute market abuse or where the person took all reasonable precautions and exercised all due diligence to avoid committing market abuse are inconsistent with any requirement for a subjective element to the offence. S123 of the 2000 Act suggests that a person could commit market abuse by mistake, inadvertence or negligence provided the FSA is able to show that the person failed to take reasonable care to prevent the mistake. [220] The question of reasonableness was raised in the FSA enforcement actions against Christopher Parry and Morton [221] bond traders at Dresdner Bank AG, where despite there being no internal compliance guidance or Industry guidance on whether soundings out of potential new bond issues constituted market abuse and it being generally accepted that it was market practice that information about potential new bond issues was not treated as inside information, Mr Parry and Mr Morton had nonetheless committed market abuse. The FSA’s conclusion was reached on the basis that the traders had a responsibility to consider whether the information he received was capable of being inside information, regardless of the market practice [222] . The FSA went on to conclude “…The fact of the market practice at the time is not sufficient to satisfy the FSA that there are reasonable grounds for it to be satisfied that Mr Parry did not engage in market abuse…"

Notwithstanding the S123 objectivity test, the FSA uses MAR to introduce the concept of a subjective element in regard to S118 (4) manipulating transactions. MAR 1.6.5 containing evidential standards states that the presence of an actuating purpose or intention to commit market abuse behind a manipulation transaction is an indication that the behaviour is an abusive one [223] . The question of whether an actuating purpose was a constituent element of market abuse behaviour was the main issue in the Tribunal reference in Financial Services Authority v Winterfloods and Ors and subsequent appeal [224] in which it was contended by the applicants that due to the interpretation of the evidential provisions in MAR the original Ss188 (2) (b) -118(2) (c) (being the regular market user requirement for market abuse that pre-dated the introduction of the Directive) required the FSA to demonstrate that there had been an actuating purpose in order to show that Winterfloods had mislead or distorted the market. The referral arose out of the FSA’s decision to impose a financial penalty on Winterfloods, a UK market maker, and two of its traders for market abuse under the original S118(2) (b) and (c) in connection with the misuse of rollovers and delayed rollovers (moving positions from one client to another) to deliberately create a distortion in the shares of Fundamental E Investments plc. As market maker Winterfloods handled the majority of the trades in Fundamental E at the material time. The FSA alleged that Winterfloods failed to have appropriate regard to warning signs and failed to ask questions about the propriety of third party trades it had executed thereby committing market abuse . The price in FEI plummeted 32% in two and a half hours on 15 July 2004 [225] . Winterfloods appealed the decision of the Tribunal [226] and LJ Moore-Brick put the matter beyond doubt holding that intention was not a constituent element of market abuse stated,“...I do not think that the provisions of the Code on which the appellants rely are to be read as restricting market abuse of a kind which creates a false impression or distorts the market to cases in which the transaction was motivated, at least in part, by an intention to achieve either of those results. In my view this is not a case in which there is any serious doubt about the meaning or effect of the Code..." [227] 

Requiring or encouraging

S123 (1) (b) specifically entitles the FSA to take action if it is satisfied that a person has required or encouraged another person or persons to engage in behaviour, which, if engaged in by A, would amount to market abuse under any of the seven market abuse behaviours. Interestingly the provision in section 123 (1) exceeds the requirement of Article 3(b) of the Framework Directive, which prohibits only positive recommendations or inducement. S123 of the Act however allows the FSA to take action in situations such as where a person’s refraining from taking any action has required or encouraged another person to engage in abusive behaviour. Although S123 has equal application to other provisions of the Market Abuse regime which have been explicitly set out by HM Treasury as provisions that are super-equivalent to the Framework Directive, S123(1)(b) application of to inactivity extends Article 3(b) in a manner not specifically highlighted by the Treasury.

The FSA enforcement case against Darwin Clifton [228] illustrates the fundamental aspect of encouragement in relation to market abuse. Mr Clifton at material times was a non-executive director of Desire Petroleum plc (“Desire") and also a director of and shareholder in Byron Holdings Limited (“Byron"), a Falkland Islands incorporated company. Desire an oil and gas company with exploration projects in the Falkland Islands had shares quoted on the Alternative Investment Market of the London Stock Exchange. By 19 November 2007 Clifton became aware that Desire was in advanced discussions with another company concerning a joint venture drilling arrangement. That information constituted inside information and on 25 February 2008 Desire made an announcement to the market that it had concluded the joint venture agreement. At the close of trading on the day of the announcement Desire shares price increased by around 36% on the previous day’s closing price. Clifton directed Byron to purchase shares in Desire on four separate occasions prior to that announcement. Byron had the inside information relating to the joint venture as a result of Clifton’s knowledge of it and Byron’s purchases of the shares based on that inside information therefore constituted insider dealing in breach of section 118(2) of the Act. By directing Byron to purchase the shares, Clifton took action to require Byron to engage in behaviour which, if engaged in by Clifton, would have amounted to market abuse.

The code of market conduct

The role of the code

The FSA is obliged under S119 to prepare and issue a code giving appropriate guidance to those determining whether behaviour amounts to market abuse. [229] S119 requires that the FSA deal with issues pertaining to market abuse behaviours and accepted market practices. The code serves as a method for the FSA to describe the behaviours that in its opinion amount to and do not amount to market abuse as well as set out the factors that in the FSA’s opinion are to be taken into account in determining whether or not behaviours amount to abuse. [230] In that sense MAR prescribes defences or conduct that does not amount to abuse. [231] It has been seen when considering the detail of the Market Abuse behaviours that often abusive behaviours can occur behaviours falls outside of an accepted market practice. Although the Act at S130A goes some way to defining the meaning of an accepted market practice, the FSA is required by S119(2) to use MAR to describe the behaviours that are and are not accepted market practices in relation to one or more specified markets. Many accepted market practices will stem from the practices sanctioned by regulated or prescribed markets and however, to a large extent the provisions of the Panel on Takeovers and Mergers own code setting out certain pre-acquisition permission requirements and large position reporting outlines processes that might fall into one or more of the S118 behaviours were those processes not to be interpreted by the FSA as accepted market practices. [232] .

An analysis of the Code of Market Conduct reveals the manner in which the FSA seek to use the code to satisfy its obligation under S119. MAR is aimed at providing a degree of certainty in a dynamic financial market. When one considers the style of the current code in the context of its legal affect (which will be considered below) together with the FSA’s role in market abuse enforcement the codes shortcomings become apparent. The code does not provide an exhaustive list of all the conduct which in its opinion may or may not amount to market abuse. Similarly the factors that it sets out that will be taken into account as determining whether behaviour amounts to market abuse are not exhaustive. [233] Although the FSA seek to use the code to provide guidance on what constitutes market abuse, the difficulty presented by continued market innovation and the ingenuity of market participants means that it is difficult for the FSA to provide concise guidance that can be relied upon with exhaustive certainty. Indeed conforming to the Directive [234] the FSA recognises that in certain market situations, it is necessary to preserve an orderly market and trading that might otherwise be deemed as abusive, should not by virtue of being recognised as ‘accepted market practice.’ [235] This all of course presents difficulty for those market participants wishing to gain some certainty about whether or not a planned activity or circumstances they find themselves in as the result of another person, in any way amount to Market Abuse. An assessment of the language of the code reveals that in many parts the description of behaviours are presented in the style of regulatory principals seeking to apply ethical standards to help determine whether or not a behaviour amounts to a market abuse and indeed where the FSA confidently describes behaviours that in its opinion either do or do not amount to abuse, these are so rudimentary they do not offer any real assistance. For example at MAR 1.3.20G and 1.3.21G the FSA provides three rather obvious examples of behaviour that constitute Insider Dealing, including one of a director disclosing details of a take-over offer to a friend who then deals on the basis of that information. The code of course is aimed at members of the public that use the financial markets, irrespective of their experience, as well as authorised financial institutions and approved persons and to the extent it has to be expected that the code will provide guidance across a wide spectrum of complexity.

The effect of the code of market conduct

It is the reliance on the FSA as the preliminary decision maker in determining whether or not a person’s conduct constitutes Market Abuse that presents considerable challenges to the operation of the Market Abuse regime and raises the essential requirement for accountability over the FSA’s activities. Indeed as seen above, the question of whether behaviour will constitute market abuse has to be considered in the light of market practice as well as whether the conduct is fair and prejudices the rights of investors. Furthermore the prospect for constant financial and technical innovation in financial markets including cross-border activities and the internet, can create incentives as well as opportunities for market abuse and has given rise to the Parliament’s reliance on technical implementing measures as a way of prescribing detailed guidance that can keep up to date with market and supervisory developments.

Those persons, concerned with allegations of Market Abuse or wanting to ensure their activity does not amount to an abusive behaviour will undoubtedly be concerned about the extent to which they may rely on material set out in MAR. Although a Statutory code, S119 (1) of the 2000 Act provides that the code is to be published for the purpose of the FSA providing guidance on whether or not behaviour amounts to market abuse. The language in S119 (1) confirms that save where the FSA confirms that certain behaviour will not be considered as abusive MAR is presented only as guidance providing only persuasive authority against an allegation of abuse. The impact of MAR, however, is slightly more subtle and while the FSA guidance under S119 (2) (a) –( c) of behaviours that amount to market abuse are no more than an expression of fact, the description of accepted market practices under S119 (2) (d) – (e) and S120A must be viewed as a statement of fact of what is an accepted market practice rather than what is the FSA’s opinion of what is acceptable. The dichotomy between the description of Market Abuse behaviours in the 2000 Act and the extent to which the FSA may supplement that description with opinions of its own presents a practical challenge to both market users and the FSA when dealing with Market Abuse enforcement. As will be seen in Chapter 3, it is the FSA that is responsible for taking enforcement action based on its assessment of not only how the Act describes the behaviours, but its own code based opinions on what behaviours amount to abuse. To some extent, however, S122 does seek to provide market participants with some certainty where they seek to rely on code guidanceis definitive if it sets out behaviour that does not amount to abuse, in all other circumstances S122 (2) provides that the Code may be relied on only as an indicator of whether or not a behaviour is abusive. Thus where a provision describes particular behaviour as abusive a market participant may not assume that by avoiding that described behaviour they will be protected from an allegation of abuse. As will become evident in Chapters 3, 6 and 7 from FSA decided cases MAR presents tensions for FSA enforcement as ultimately it is not the FSA that is the arbiter of what constitutes market abuse but the Judicial authorities through the Tribunal and the Courts.

Although the Code of Market Conduct largely comprises the FSA’s opinion on whether or not behaviours amount to market abuse, in a practical sense the authoritative nature of MAR is evident from FSA final notices. The extent to which authorised persons and market participants defer to the provisions in the Code is such that it can in effect shape the behaviour of the financial markets and arguably can give rise to standard market practice. Although a clear procedure is laid down in the 2000 Act for how the FSA may determine what are and what are not accepted market practices [236] . It is important to consider how opinions on acceptable and unacceptable standards of behaviour are identified for inclusion in the Code. It might be easy to conclude that the FSA has complete discretion over the content it chooses to include. Pursuant to S2 (1) (b) of the 2000 Act the FSA must in relation to the discharge of its General Function (which includes its function of preparing and issuing codes under the Act [237] )so far as is reasonably possible act in a way which the FSA considers most appropriate for the purpose of meeting its Statutory Objectives. The FSA is required by S2 (3) nonetheless to observe a variety of principles of good regulation, including a) the need to use its resources in the most efficient and economic way [238] and b) having regard to the principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits...which are expected to result from the imposition of the burden or restriction [239] .

FSA principles for business and market abuse for authorised persons

As identified earlier in this Chapter, market abuse is an unusual aspect of FSA regulation as it applies to all persons, whether or not authorised. However, it should be noted that market abuse by authorised or approved persons is on occasions addressed by the FSA’s reference to an authorised person’s failure to establish and operate appropriate systems and controls [240] . Many of the FSA’s rules on system and controls take the form of general principles of conduct rather than detailed or prescriptive rules. Indeed significant elements of the FSA's Code of Market Conduct are arguably “principles based" such that the FSA and authorised persons may focus more on the outcomes gained by compliance with principles rather than how to comply with prescriptive rules. To put it another way, it encourages compliance with the spirit of regulation as opposed to the letter. The FSA believes an approach focused more on outcomes allows it to achieve its regulatory objectives in a more efficient and effective way and leads to an increased focus on principles-based enforcement action [241] . Chapter 7 will explore the extent to which the FSA’s principles are justiciable before the Tribunal and Courts

Recent enforcement cases such as Roberto Chiarion Casoni [242] and Deutsche Bank AG [243] show that the FSA when dealing with authorised and approved persons will consider enforcement by reference to breaches of high level principles and failures in systems and controls obligations rather than by reference to allegations of specific breaches of the Market Abuse regime [244] . As part of its work in developing principles based regulation, the FSA has identified positive outcomes for a move towards principles based regulation. It has expressed the view that a large volume of detailed, prescriptive and highly complex rules can divert attention towards adhering to the letter rather than the purpose of regulatory standards confirming this Dan Watters FSA Director of retail policy stated “Why then is the FSA committing itself to a more principles-based regime? The short answer is that we believe it will enable us better to discharge our statutory duties." [245] 

In its enforcement case against Citigroup Global Markets Limited (CGML) [246] due to the trading in question not taking place on a prescribed market, the FSA focused on breaches of High Level Principles 2 due skill, care and diligence; and Principle 3 organisation and control, highlighting how its high level principles can be used to good effect to deal with legally difficult market conduct cases. In the final notice it was reported that four traders on CGML’s European Government bond desk had developed a trading strategy on European government bond markets involving the building up and rapid sale of long positions in government bonds resulting in a temporary disruption to the volumes of bonds quoted and traded, as well as a drop in bond prices and a temporary withdrawal by some participants from quoting on a certain trading platform. It was reported that although the traders that had developed the strategy had discussed their proposal with their head of desk, who in turn sought and gained approval of the strategy from CGML’s head of interest rate trading, their was no common or clear understanding between them as to the size of the proposed trade and thus no effective communication of the arrangements CGML was to establish. FSA’s Hector Sants when commenting on the case stated, “…the lack of adequate systems and controls meant that the strategy was never fully considered, as would be expected, at an appropriate senior level within CGML…"

However, the regulatory flexibility offered by principles based regulation does present issues relating to compliance certainty for firms, such as determining whether their adopted approach to compliance will meet FSA expectations and not expose the firm to a threat of enforcement. This point is not lost on the FSA, which recognises the importance of a regulatory environment in which authorised persons understand what is expected of them and that the Principles based regime encourage an exercising of judgement about how to comply with Principles in terms of how they conduct their business. [247] In addition it has promoted the importance of authorised persons being able to predict reasonably, at the time of the action concerned, whether the conduct would breach the Principles. However, rather than establishing a legal test of predictability, the FSA indicates that it will not take enforcement action unless it was possible to determine at the time of an alleged breach that the conduct fell short of FSA standards. [248] 

Therefore the ability for authorised persons to identify the standards that are required is vital. In response to this need, the FSA points to the roles played by its guidance as well as any formally recognised industry guidance. [249] The clear distinction between industry guidance and industry practice is worthy of note as it is possible that business practice within a particular sector even though widespread can fall below the standards expected by the FSA and result in enforcement action for individual industry participants. Guidance is not however binding on authorised persons and the advantages of a principles based regime allows authorised persons to develop approaches to regulatory compliance that are appropriate for their business in the context of its size, type and complexity provided of course that the underlying regulatory requirements are met. [250] Analysis of guidance can however provide firms with a degree of predictability and the extent to which guidance is followed will be used by the FSA in its enforcement work. Indeed the FSA state at paragraph 6.2.1 (4) of its Decisions Policy and Procedures Manual (DEPP) that it will not take action for behaviour that it considers is in line with guidance or other materials published by the FSA in support of its rules or FSA confirmed Industry Guidance, which was current at the time of the behaviour in question. The reference in DEPP 6.2.1(4) to “other materials" raises the profile of the extent to which authorised firms should or can take into account so called “soft" guidance published by the FSA, in documents such as FSA speeches, consultation documents, correspondence from FSA supervision teams and of course the content of FSA Final Notices. The specific reference to “other materials" in DEPP and reference to “supporting materials" in the FSA’s enforcement guide, [251] suggests that such other material can provide useful material, provided that authorised firms recognise that it can only be used to supplement the FSA formal guidance and the firm’s own assessment of how it should meet its regulatory obligations.

Of importance is the sense that compliance with principles based regulation can give rise to so called “regulatory creep" resulting in the expectations of compliance increasing over time. In essence, what might have been historically acceptable behaviour becomes unacceptable even though the strict wording of a principle does not change. Of concern to authorised firms is being confident that their historical behaviour will not, as a matter of course, be judged by the standards of today. This point was recognised by the Financial Services and Markets Tribunal in the matter of Legal General Assurance Society Ltd v Financial Services Authority [252] . Although the case does not relate to market abuse it does provide useful information regarding the standards necessary to comply with Principles. The Tribunal had to determine standards of behaviour derived from broad requirements of "best endeavours", "due skill care and diligence" and the obligation to establish procedures directed at all the "Rules and Principles." The Tribunal was concerned with the situation where standards changed over the course of the relevant period and ensure that the standards it applied were those considered acceptable at the time appropriate to the facts of the case. It concluded that there was not a problem when a firm is being judged against an objectively measured standard or where there is explicit guidance indicating in reasonable detail what should or should not be done. The Tribunal made clear in its written decision, that judging a past problem with today’s standards was not appropriate. It stated,

‘… it is common ground that L&G have to be judged against the compliance standards as they applied in the Relevant Period. The fact that procedures are changed and improved as they were in the latter part of 1999 does not mean that prior conduct was necessarily inappropriate or in breach of the rules …’

Firms can take comfort from FSA’s statement at paragraph 2.21 of its Enforcement Guide that it will not apply later, higher standards to behaviour when deciding whether to take enforcement action for a breach of the Principles.

In the following Chapter consideration is given to the source of the FSA’s powers of enforcement and the procedures and policies it follows when determining when it is appropriate for enforcement action to be taken.

CHAPTER 3: FINANCIAL SERVICES AUTHORITY AND ITS ENFORCEMENT DECISION MAKING PROCESS

"The penalties the FSA has imposed as a result of this investigation send a clear message to companies and individuals wherever they are based that dealing with the benefit of inside information is not acceptable." [253] 

Introduction and background

This Chapter considers the powers available to the FSA to deal with identified cases of Market Abuse through an analysis of the FSA’s approach in Market Abuse cases together with its general enforcement practice (which will assist in providing an amplification of the FSA’s practices and procedures). In providing such analysis consideration is given to Market Abuse enforcement on two fronts. First, by considering the FSA’s powers of enforcement in the context of the Act’s statutory enforcement process, an assessment will be provided in later Chapters as to whether such process acts to ensure the FSA is accountable for its enforcement decision making or whether the Tribunal references are a necessary check to ensure that the FSA takes the right decisions in a fair, proportionate and lawful way. Secondly by considering the policy issues that drive the FSA’s Market Abuse decision making a picture can be built up of the FSA’s enforcement policy motivations and of the extent to which such policy issues put pressure on how the FSA discharges its powers of enforcement.

The FSA has at its disposal a number of enforcement powers [254] to combat market abuse including the imposition of financial penalties and restitution orders against those that use the financial markets plus disciplinary measures against authorised persons and approved persons. In the context of Market Abuse, the FSA’s enforcment activity relates to identified breaches of the prohibited Market Abuse behaviours in S118 of the Act and more widely for authorised persons where abusive behaviour causes a breach of the FSA’s high level principle and rules. In addition, the FSA also has power to apply to the civil courts for injunctions and restitution orders to support its enforcement activities. [255] Finally, the FSA has power to prosecute criminal offences of market misconduct [256] . The decision to take enforcement proceedings, is not however, a straightforward one. The FSA’s finite resource results in it having to apply a risk-based approach to its enforcement work [257] and is not being able to pursue each and every identified instance of abuse. Even where it determines that enforcement action is necessary it must select from wide ranging Statutory powers a response that is most appropriate for dealing with the issues that it has identified.

Enforcement of the market abuse regime would not be possible without adequate market intelligence and evidence gathering provided by viable methods of routine market surveillance and robust information gathering. [258] Indeed the FSA’s ability to gather reliable information is critical to the effective exercise of its enforcement tools. [259] It is easy to distinguish the FSA’s surveillance tools - viewing these as supervisory tools – from formal powers of investigation granted to the FSA under the 2000 Act, which are viewed as primary tools utilised when enforcement proceedings are in mind. On analysis it appears clear that the FSA’s market surveillance and formal powers of investigation collectively provide a suite of tools that contribute to market abuse enforcement work and although such intelligence work might be split between that which alerts the FSA to potential concern such as its surveillance tools and that which is gathered as evidence to support any FSA enforcement proceedings, a significant amount of evidence, necessary to support a successful market abuse cases, is obtained from the FSA’s surveillance activities. [260] Nonetheless instances of abuse in the markets do go undetected and there are indications that the market abuse cases brought by the FSA are merely the tip of the market abuse iceberg, with thousands of abusive activities going either undetected [261] or considered inappropriate for formal enforcement activity [262] .

The FSA’s enforcement powers are significantly affected by a series of external media and political pressures [263] which combine to influence the FSA’s success in bringing cases as well as determining whether or not such cases ought to be commenced at all. In this overall context it will be seen that promotion and development of the FSA’s enforcement settlement process has resulted in the settlement scheme becoming an integral element of the FSA’s enforcement process to the extent that as can be derived from appendix Table , market abuse cases are now concluded with some element of settlement in over [ 70 ] % of cases. Although there are merits in providing for a system of enforcement that allows for early settlement in clear cut cases, given that the FSA does not have the resource to take enforcement action in every identified case of market misconduct, it is reasonable to question whether the combination of the settlement process and a risk based approach to enforcement has the effect of diluting the overall impact of enforcement proceedings.

Statutory Powers of Enforcement and the Statutory procedure

The enforcement structure adopted in the 2000 Act appears unncessarily complex, duplicating what is in essence a standardised set of powers and duties by reference to varying areas of regulation as well the Statutory imposition on the FSA to publish enforcement policies and procedures. [264] The FSA’s policies and procedures are set out in its Decision Procedures and Penalties manual, referred to as DEPP [265] . Although the effect of such procedues are analysed in detail later in this Chapter, reference is made to it in analysing the impact of the FSA’s Statutory powers of enforcement and it will be seen through such analysis that subtle tensions impact the threashold the FSA must satisfy in determining whether enforcement action can be taken.

The power to impose a financial penalty on a person that has engaged in market abuse or has required or encouraged another person to engage in Market Abuse is granted to the Financial Services Authority in S123 (1) of the Act, more widely to the Courts under S381 where the FSA has applied for an injunction to restrain actual or threatened Market Abuse and S383 on an application for restitution of profits made, losses suffered arising from market abuse. In addition to the imposition of a financial penalty, S123 (3) grants power to the FSA to publish a statement about a person engaging in Market Abuse [266] .

More specifically, in circumstances where the FSA considers that an authorised person has contravened a requirement imposed under the Act, S206 grants the FSA power to impose on that person a financial penalty of such amount as it considers appropriate [267] and under S205 the power to publish a public censure. S66 of the Act allows the FSA to impose a financial penalty against or publish a statement of misconduct regarding an approved person if it appears to the FSA that the person is guilty of misconduct [268] and the FSA is satisfied that it is appropriate in all the circumstances to take action against him. S66(2) specifies that a person is guilty of misconduct if while an approved person: he has failed to comply with a statement of principle issued under S64, or he has been knowingly concerned in a contravention by the relevant authorised person of a requirement imposed on that authorised person by or under the Act. It is the FSA’s experience that cases against individuals are harder to prove, take longer to resolve and are less likely to be settled [269] . Nonetheless, the FSA has, stressed that the importance of approved persons enforcement confirming that in appropriate cases it will take enforcement action against individuals, particularly senior managers. “…Failure to manage risks properly is now, more then ever, likely to result in disciplinary action being brought against individuals as well as firms. Senior managers need to understand this and ensure that they are taking appropriate action to identify and mitigate risks to protect their firm, and increasingly, themselves…" [270] 

The Act sets out a standardised and three staged mandatory notice procedure applicable in both Market Abuse and authorised and approved person enforcement. Each of these stages act as a notification of the basis of the FSA’s enforcment action [271] with the important second stage triggering the respondents right to make a reference of the matter to the Tribunal [272] .

Stage One: The Warning Notice and representations

The first stage in the notice process is the giving of a written Warning Notice and arises where the FSA proposes to take action. Such requirement arises under S126(1) in relation to Market Abuse, S207 in relation to Authorised Person discipline and S67 (1)-(3) in relation to Approved Person discipline. Each of the aforementioned sections together with S387 provide that the Warning Notice must satisfy minimum content requirements including the action the FSA proposes to take, the reasons for that action, the amount of any proposed penalty and the terms of any proposed statement [273] . A similar procedure applies where the FSA proposes to require a person to pay restitution pursuant to its administrative powers [274] .

The Warning Notice must specify a reasonable period (which may not be less than 28 days) [275] within which the person to whom it is given may make representations to the FSA,. The Notice thus acts as the formal trigger for a response and making of formal representations to the FSA (as well as any settlement negotiations, which is explored in more detail below). The FSA also indicates that, where appropriate, it will include a statement that the mediation scheme is available [276] .) The period of time allowed for making representations is set by the FSA decision maker [277] and although will usually be not less than 28 days, the recipient may seek an extension of time to make any representations. A person dissatisfied with the time allowed for representations may request more time from the FSA decision maker in writing within 14 days of receiving the warning notice [278] .

Following receipt of a Warning Notice [279] , the person concerned may make representations to the FSA in accordance with DEPP 3.2.7 [280] . Making any representations following the warning notice and ensuring that these are made within the relevant time limits is critical. In particular, in relation to the Market Abuse regime, S 123(2) provides that the FSA may not impose a penalty on a person if it is satisfied on reasonable grounds following representations by the person concerned in response to a warning notice that the person either believed on reasonable grounds that his behaviour did amount to market abuse or took all reasonable precautions and exercised all due diligence to avoid the abusive behaviour. Focusing on the legitimacy of any alleged abusive conduct, DEPP 6.3.2 provides some assistance in setting out factors against which the FSA judge a persons conduct in the market including: (1) whether, and if so to what extent, the behaviour in question was or was not analogous to behaviour described in MAR 1 as amounting or not amounting to market abuse, or requiring or encouraging;(2) whether the FSA has published any guidance or other materials on the behaviour in question and if so, the extent to which the person sought to follow that guidance...(3) whether, and if so to what extent, the behaviour complied with the rules of any relevant prescribed market...

Stage Two: The Decision Notice

The conclusion of the FSA’s consideration of any representattions made regarding the content of a Warning Notice triggers a requirement to issue a written Decision Notice [281] . In practical terms a Decision Notice is the communication of the FSA’s determination of the matter and indicates that the enforcement action set out in the notice will take effect unless the respondent refers the matter to the Tribunal. The Statutory obligation to issue a Decision Notice arises under S127(1) in relation to Market Abuse, S208 in relation to Authorised Person discipline and S67(4) in relation to Approved Person discipline. The Statutory minimum content of a Decision Notice is prescribed through a combination of S388 together with the respective sections of the regime to which the action relates. The Notice must set out the action the FSA has decided to take and the amount of any financial penalty [282] , the reason for the decision and give an indication of any right as well as the procedure for the respondent to refer the matter to the Tribunal [283] . The procedure for making a referall to the Tribunal is explored in detail in Chapter 5 and 6, however it is important when considering the FSA’s procedures to note that it may not take action specified in a Decision Notice until the period for referral has expired or if the matter is referred, or until as the case may be the reference and any appeal against the Tribunal’s decision have been finally disposed of [284] .

Stage Three: The Final Notice

If the matter is not referred to the Tribunal, the FSA is required under S390, to issue a written Final Notice to the person concerned and to publish such information about the matter to which a Final Notice relates as it considers appropriate and in such manner as it thinks fit, unless publication would, in the opinion of the FSA, be unfair to the person with respect to whom the action was taken or prejudicial to the interest of consumers [285] . S390 prescribes the minimum content requirements of Final Notice, including that it must set out the terms of any statement that is to be made and the details of the manner and date on which the statement will be published [286] and in regard to a financial penalty, the amount, the manner and period for payment as well as how it will be recovered if not so paid [287] . The Final Notice has the effect of formally concluding the FSA’s enforcement action and all of the actions set out in the Notice take affect. For instance any financial penalty becomes a debt at the end of the period given for its payment in the final notice, which must be not less than 14 days beginning with the date the final notice is given [288] . Similarly, pursuant to s 390(2), if the Tribunal or the Court following an appeal gives the FSA directions to take certain action, the FSA must give the person to whom the Decision Notice was directed a Final Notice. Section 390 sets out mandatory requirements that must be included within such notice [289] .

What is evident, however are the contrasting Statutory content requirements between Final Notices and the Tribunals written decisions (which will be explored in Chapter 7). One has to question whether this negatively impacts the regulatory and jurisprudential value of the Final Notice. As seen in Chapter 2 Final Notices are often relied on to provide ‘soft guidance’, but an analysis of notices reveals that they follow a standard pattern setting out the factual background to the case, the rules breached and providing a linkage between the rules and facts and in essence, given the preponderance of settled enforcement cases the content of Final Notices read as the outcome of settlement negotiations. It is only on rare occasions, such as in the Woolworth Final Notice [290] that details are provided of the respondent’s contentions.

Notice of discontinuance

The FSA is obliged to give a notice of discontinuance to a person to whom it has given a warning or decision notice if it decides not to take the action proposed or set out in a Decision Notice [291] . The FSA also indicates that it will send such notice to a third party served with a warning or decision notice [292] . The FSA may publish such information as it thinks appropriate in relation to a matter in which a notice of discontinuance has been served provided that the person concerned consents [293] .

The separation of Supervisory and Enforcement functions

One of the major concerns voiced during the passage of the Financial Services and Markets Bill was the need to ensure proper separation between the exercise of the FSA’s powers of investigation and enforcement. “various legal experts who made submissions on the matter referred frequently to Chinese Walls and I remain unclear as to how thick and sturdy the walls of the FSA’s structure will be"’ [294] S395(2) requires that the FSA procedures in relation to, warning and decision notices [295] must be designed to secure that the decision which gives rise to the obligation to give any such notice is taken by a person not directly involved in establishing the evidence on which that decision is based. In essence, requiring the FSA to maintain its own operational barrier. The FSA states that notwithstanding the statutory requirement to separate its investigation and recommendation functions from its decisions functions, it is also vital that the FSA enforcement decisions making process is perceived as being fair to ensure confidence in the system [296] .

Part of the FSA’s obligations under s395 are met through the establishment of the Regulatory Decisions Committee(‘RDC’) [297] . The Committee operates as an independent and objective committee to take administrative decisions in respect of enforcement actions proposed by the FSA. The RDC is a committee of the FSA board exercising regulatory decision making on behalf of the FSA [298] to which it is accountable. [299] The chairman of the RDC is the only member who is an employee of the FSA [300] , although the committee has its own legal advisers and administrative staff all of whom are separate from the FSA staff involved in conducting investigations and making recommendations to the RDC.

The FSA process supporting whether it will take the decision to issue Statutory Notices is centred on an FSA “decision maker." Since the FSA’s review of its enforcement process in 2005 [301] considerable adjustment has been made to that process including the introduction of additional procedures to safeguard the independence of the RDC from the Enforcement Division. Subsequent to the 2005 review the FSA has operated a multi layered decision-making process allowing for simple and less contentious cases to be handled and concluded by its senior executive team thus reserving for its Regulatory Decisions Committee more complex and contentious cases. Through the life of an enforcement case it is possible that the decision leading to the relevant FSA Statutory Notices, (such as warning notices and a decision notices) will be taken by different decision makers. For example, where the person against whom enforcement action is taken disputes the matter, a warning notice decision will be taken by FSA staff under executive procedures with any subsequent decision notice decision being taken by the RDC. [302] The RDC’s approach to dealing with matters is informal and although it will allow firms and the FSA to make oral representations about cases, it is not intended to resemble a Court or a Tribunal or to have a quasi-judicial function. Indeed the RDC will reach its decisions having considered the papers presented and representations made either on paper or orally by both the FSA and the person subject to enforcement . The RDC’s decisions, however, will be based on the FSA's interpretation of the law and if there is an irreconcilable difference between the parties on a point of law then, it will be for the person against whom the decision notice relates to refer the matter to the Tribunal.

FSA Enforcement Decision Making

Enforcement Procedural Requirements

The Act imposes a variety of procedural obligations on the FSA with regard to its enforcement functions. S395 (1) states the FSA must determine the procedure that it proposes to follow in relation to the giving of a) supervisory notices; and b) warning notices and decisions notices and Schedule 1 paragraph 6(3) provides that the FSA must maintain arrangements for enforcing the provisions of, or made under, this Act. In addition the FSA is required under S206 (in respect of authorised persons) and S66 (in respect of approved persons) to publish its policy towards enforcement and discipline. Unlike its arrangements for monitoring, its enforcement activities may not be delegated. The FSA’s Enforcement Guide (EG) describes the policies and procedures for the exercise of the enforcement powers granted to the FSA and DEPP sets out the steps the FSA take in reaching enforcement decisions.

Although addressed at the FSA’s wider enforcement process (integral parts of which are its powers of investigation) paragraph 2.2 of EG recognises a number of principles underlying its approach to enforcement. The guide makes reference to the need to ensure fair treatment when exercising its enforcement powers as well as matters such as transparency and proportionality. It is submitted that a considerable element of fairness in any enforcement process is achieved through the consistency in which the process is applied as without such standard, the regime’s application becomes considered as arbitrary by those subject to the enforcement process. The need for consistency is also referred to by the FSA in paragraph 2.2 of EG and it is submitted is central to the role played by the enforcement process in meeting the FSA’s Statutory Objectives.

Decision to commence enforcement

The FSA describe in EG 2.10 criteria for the taking of enforcement proceedings. The FSA stress that the criteria are not exhaustive and that there may be other factors in a case that are relevant and thus it will consider the full circumstances of each case. It is right to assume that the criteria are applied to ensure that enforcement cases are selected and conducted consistently. However the FSA acknowledges in EG 2.9 that its limited resource means that it has to focus its attention towards the priority given to certain types of misconduct over others and that such risk-based approach to enforcement means that certain like cases will be subject to enforcement action and others not. Nonetheless, the FSA does consider that enforcement action is necessary in cases of particular significance to protect markets, consumer protection, financial crime, or in cases that the FSA thinks is necessary to achieve effective deterrence [303] . Nonetheless, as is evident in case selection the contrasting approach between principles based and market abuse regime enforcement in cases such as Pignatelli [304] and Winterflood Securities Ltd [305] it is sometimes difficult to determine the exact reason why certain enforcement cases are selected over others and why cases on similar facts are concluded in different ways, thus leading to concerns that FSA enforcement decision making is at times arbitrary.

Standard and burden of proof before the Regulatory Decisions Committee

There is a view that the Regulatory Decisions Committee merely rubber stamps enforcement actions proposed by the FSA enforcement division staff [306] . Whilst it has been made clear since the inception of the FSA, that the RDC does not operate a judicial process, its procedures allow for the presentation of the investigation report produced pursuant to S170(6) and the rights for the parties to appear and make representations. Full evidential analysis and the examination and cross examination of witnesses does not however, take place and as the RDC is an administrative decision maker, the concepts of burden and standard of proof are not strictly relevant. Nonetheless the Act does impose on the FSA standards of proof in order for it to take enforcement action and as the FSA key enforcement decision making body such standards will apply to RDC. The standards required by the Act differ, suggesting that a higher standard is required where action is being taken under the Market Abuse regime where S 123 requires the FSA to be "satisfied" that market abuse has taken place; whereas S205 suggests a lower standard, allowing the FSA to take action against an authorised person for breaches of its rules of conduct if it “considers" there has been a breach of its rules; and under S66 the FSA may take action against an approved person for breaches of the approved person code where it “appears" there has been a breach.

In Market Watch edition 21, the Authority recognises the evidential challenges in bringing successful enforcement cases [307] Paul Davidson and Baldwin and AMT Investments [308] serve to illustrate clash of evidence evaluation between the RDC and the Tribunal. [309] Particularly in the case of Baldwin the Tribunal commented that its adjudication is markedly different from that of the RDC as it is in a position to re-evaluate evidence put before it in more detail than the FSA, it has access to new material that the FSA may not have enjoyed and reach decisions without the regulatory motivations and political pressure faced by the Authority to meet its Statutory Objectives. [310] 

Circumstantial Evidence

The FSA’s Marketwatch issue 26 observed, “one of the challenges of combating market abuse is establishing to the necessary degree all the many and varied elements of the offence" The FSA has become more prepared to take action based on compelling circumstantial evidence and of late there have been a number of examples of cases concluded without the FSA being able to rely on direct evidence of market abuse. In the matter of Shevlin [311] , an IT technician at the Body Shop, from 8 January 2006 by virtue of his role had access to confidential emails containing inside information about how the Body Shop was not going to meet its profit targets. On 10 January 2006, Mr Shelvlin purchased a contract for difference for 80,000 Body Shop shares requiring him to borrow £29,000 more than his annual salary. Mr Shevlin closed out his CFD position on 11 January 2006 making him a net proit of £38,472. The FSA noted that it was unable to demonstrate conclusvely that Mr Shevlin had accessed the Inside Information at the Body Shop but that “there is cogent and compelling circumstantial evidence against Mr Shevlin" [312] It appears that recognising the evidential challenges in Market Abuse cases the FSA will consider the aggregate of circumstantial evidence and determine whether that is sufficently compelling to statisfy it that it is in a position to proceed with a case [313] .

Enforcement for discipline

In strict terms the FSA’s disciplinary measures refer to public statements and public censures, and financial penalties. [314] 

Penalties and statements

The FSA has power under the S123(3) 2000 Act to publish a statement that a person has engaged in market abuse rather than impose a penalty. [315] Although the imposition of a penalty is more appropriate for serious cases, the publication of a statement as a sanction affords the FSA flexibility to adapt to different situations. For instance, as in the case of Parry and Morton [316] where the FSA was challenging abusive behaviour that had widely been considered as legitimate market practice, the RDC considered it more appropriate to issue a public statement than impose a financial penalty [317] . The imposition of a financial statement alone, is however rare occuring only once in the [46 ] reported market abuse related cases. Conversely the FSA considers it more appropriate to impose a financial penalty on the basis that a person should not be entitled to benefit from their misconduct, if the person has made a profit or avoided a loss as a result of the breach [318] . Chapter 6 of the DEPP contains the FSA’s current statement of policy as required by S124 and regarding the imposition of penalties for Market Abuse under s 123. A similar policy is also required by S66 in relation to regulatory penalties against approved persons and S210 in relation to authorised persons. .

Determining the level of financial penalty

It will be recalled that the S123 of the Act limits the circumstances in which the FSA may impose a financial penalty. The factors that determine whether the FSA may impose a financial penalty for market abuse are set out at DEPP 6.3

Strictly speaking the FSA does not operate a penalties tariff, [319] although following a review of financial penalties in enforcement [320] for conduct occurring after 6 March 2010 save in mitigating circumstances, the starting point for cases of market abuse is a penalty of £100,000 and DEPP now contains a formula linking the calculation of the penalty with a person’s income or profit. [321] In accordance with its obligation under S124(2), operates a policy to determine the amount of a penalty which includes refernce to matters including (a) whether the behaviour in respect of which the penalty is to be imposed had an adverse effect on the market in question and, if it did, how serious that effect was, (b) the extent to which that behaviour was deliberate or reckless and (c) whether the person on whom the penalty is to be imposed is an individual [322] . The approach to determining an appropriate penalty in Market Abuse was addressed by the Tribunal in Parker v the FSA [323] which confirmed that by virtue of the language in S124 the question of imposition of a penalty is purely discretionary and the FSA is under no obligation to impose a financial penalty. It held that the matter was to be determined in line with the FSA’s statutory penalties policy (now contained in DEPP) and that that any penalty should be proportionate to the gravity of the offence it is designed to punish and discourage. It stated “A significant factor must be the financial advantage the person committing the abuse set out to obtain, which will not necessarily be the same as the gain actually made or the loss actually avoided." [324] 

Considering that the FSA is expectation that its financial penalties will from March 2010 increase significantly [325] , one has to question whether the level of potential penalties may become so large that they act as a burdon to regulatory efficiency by causing financial supervision to become litigious thereby reducing the opportunity for settlememt in enforcement cases. The imposition of a financial penalty without any further action, need not however act as a future prohibition on an individual’s future prospects of working in the financial industry and there are examples of individuals being fined and continuing in employment [326] . The levels of penalties varies considerably, with the largest Market Abuse penalty curently standing at £17m [327] and the smallest at £1,000 [328] . A more detailed analysis, reveals a clear disctintion between the Market Abuse penalties imposed on members of the public with the highest penalty against an individual standing at £967,005 [329] as compared with authorised persons at £4m [330] and approved persons £2.8m [331] . Unexpectedly, however there is no indication of a year on year increase in the cumulative amount of fines with the FSA although it is apparent that the typical level of penalty imposed on individuals whether members of the public or approved persons has steadily increased.

Cases such that of Mehmet Sepil [332] where FSA imposed a financial penalty of £967,005 inclusive of £267,005 disgorgement of profit illustrate that the FSA uses its power to impose a financial penalty to recover any profits made from abusive behaviour and even in circumstances where the FSA deternines that due to financial hardship that a financial penalty is inappropriate, as in the case of Stewart McKegg [333] , it will nonetheless disgorge profits made from that activity in question. Furthermore illustrating that the FSA will utilise the power to impose a financial penalty creatively and in a way that advances its purpose in bringing the action, in the case of Bertie Hatcher [334] , who agreed to cooperate with the FSA as part of its Insider Dealing criminal prosecution of Malcolm Calvert [335] , the penalty imposed on Hatcher comprised only a profit disgorgement showing the value the FSA is beginning to place on the assistance and cooperation that persons can provide to its wider investigations. In the Hatcher Final Notice the FSA states that it had regard to Mr Hatcher's level of culpability and the value of the evidence that he has provided and considers that the penalty imposed is appropriate in all the circumstances [336] .

Private warnings

The FSA uses Private Warnings as a non-statutory tool to make a person aware that they came close to being subject to formal enforcement action. EG 7.12 gives two examples of circumstances in which a private warning will be given: if the matter of concern is 'minor in nature or degree'; or the firm has taken 'full and immediate remedial action'. Although such warnings are more typically used against authorised and approved persons the FSA clearly does anticipate their use against the public in appropriate Market Abuse cases [337] . There is no provision in the Act for the giving of private warnings although an explanation of their meaning and impact is set out in EG 7.10.

Although a private warning is only considered a reprimand, EG 7.15 makes clear that it will have an influence on the FSA’s response to any future misconduct and the question of whether to start enforcement action. Although at EG 7.15 it is stated that the FSA do not mean Private Warnings to be a determination of a breach of FSA rules, such warning might give rise to a duty to inform another professional regulator where parallel professional regulatory obligations exist [338] . Because of the very nature of the Private Warning, it is difficult to identify precise details of the application of such warnings in the context of the Market Abuse regime. Furthermore the FSA’s use of a tool that falls outside of its Statutory Powers, although one that potentially has wider regulatory impact calls into question the extent to which the imposition of such a warning might be challenged. The question of privacy of Private Warnings has been tested following a request under the Freedom of Information Act 2000, for the names of firms where an FSA legacy regulator [339] had informally required twelve firms to compensate clients for setting inappropriate endowment mortgage charges [340] . In particular the FSA argued that disclosure of the names of the firms would amount to a statement of misconduct in breach of the safeguards in S207 and S208 that in not following the Statutory requirements, the FSA would not have followed common law due process or the requirements for a fair trial under Article 6 Human Rights Act 2000. Rejecting the FSA’s assertion, the Information Commissioner considered that by accepting the FSA offer of a private warning, Article 6 had not been breached, in that it was open to the firms to challenge the FSA’s findings and defend any formal action which the FSA chose to take. The Information Commissioner’s reasoning appears, however, to assume that every private warning is accompanied with a set of positive actions by firms. This is not always the case, and given that the FSA can use the private warning merely to communicate where a person has come close to breaching rules, it is difficult to identify how a firm might be able to use the FSA’s internal processes to formally challenge the FSA private warning findings.

Enforcement to secure results

In broader terms, however, the FSA has available a number of enforcement measures it can take which can be viewed as protectionist in nature rather than disciplinary. Such additional measures may be taken where the FSA considers it is necessary to take remedial action or ensure the protection of the market or individual investors. A number of such measures available to the FSA are exercisable only following an application to the Court are thus outside of the scope of this thesis. [341] 

Removal or variation of business pemissions and canecellation of Approved Person status

Although the imposition of a financial penalty might be appropriate to disgorge abusive profits or act punitively. In severe market misconduct cases against authorised persons or approved persons, the FSA may determine that the facts of the misconduct are so serious that the person lacks probity, ceasing to satisfy the threshold conditions for authorised persons, the requirement to be fit a proper for approved persons [342] or that the intersts of consumers are at risk to the extent that the FSA considers it desirable to impose limitations or restrictions on the person’s regulated activities.. Part IV of the 2000 Act grants to the FSA power to cancel or vary a firm’s business permissions [343] and S63 grants power to withdraw an approved person status. Indeed if as a result of a withdrawal of a person’s busness permission there remains no regulatory activity for which the person has permission, then the FSA may under S33 withdraw the person’s authorisation. Chapter 8 of EG distiguishes the grounds that might justify a variation to permissions including cirumstances that warrant urgent action and those that justify cancellation. Paragraph 8.2 of EG states that formal action affecting the conduct of a person’s commercial business is taken only if that business is being or has been conducted in such a way that the FSA considers is necessary to act in order to secure compliance or address the consequences of non-compliance. In essence such action will only be taken where it is necessary for the FSA to meet its Statutory Objectives. [344] Analysis of market abuse enforcement cases against approved persons shows that the FSA is increasingly determining that abusive behaviour by approved persons is inherently lacking in intergrity and thus without any mitigating circumstances it is likely that an approved person will be prohibited. Indeed EG 9.9(4) specifically refers to Market Abuse as one factor the FSA will be taken into account when considering a Prohibition Order. For example, as illustrated in Appendix Table 2 of the [seven] market abuse cases against approved persons reported in 2010 (at the date of this thesis) [five] were prohibited representing over 71% [345] compared to none of the three approved person market abuse cases in 2009. Emphasising the interplay between deliberate abuse, fitness and probity and the FSA Statutory Objectives in the matter of Andrew Kerr [346] , in justifying a prohibition the FSA considered that Kerr’s deliberate engagement in Market Abuse, subsequently providing of false and misleading information to the FSA directly impugned his honesty, integrity and reputation, demonstrating that he is not a fit and proper person and presented a risk to the FSA’s statutory objective of market confidence.

Settlement

Analysis shows that the settlement process has now become such a major feature of the FSA’s civil enforcement. Appendix Table 1 shows that of all Market Abuse cases concluded in 2010 [ %] were settled by an FSA decision maker. Achieving early settlement in its enforcement cases enables the FSA to secure prompt redress where consumers have been affected and also to efficiently utilise its resource thus allowing it to and move on to the next important case. Although early settlement is in the main in the interest of both FSA and the regulated person the FSA stresses that it is not prepared to compromise the integrity of its enforcement decisions making by rushing to reach a settlement on bases which are inappropriate. Margaret Cole has said

“..And you should not approach settlement discussions as if you are trying to resolve a commercial transaction. There will be limits beyond which we will not go and we will not engage in pure horse trading…" [347] 

Although the benefits offered by early settlement apply to both the FSA and those against whom the action and is brought both in financial terms (by a saving in management time and cost and a recognised discount on any financial penalty). The jurisprudential value of the content of Final Notices in settled cases, as discussed earlier in this Chapter, is questionable. As shown in Chapter 2, Final Notices can provide “soft gudiance" on the application of Market Abuse regulation and the sheer number of people, including some who maintain their innocence, that choose to settle cases for an agreed outcome [348] acts to devalue the consistency of FSA decision making between similar cases and hence the value of gudiance provided in such cases.

The FSA is clearly keen to encourage negotiations, informal settlement and mediation in appropriate cases [349] . Mediation has become increasingly popular as a method to assist in the settlement of enforcement cases and involves a neutral mediator helping the FSA and persons concerned to negotiate an agreed settlement. Mediation is available in enforcement cases involving market abuse, although the FSA does not consider it appropriate to deal with cases by this route where there are allegations of criminal conduct. [350] The FSA has introduced increased transparency [351] supporting a formal settlement process which is set out at Chapter 5 of DEPP. That process allows for the subject of enforcement to enter into settlement discussions with the FSA at any stage of the enforcement process as well as for two FSA decision makers of at least Director level to agree to settle an enforcement case. In addition to setting out a formalised settlement process Chapter 6.7 of DEPP also sets out a clear discount scheme for financial penalties that is applied to the stage at which during the FSA enforcement process settlement might be achieved. In essence the following discounts are applied [352] :

Stage 1: being the period from the commencement of an investigation up to the time when FSA has communicated its assessment of the breach and allowed the person concerned a reasonable opportunity to reach agreement as to the amount of the penalty: A 30% discount.

Stage 2: being the period from the end of stage 1 until the end of the period for making written representations or the date on which the written representations is sent if sooner: A discount of 20%

Stage 3: being the period from the end of stage 2 until the FSA gives a decision notice: A discount of 10%.

Stage 4: being the period after the end of stage 3: No discount

Although the RDC and FSA Enforcement Division are separate, it is important that the FSA is seen to achieve consistency in approach between contentious matters dealt with by the RDC decisions and cases settled by the FSA executive. To achieve such consistency there is regular liaison to ensure consistency of approach and briefings to the RDC to ensure awareness of factors the FSA considers are important when setting financial penalties. There are indications, however of inconsistencies between RDC and Enforcement division settlement decision making. For example, in the FSA’s market abuse case against Morton and Parry, two Dresdner Kleinwort bond traders [353] it was reported that the financial penalty and prohibition sought by FSA staff was replaced with just a public censure after the matter was considered by the RDC [354] .

Enforcement and policy considerations

The FSA has indicated that it will not institute enforcement action in all cases of market abuse [355] and so it can be inferred that a significant element of the FSA’s approach to Market Abuse enforcement is influenced by policy considerations. In the previous section of this Chapter consideration was given to the critera used by the FSA in deciding whether or not to take enforcement action. At the heart of any decision to take proceedings for market abuse is consideration of a number of principles [356] including its desire to change the behaviour of the person who is the subject of its action, to deter future non-compliance by others, to eliminate any financial gain or benefit from non-compliance, and where appropriate, to remedy the harm caused by the non-compliance. In addition the FSA takes Market Abuse enforcement in the context of it meeting its statutory objectives, namely the maintenance of market confidence and protecting the interests of consumers [357] .

The FSA’s priorities

In summarising the development of UK financial regulation, Chapter 1 of this thesis highlighted the importance of the FSA’s Statutory Objectives in influencing the FSA’s regulatory activity. It is the FSA’s assessment of the threats to these objectives that allows it to prioritise its activities [358] . In part the FSA’s undertakes supervisory thematic work allowing it to focus resource on those industry sectors or practices that threaten its objectives [359] . Historically, the FSA has stressed that it is not an enforcement led regulator and that its Enforcement Division shares the same priorities as those of the FSA. Prioritisation of regulatory activity not only shapes the general work of the FSA but also how each division of the FSA uses it resources. To an extent, however, the FSA’s enforcement division is not in a position to manage the deployment of its resource and each year is required to liaise with other FSA departments in order to support the strategic priorities set by those other departments. The combined effect of thematic supervision and reactive enforcement activity creates regulatory emphasis on the use of front line means of regulation, supervision and on-going relationships with authorised firms rather than the routine taking of enforcement actions as a way of dealing with infringements of the rules [360] . Analysis shows that Enforcement Division activity closely mirrors the thematic work undertaken by the FSA. For example in June 2008 the FSA announced that it would routinely review the integrity of firms Transaction Reports (an obligation that generates market abuse intelligence) and refer non compliance to its enforcement division [361] . Since that date the FSA has taken enforcement action against five authorised firms [362] imposing financial penalties amounting to £7,245,000 in comparison to three cases in the prior seven years with total fines amounting to £240,000 [363] . In the context of Market Abuse, enforcement is merely one of a range of tools available to the FSA deal with market misconduct, and nor is enforcement the most widely used of FSA regulatory tools for authorised and approved persons. [364] As analysed in Chapter 2 to this thesis, the Market Abuse regime however, is of equal applicability to members of the public using the financial market as it is to authorised persons and whilst the authorised sector is able to take full advantage of the FSA’s deployment of non-enforcement related regulatory tools, no such luxury exists for members of the public. Enforcement is viewed, as an essential method of ensuring satisfactory standards of compliance and while the views expressed above still fundamentally hold firm, the FSA response to criticism of its light touch approach to regulation in the period leading up to the financial crisis of 2008 has resulted in it promoting a much tougher more intrusive approach to regulation. In 2009 Hector Sants when explaining the nature of intrusive supervision referred to the FSA’s increased enforcement presence [365] “...we have demonstrated by our actions that we will use all our powers including criminal prosecutions to deliver our mandate and we are not ducking that responsibility...There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA." Evidence of the increased profile of the Enforcement Division is expressed through the growth in resources committed to that division [366] . Moreover, such a dramatic growth in resource not only suggests that the FSA wishes to ensure that it can deploy sufficient man-power to ensure that individual enforcement cases are comprehensively disposed of but creates an expectation of an increasing complexity in enforcement cases. [367] 

Having observed that the FSA is not an enforcement lead regulator, recent enforcement campaigns, many of which have a significant affect on Market Abuse enforcement suggest that the FSA is becoming more enforcement focused and that a robust enforcement programme has become such an integral part of the FSA regulatory duties, that it can be argued that enforcement focused regulatory objectives have emerged within the FSA. In an effort to ensure the integrity of markets in the UK the FSA has reported that Market Abuse is one of its major priority areas and consequently a priority area for its Enforcement Division. [368] Whilst the FSA considers that prevention is better than cure [369] , it believes that appropriate enforcement action sends out a strong message that contributes to deterrence to others that might be prepared to abuse the markets.

An element of the FSA’s prioritisation supports the model of a flexible regulatory agency with the ability to respond promptly to the financial markets innovation. Constant development of new financial products and trading initiatives is on one hand necessary for ensuring that the market remains competitive, contributing to both the success of operators in the market as well as the overall economy. Conversely, certain types of misplaced financial ingenuity can be damaging to the reputation of financial markets as well as causing damage or loss to uninformed counterparties to the trading activity. A broad and flexible regulatory regime allows the regulator to respond to new developments whether good or bad. Often, however by the time the regulator has responded, the unacceptable conduct has already taken place and damage has been done to the market, leaving the regulator to deal with the consequences of the conduct. Swan supports the necessity of “Regulatory Autopsies" as a way of allowing a regulator to punish and correct previously unforeseen market abuse techniques [370] . Swann asserts that to restrict flexibility too much, by requiring the FSA to anticipate and describe every possible illegal activity, is to condemn the critical financial markets to inadequate and ineffective regulation. He argues that as a consequence of such flexibility there is going to be a certain amount of ambiguity in the UK regulatory regime, serving as a warning to financial market participants that they will not be able to escape their reasonable obligations to conduct their affairs in a fair and efficient manner. [371] While Swan’s assertions cannot, at a theoretical level, be argued with, the application of the UK Market is such that complex Market Abuse cases have proven to be difficult for the FSA to prove before the Tribunal leading not only to uncertainty for market participants but also for the FSA. Dr Edward Swan observes the necessity of regulatory uncertainty to support a regime that continually needs to develop as a way of keeping pace with rapidly changing financial markets [372] . Swan asserts that there are two types of behaviour that a regulator is seeking to control. The first consisting of the well-known and clearly understood violations of insider trading and market manipulation such as misuse of non-public information gained from one’s employment or position. He observes, however, a second regulatory objective necessary in a rapidly developing financial market, he states; “there is a second equally important category of market abuse offences that are going to be the result of previously unknown or cleverly disguised ways of rigging the markets in one’s favour. Because it is not always possible for a regulator to anticipate what forms these disruptive techniques may take, a significant amount of ambiguity needs to be built into the market abuse regime to allow its prohibitions to be flexible enough to stretch to cover unforeseen situations." [373] 

The FSA Enforcement Process Review [374] clarifies the consideration that the enforcement department takes before commencing cases. It first must have sufficient grounds for believing that a rule breach has occurred and secondly the case must meet one of the strategic priorities set by the FSA.

“...we intend to be bolder and more resolute about proceeding with market abuse and insider dealing cases so that we can actually bring about a change in the culture in the City.  We’ve got to get all the market players to take this subject seriously...". [375] 

The Importance of publicity

The impact of Enforcement action is significant and FSA’s Enforcement work does appear to generate more publicity for the FSA than any other area. Even the announcement of investigations into alleged Market Abuse can generate significant publicity and news for the City of London. [376] The FSA’s dual responsibility of maintaining confidence in the financial markets and reducing the extent to which it is possible for a business to be used in connection with financial crime lead the FSA to be concerned to ensure that its enforcement process appropriately contributes to its drive to improve cleanliness in the United Kingdom’s financial markets. The FSA stresses that it will take enforcement action where it needs to publicise a specific or general deterrent. Margaret Cole, FSA Director of Enforcement stated in a speech on 29 June 2007, “Enforcement outcomes contribute towards both the prevention and cure elements of our market abuse strategy. Published Final Notices are a useful tool for industry to understand better the types of behaviour we consider unacceptable. Last year supervisors observed that the publication of an enforcement action often led firms to consider whether the enforcement action had implications for their business, systems and controls." [377] 

Appropriately directed enforcement action sending a strong message is an important part of achieving deterrence. As part of its regulatory tool kit the FSA has available a number of enforcement based tools, each designed to secure a particular outcome. The imposition of disciplinary action such as financial penalties and public censures illustrates that regulatory standards are being upheld and helps to maintain market confidence and promote public awareness of regulatory standards; it can also act as a deterrent to others from committing regulatory misconduct. [378] In a speech on 11 April 2006 Margaret Cole FSA’s head of enforcement said,

“…Enforcement activity generates more publicity (whether positive or negative) about the FSA than any other single issue. Enforcement outcomes can therefore play a very significant role in educating the industry and consumers about issues of concern and the FSA's approach to them. It can also be a very powerful way of changing behaviour. Obviously we want to encourage and promote high standards of behaviour, both in terms of our market integrity and our protection of consumers' objectives…"

Enforcement as a credible deterrent and senior FSA staff’s influence over enforcement policy

The FSA has invested considerably in developing its capability to deliver a credible deterrent and the FSA appears determined to have a real impact. It states that to achieve a credible deterrence wrongdoers must “realise they face a tangible risk of being held to account" [379] It is submitted that the deterrent effect of enforcement proceedings is in part about the extent of the FSA’s readiness to use enforcement proceedings in cases where it might have previously dealt with a matter through supervisory tools. The emergence of FSA enforcement is submitted as in part a reaction to the FSA’s experience of its enforcement decision making before the Financial Services and Markets Tribunal. This is explored in detail when considering the FSA’s response to Tribunal decisions in Chapter 7 of this thesis.

There has been a clear shift in the approach to enforcement by the FSA associated with changes in senior personnel at the Authority including the appointment of a succession of heads of the enforcement division. Andrew Procter the FSA’s head of Enforcement between December 2001 and 2005 was in place from the time that the FSA assumed its full powers formally under the 2000 Act and at a time when the FSA was widely criticised for operating an opaque and bureaucratic approach to enforcement [380] . During Procter’s time at the FSA he was credited with introducing change to elements of the FSA’s internal enforcement procedures and through effective targeting of FSA’s resources reducing the number of open enforcement cases from 600 in around 2001 to 170 and speeding up its investigations from on average of 16 months to 11 months [381] . Procter’s time at the FSA also coincided with a number of high profile cases bringing both success and criticism for the FSA. The reputation of the FSA’s enforcement process was damaged following its controversial investigation and settlement of split capital investment trusts. However, in 2004 the FSA successfully completed its investigation into Market Abuse by Royal Dutch Shell and imposed its largest Market Abuse financial penalty. [382] It was however the Tribunal’s criticism of the FSA enforcement procedures in the Legal and General Assurance Tribunal reference in 2004 (the Tribunal’s decision was albeit published soon after Procter’s departure from the FSA) that was perhaps the low point of FSA enforcement and lead to the Authority reviewing and making fundamental changes to its enforcement procedures [383] .

Margaret Cole the current head of enforcement was appointed in July 2005 and is associated with a tougher enforcement activity than her predecessors. Cole aware that the history of insider dealing prosecutions in the UK has not been distinguished is reported to be determined to reverse and make the FSA feared and respected [384] . Since her appointment, Table 1 of this thesis shows that the FSA has taken [ ] market abuse cases and [ ] market abuse prosecutions compared to [ ] [385] Furthermore she can be credited with the 2009 review of financial penalties and the setting of a minimum £100,000 penalty for market abuse [386] . Much of the work done to promote enforcement as a credible deterrent can be attributed to Margaret Cole’s influence at the FSA including the development of a larger and more able enforcement division. At the time of Cole’s appointment in 2005, the FSA’s enforcement division comprised 250 staff, although Cole has gone on record as confirming that the FSA did not have enough staff with sufficient legal and financial experience to prosecute big cases. [387] The enforcement division has since axed many of its less experienced staff while at the same time increasing its head count to around 430, which includes a number of significant senior appointments. Since 2005, the FSA has raised the profile of its enforcement division, shaking off the embarrassment of losing a number of high profile market abuse cases before the Tribunal and has reached the stage now where it is not only seen to be approaching cases in an aggressive manner but also makes a virtue of losing cases as a necessary element of a tougher and more active enforcement cases load [388] . Although much political capital is now being made of the need for tougher regulation and enforcement and the necessity of moving away from light touch regulation, Market Cole has distanced the enforcement regime from such criticism, stating, “I never was light touch. That is an oxymoron in enforcement...We have been arguing for tougher sentences as a way to change behaviour for some years..." [389] There is, nonetheless commentary that the FSA’s aggressive enforcement stance is in part a response to criticism of the FSA during the financial crisis of 2009 and is about self-preservation [390] .

The work done by Cole to enhance the capability of the enforcement division certainly has led to an increase in enforcement activity and one wonders whether successes in high profile cases such as the insider dealing prosecution of Malcolm Calvert [391] , Market Abuse case before the Tribunal and Court of Appeal in the matter of Winterflood [392] as well as the significant financial penalties being imposed in Market Abuse cases has a positive impact on the moral of enforcement division staff and the drive to pursue cases more vigorously. “The moral is positive...people in the division are motivated to now see so many cases coming to trial...we have the personnel we need for the work ahead of us" [393] 

The Impact of Risk-based regulation on the fairness of enforcement proceedings

In recent years the FSA drive to reduce the number of specific rules and move to a system of risk-based regulation together with principles based regulation have arguably each impacted the manner in which the FSA deals with enforcement [394] . Risk-based regulation has resulted in FSA promoting the idea that it cannot eliminate all risk from financial markets and that indeed that it does not seek to instill a zero tolerance regime. Such a regime referred to by FSA as risk-based regulation is in part motivated by FSA’s need to manage its own resources including those of its enforcement division, necessarily resulting in the FSA having to chose carefully which Market Abuse cases are important enough to prosecute and which of those it considers are acceptable to be left or dealt with by utilising others of its regulatory tools. Indeed the FSA (as discussed previously) has in the past made it clear that it is not a enforcement led regulator, meaning that its enforcement function does not operate its own objectives and goals but rather provides enforcement support for those regulatory goals set by the FSA. In simple terms this has the affect of the FSA’s enforcement function responding to enforcement referrals made to it by the FSA’s supervisory functions. Although this relationship between the FSA’s senior management, supervisory functions and enforcement function is not determined by statute, it does materially shape the way the FSA operates and the way it is perceived by the investment community. An effective and proportionate use of enforcement powers impacts considerably upon the FSA’s ability to meets its Statutory Objectives. [395] There is a strong interconnection between the FSA’s investigation and enforcement powers and effective prosecutions and regulatory proceedings. As a risk based regulator with limited resources, the FSA prioritises its resources towards the areas which pose the biggest threat to its Statutory Objectives and thus not every instance of potential market abuse or regulatory breach will result in an investigation or enforcement outcome. Such an approach very much supports the FSA’s desire to achieve a balance between regulatory intervention and a regime that allows some risk to materialise. This approach is illustrated by the following comments

‘After all, most markets have some element of market failure. Often those who favour intervention argue that any market failure justifies intervention. But, the real test goes beyond that: there must be both market failure and the prospect that intervention will provide a net benefit. This involves recognising that regulatory intervention has a cost; and that regulatory intervention, like reliance on market operations, has a non-zero probability of failure….’ [396] 

The FSA’s selection method for cases involving authorised and approved persons and in market abuse is determined by both its strategic planning such as priority and thematic work and its decision making on individual cases. The FSA will not however only take action in priority cases and underlying its case selection method is a determination, expressed in EG 2.8, to deal with particularly serious cases where enforcement action is necessary, such as those that have a particular significance in a market or involve financial crime. In respect of individual case assessment the FSA considers that the nature of its overall relationship with a firm has a bearing on whether or not the use of its enforcement powers will support its overall regulatory objectives. Confirming this point EG 2.33 provides that:

“...using enforcement tools will be less likely if a firm has built up over time a strong track record of taking its senior management responsibilities seriously and been open and communicative with the FSA...."

Conclusion

None of the FSA enforcement tactics come without risk and FSA will take cases where the outcomes are uncertain. FSA accepts that it needs to test the boundaries, needs to establish itself as a feared prosecutor, needs to establish regulatory jurisprudence and identify tests and standards in principles based regulation.

Market Abuse and Insider Trading is a strategic priority for FSA, but not all cases are referred to Enforcement. FSA has said that where it sees evidence that amounts to Market Abuse it will pursue cases under that regime, but where conduct doesn’t amount to abuse may deal with matter under high level principles, particularly when dealing with an approved person. [397] In general the absence of enforcement jurisprudence in final notices arising from settled cases is unhelpful as it does not encourage acceptance or settlement of cases particularly with regard to the appropriateness of the level of penalties. Even where an analysis indicates there has been a market failure, FSA is not always convinced that regulatory enforcement or intervention is the most effective way to deal with the matter. It is of the view that market failures can also be addressed using other mechanisms such as using its considerable influence with market participants and their trade representatives to change firms' policies, processes and behaviours. The downside, to FSA’s approach, however, is that as a single regulator for the UK financial Market, FSA resources are widely stretched across its huge jurisdiction.

In conclusion the FSA enforcement process appears arbitrary and the decision making process designed to encourage enforcement cases to be settled prevents appropriate jurisprudence for both actions taken and level of penalties.

CHAPTER 4: THE LEGAL BASIS FOR REGULATOR ACCOUNTABILITY

“The second crucial advantage of the new regime is that it incorporates clear lines of accountability. There is clearly no doubt about who is responsible in the event of a regulatory failure. I may live to regret that clarity of responsibility, but at least as a theoretical proposition it is attractive..." [398] 

Introduction

The consideration of the structure of the civil law market abuse regime in Chapter 2 illustrates that although the regime is rooted within a statutory framework, the FSA is vested with significant power to set expectations of the conduct it considers to be abusive, and to provide guidance through the code of market conduct (MAR). Moreover, when one adds the FSA’s influential self interpretation of the statutory powers of enforcement considered in Chapter 3, it is beyond doubt that the FSA has considerable power to set and enforce standards of market conduct. Through these powers the FSA can have a significant impact on market protection. Moreover the performance of the FSA’s supervisory and regulatory activity can affect both positively and negatively the activities of persons trading in the financial markets. The administrative law dynamic presented by the concentration of regulatory power has been of concern for legal commentators. In Wade and Forsyth it is commented that “...The drastic powers of the regulators to investigate, to make rules, to impute fault and to impose penalties involve a mixture of legislative, administrative and judicial functions and pose obvious problems of administrative justice...". [399] Regulation is not however an industry independent of Government and nor should it be free from responsibility. The question, therefore should be, to whom should a regulator be accountable for its actions and how should it be made to account for its decisions. Goodhart and others observe [400] that in democratic society, regulatory accountability takes four forms: Accountability to the market place, accountability to the industry itself, accountability to political authorities and accountability to the judiciary for the legality of its actions and decisions. These four forms if in place establish a framework of accountability, where it is submitted, no single accountability form can in isolation from the other forms, provide effective oversight of a regulators activities and performance.

Although the framework of accountability provided in the 2000 Act will be touched upon in this Chapter in order to demonstrate a Statutory application of accountability theories, this thesis is concerned with the effectiveness of the Tribunal in providing legal accountability.

This chapter will consider mechanisms of accountability that best serve regulation of the financial services market and in particular the accountability mechanisms necessary to support the civil law based system of Market Abuse. To fully appreciate the accountability framework established in the 2000 Act and assess how effectively they operate, consideration will be given to traditional methods of accountability including, those of Political accountability, arising where a regulator or agency is required to account to Government of Parliament for its past and future actions and conduct; legal accountability where the Courts or an independent tribunal reviews the actions of the regulator. The Chapter will then go on to consider extended frameworks of accountability that have arisen as a consequence of the devolution of government administrative functions to regulatory agencies. Such extended or modern accountability frameworks rely on an interdependent matrix of reporting, consulting, oversight and legal review, where each supplies its own expertise and accountability for one particular area or approach, but where full accountability is only achieved if the framework as a whole operates effectively. One has to consider whether the true measure of the success of accountability is based on the extent to which it influences change following the event; or it can prevent erroneous of excessive decisions from being taken.

Accountability framework in the financial services and markets act 2000

Chapter 1 considered that the criticism about the lack of clear regulatory objectives in the Financial Services Act 1986, led Parliament to create a regulatory constitution containing a cocktail of measures to hold the FSA accountable for its activities. [401] In particular the FSA has a duty to consult in relation to its rule making and guidance function. Under s 8 it must consult with Consumer and Practitioner Panels (created under S10 and S9 respectively) and under s 65 (in relation to a new approved persons code), s 155(in relation to new rules) and s 121 (in relation to a new code of market conduct) it must consult with the public. The FSA has further established a number of other panels with whom it consults in connection with the discharge of its functions. This includes a Small Business Practitioner Panel, a Training Advisory Panel and Collective Investment Scheme Forum. Finally, established under para7, Sch 1 of the Act, an independent Complaints Commissioner, whose role is to adjudicate on any complaints about the discharge of the FSA’s powers and make, is able to recommendations for change to the FSA.

In practice these measures create an interplay between the FSA’s statutory objectives, obligation to report to Parliament, control by the Treasury and references regarding FSA decision making to the Tribunal [402] . Many of the accountability measures can be interpreted as checks and balances over the FSA’s activities and link the Statutory Objectives with the FSA’s mode of operation and method of governance. It is, however the breadth of enforcement powers granted to the FSA under the 2000 Act that have warranted special arrangements in the 2000 Act. The regulatory functions granted to the FSA have created a situation where the FSA is in the position of legislator, law enforcement agency and judiciary. To deal with concern raised by the scenario that the FSA is in the unique position of enforcing the rules that it makes (as discussed in Chapter 3), the Act requires that the investigation and enforcement recommendation functions of the Authority are carried out separately from the FSA’s functions of taking of decisions and issuing of statutory notices. Section 395(1) to the Act provides that the FSA must determine the procedure that it proposes to follow in relation to the giving of a) supervisory notices; and b) warning notices and decision notices. Section 395(2) to the Act provides that procedures must be designed to secure, among other things, that the decision which gives rise to the obligation to give any such notice is taken by a person not directly involved in establishing the evidence on which that decision is based To meet this requirement the FSA Board has established the Regulatory Decisions Committee [403] to takes those enforcement, authorisation and supervisory decisions that are of material significance for the firms and individuals concerned. The principle of separation is made more effective by the committee’s members, drawn from industry and consumer groups who introduce independence and objectivity to the committee’s deliberations. The FSA has stated that notwithstanding the statutory requirement to separate its investigation and recommendation functions from its decisions functions, it is also vital that the FSA decisions and disciplinary process is perceived as being fair to ensure confidence in the system. In relation to the enforcement of the United Kingdom’s Market Abuse regime, the 2000 Act has sought to meet the requirements of Article 6 by establishing a fully independent Tribunal, administered by the Lord Chancellor's Department. In particular under s 132 the Tribunal acts as an adjudicator of those decisions of the FSA specified under the 2000 Act, referred to it by the aggrieved person [404] . Article 6(1) of the European Convention on Human Rights provides that in the determination of civil rights and obligations everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.

Theories of accountability

When assessing the scope and effect of accountability measures it is important to draw a distinction between those measures that related and hold to account how the regulatory system impacts on the individual or single institution and those measures that hold accountable regulatory decision making as it relates to the financial system and market as a whole. Traditionally, those aggrieved with threatened or actual administrative decision making (including that of regulatory agencies) have relied on a right to seek Judicial Review. Legal accountability in terms of judicial review provides only a retrospective and backward looking review and there has been argument that Judicial Review is not an appropriate alternative to Parliamentary accountability. [405] Nonetheless legal accountability has an important role to fill particularly where it requires the FSA to prove an enforcement cases before an independent legal tribunal of both fact and law. In Chapter 5 there will be consideration of the regulatory framework in which the Tribunal operates which provides an enforcement structure in essence allowing the FSA to propose Market Abuse enforcement which the respondent may chose to accept without any need for the matter to be referred to any judicial body for consent. Only if the respondent objects to the FSA’s proposed outcome does the matter have to be referred to the Tribunal.

The rise of regulatory agencies and the need for accountability.

UK society has seen the growth of the regulatory state. The UK Government has experienced a shift away from the direct provision of public services associated with a welfare state, towards oversight of provision of public services by others. Scott observes that this shift is in part a recognition that “total control" models of state activity fail to deliver desired outcomes [406] . He expresses these concerns in a number of ways including that of the limited capacity of central-state institutions to know what is best provided by state intervention. He observes that the response to these concerns has been a withdrawal of government institutions from much operational activity with the reservation of certain policy tasks and a marked expansion of oversight functions. [407] These observations apply equally to the FSA relationship with the UK government and the Government’s desire to ensure that the FSA provides appropriate, and timely expertise towards the regulation of the financial services industry and is able to apply its regulatory activity in such a way that it can respond to the ever developing creativity of the financial community. It is submitted that the expertise necessary to provide such response is best drawn from the investment community given its knowledge of the abuses which need to be regulated and its proximity to the scene of activity of financial institutions and market participants and that it is not realistic for Government to have to supply in-depth knowledge of financial markets. The rise of privatised industry in the 1980s and 1990s together with the gradual reduction of anti-competitive practices [408] led to the establishment of frameworks of regulation to support and often encourage the transfer of many of the administrative and quasi regulatory functions from central Government to externally operated administrative agencies, often referred to as Quangos. [409] It has long been a principle within the constitution that Government through its ministers are accountable for the performance of their activities and such accountability extended to the Government’s involvement in the running of nationalised industry as well as its administrative functions serving privatised industry and social activities by the general public. The 1988 report to the Prime Minister entitled “Improving Management in Government: the Next steps" recommended that agencies be established –either within or outside of government departments – charged with the responsibility of overall management of the departments [410] . By 1996 some 130 agencies had been created [411] . The report noted that the main controls would continue to lie with ministers or a Permanent Secretary, but once policy objectives and budgets had been established, the agency should have as much independence as possible in deciding how its objectives should be met [412] . The crucial question raised in the report was that of responsibility and the report suggested that the head of the agency should be given personal responsibility to achieve the best results. The report considered the future role of ministers and recommended that ministers continue to be wholly responsible for policy but that it was unrealistic to suppose that they could have in-depth knowledge about every operational question. The report stated, “…the convention that they do is part of the cause of the overload which was observed. We believe it is possible for Parliament, through Ministers, to regard managers as directly responsible for operational matters…" [413] This statement, clearly aimed at the notion that managers of governmental agencies be given freedom to exercise their competence of management without meddling from politicians, does not address the question of how to maintain accountability of the managers performance of the operational matters. Although the report talks in terms of managers of agencies being responsible for their activities it did not address the question of an appropriate framework to monitor or ensure accountability of the agencies activities. The 1998 report had nonetheless post dated the financial services regulatory regime created by the Financial Services Act 1986 and that regime had created a rudimentary framework of accountability by ensuring that SIB was answerable to the Secretary of State and he to Parliament and by what Professor Gower referred to as the “nuclear deterrent" of the removal of the SIB’s delegated powers or more realistically, through the power of the Secretary of State and the Governor of the Bank of England to dismiss the governing body of SIB’s board [414] . Although the 1986 Act provided a simple accountability framework (as explained in Chapter1), a number of failures in the financial services industry were blamed in part on a lack of appropriate accountability and led to the creation of the single regulator regime under the Financial Services and Markets Act 2000.

In 2004 a House of Lords Select Committee [415] conducted an inquiry into wide issues of regulator accountability and made twenty four recommendations for improvement. The Select Committee identified three essential elements of regulator accountability being: the duty to explain; exposure to scrutiny; and the possibility of independent review. [416] The Committee postulated what it called a three hundred and sixty degree view of accountability where regulators are subject to multiple accountabilities, including to Parliament, Ministers, citizens, consumers and the Courts [417] . The role of the Courts in providing legal accountability of regulators decision making was viewed by the Committee as a powerful weapon serving as a deterrent to regulators ensuring that they are rigorous in reaching decisions. The Committee was however wary of the delay and cost associated with traditional Judicial Review, believing instead that there should be a more accessible and efficient appeals mechanism. It reported, “...Our view is that the power of the regulatory state needs to be matched by effective rights of appeal based on the merits of the case. The only right of appeal open to many regulated bodies is the very restricted one of judicial review. This is normally expensive, time consuming and narrow. Delays leave the regulated in a state of potentially costly uncertainty. For many, therefore, it is not a viable option..." [418] One of the Committee’s recommendations was for regulatory systems to ensure that the regulated had opportunities to appeal on the merits of their case, something that traditional Judicial review did not allow for [419] .

The growth in non-governmental regulatory agencies raises the question of how to maintain and ensure the responsibility for regulatory agencies such as the FSA and how best to establish an effective framework of accountability. Indeed the establishment of a regulatory agency to take over previous government oversight and governance of commercial activities, whilst remaining administratively effective, creates a system where government is removed from accountability to the electorate for the effectiveness of the regulatory regime in question. In fact, regulatory regimes often create institutions that are partially or wholly independent from elected politicians and yet are given authority to make politically sensitive decisions. Importantly, in order to appreciate and define required levels of accountability it is necessary to develop an understanding of what is meant by accountability, the potential outcomes of available accountability mechanisms as well as the potential alternatives to the accountability norms in use in other regulatory systems. Academic and practitioner debate regarding accountability in a regulatory regime has traditionally centred on the notion that accountability is best achieved by employing political oversight to ministers and parliament and legal accountability to the Courts through Judicial Review [420] . Traditionally, however, the achievement of accountability generally involves ex-post oversight of a person or institution by another person or institution. Morgan and Yeung argue [421] , that implicit in a regime of ex-post oversight is a notion of simultaneous communication and justification that can be concretely described by answering the question “who is accountable, to whom and for what?"

To assess how best to ensure the efficacy of an accountability framework it is important to begin by identifying an appropriate definition of accountability. Colin Scott in Accountability in the Regulatory State defines accountability [422] as “…the duty to give account for one’s actions to some other person or body." This attempt at defining accountability may be considered an overly simplistic definition. Scott opines that it is helpful to keep distinct the three sets of accountability questions: “who is accountable", “to whom" and “for what." He opines, however, that the concept of accountability has traditionally been drawn narrowly by public lawyers, to encompass the formal duties of public bodies to account for their actions to ministers, Parliament and to the Courts [423] .

Accountability models

Narrow and extended models of accountability models

In defining accountability, Scott offers the view that accountability in its narrow form ensures that all public bodies act in a way that conform to the juridical value of legality and thus correspond with the democratic will. [424] He expresses concern about such a narrow application through his observation of the need for discretionary authority and decision making. This concern must be right and would apply to the rational for the development of the FSA as an expert financial regulator whose decisions impact individual investors and market participants. Furthermore, as discussed in Chapter 3, the application of such expertise in a prompt and flexible way will from time to time require the FSA to exercise judgment about its enforcement decision making how it is to operate, thus requiring the development of juridical approaches to fairness and reasonableness in decision making. A narrow form, of accountability can often fail to address adequately the needs and rights of individual participants, but Scott observes [425] that even where accountability models are developed around a broader approach that attempt to measure an authority’s performance against wider values, such as openness and value for money, subjective measurements become necessary which do not lend themselves easily to objective assessment. Scott highlights the growth of extended accountability as a response to the inadequacy of the narrower model where the extended model relies on a series or network of linkages between a variety of accountability mechanisms some designed to provide oversight of and support regulatory legitimacy, others to test regulatory decision making and others to test regulatory values. Scott refers to the extended model as falling into two models: the interdependence model where the traditional models of accountability in which formal parliamentary, judicial and administrative mechanisms are supplemented by an extended accountability giving rise to a model where interdependent actors each supplying expertise and being dependent on each other and the redundancy model.

Interdependence

Interdependence models of accountability entail a structure in which the traditional accountability methods such as Parliament and the Judiciary are supplemented by extended forms of accountability in which there is dependency between each accountability provider in a system where there is a distribution of both formal and informal sources of authority such as legitimacy, information and expertise. Indeed in such a structure each accountability provider may not only have a specified accountability objective but also hold to account a range of items. In such a model the providers themselves have to constantly account for some or more of their acts to others within the structure. The regulatory framework in the 2000 Act, illustrates accountability lines and oversight activity that can be described as interdependent. In the context of the Market Abuse regime, the interdependence model is evident in the relationship between the roles of the Financial Services Practitioners Panel, the Consumer Panel, HM Treasury and the Tribunal. Whilst each of the aforementioned bodies have obligations specified under the 2000 Act, the interrelationship between the four bodies can and does have a considerable impact on the manner of the FSA’s handling of Market Abuse cases as well as the market and public perception of the effectiveness of FSA’s activity, such as in FSA giving evidence before the Treasury Select Committee. [426] It is unclear whether Parliament intended or even considered the interrelationship of its accountability providers in the context of the interdependence model of accountability. It is evident from the records of debate during the Financial Services and Markets Bill passage through Parliament, that the Government, although keen to ensure appropriate accountability and controls were put in place to ensure that the FSA did not fall into the traps encountered by its predecessor SIB, gave little consideration to the overlapping nature and inter-reliance that would eventually be created by the accountability network being created. ‘...the Government had considered various aspects of accountability. First the consultation responses generally acknowledged the importance of effective accountability arrangements to Ministers and Parliament. Second, most of those responses which expressed views on the accountability framework focused on suggestions about how to ensure that the regulator takes proper account of the views of practitioners and consumers...’ [427] 

Nonetheless Scott is of the opinion that identification of interdependence has important implications for accountability structures and that even in more traditional or monolithic structures an intricate but opaque web of control and accountability exists that is akin to more modern instruments of interdependent accountability [428] . It is submitted however, that in practice although the roles of each of the 2000 Act’s accountability institutions can contribute to the overall accountability of the FSA, there is little formality to the inter-relationship between each of them. Both the Consumer Panel and Practitioner Panels operate to express the views of the sector of the financial markets they represent and are often at odds with each other. Similarly HM Treasury often takes a distanced view from the day to day operation of the FSA. Arguably this leaves the combination of the activities of Treasury Select Committee and the Tribunal to impact in a fragmented way upon the FSA’s functions and Market Abuse decision making.

Redundancy model

A feature of Scott’s redundancy model is that at least two independent mechanisms of accountability are deployed to ensure the system does not fail, albeit both systems are capable of working on their own. The basis of the redundancy system is that should one system fail then the other will still ensure that regulator accountability is maintained. In essence the redundancy system presents a fail-safe mechanism [429] . It can never be certain whether those responsible for the design of accountability systems intend to establish redundancy featuress of whether examples of redundancy in accountability structures are an unintended effect. Scott believes that examples of redundancy are a product of design and contingency [430] . In the context of the current financial services regulatory system it is difficult to identify whether it’s accountability network intentionally incorporates redundancy model features or whether it is merely a complex web of interdependent accountability where each player has distinct responsibility for accountability of elements of the FSA’s duties which coincidentally overlap with the duties of others. Whilst the failsafe nature of redundancy provides clear advantages of added protection to the system it does nonetheless increase the cost and administrative burden of the system. In terms of legislative accountability (as discussed later in Chapter 5) there is a seeming overlap between the role of the Tribunal as well as the Courts jurisdiction in providing Judicial Review of the FSA’s administrative functions [431] . In certain situations both the Courts and the Tribunal could have authority to deal with matters of complaint thus providing overlapping capacity to ensure accountability of the FSA’s decision making. This model, however, is neither an express or implicit attempt to provide a judicial accountability failsafe mechanism, but rather two alternative methods for allowing an aggrieved person to review and litigate a grievance concerning FSA’s decision making. Indeed,, as will be explored Chapter 5) the jurisdiction of the Tribunal and the Courts is distinctly different to that of a Tribunal being given a specific and active role in the FSA’s enforcement decision making. The downside of the structure however, is that the Tribunal’s only jurisdiction and powers are those prescribed in the 2000 Act. As such and unlike the Courts, it has no inherent jurisdiction, thus lacking the ability to deal with FSA enforcement decisions in a more lateral manner. Given the Tribunal however, it is unlikely that the Courts would consider an application for review against the FSA’s administrative decision making where a reference to the Tribunal is available [432] . Moreover, on analysis it is not the case that the Courts, or the Tribunal provide any overlap with the FSA Complaints Commissioner who is designated only to deal with matters relating to maladministration rather than an alternative method of handling enforcement disputes. The scheme rules state that [it] ‘ will not investigate a complaint…which it reasonably considers could have been, or would be, more appropriately dealt with in another way (for example by referring the matter to the Tribunal or by the institution of other legal proceedings).’ [433] In summary whilst the current accountability model provides areas where overlap resembling Scott’s redundancy model, on analysis each overlapping mechanism with a role in the Market Abuse regime contributes a discrete element of oversight., Each element capable of standing and operating independently of the other but each dealing with a specific area of alone

On a more subtle analysis, however, a redundancy model might be present in the FSA’s relationship between its Regulatory Decisions Committee and the role played by the Tribunal. Although the RDC was designed to overcome the Human Rights issue concerning lack of independence in FSA internal decision making the combination of RDC and Tribunal decision making might arguably gives rise to concerns for judicial accountability as it can provide aggrieved persons with the opportunity to make representations (in effect litigate) over an FSA decision on numerous occasions. The redundancy model presents particular problems. It is difficult to calculate how much of a redundancy model is adequate and whether any additional layer of accountability is inefficient. Equally, it should not be viewed as the panacea for accountability models. It can still be subject to the risk of complete failure of both sides of the model such as for example where information or data is intentionally hidden from both parts of the accountability structure.

Accountability and transparency

Over the years of regulatory development a relatively high degree of openness and transparency in financial regulators activities has developed. Whilst transparency aids an understanding of a regulators policymaking and rule making behaviour, often the handling and disposal of individual cases lacks transparency and can be covered in secrecy and lacking in formal disclosure or even understanding of information. While transparency enables negative feedback before or during a decision or action, accountability mechanisms can constrain the extent to which a regulator and its office-holders might deviate from their responsibilities or operate in an un-controlled manner leading to them arriving at their chosen solution with the threat of external influence. Commenting on accountability prior to the creation of the financial Services Authority, Hadjiemmanuil stated [434] that public control over activities of the administration is only possible if these activities are characterized by openness and transparency and are subject to formal mechanisms of accountability, requiring the official decision-makers to justify their decisions and opening the way for corrective interventions in the event of administrative failure.

In the case of financial regulation, finding appropriate methods of accountability can be difficult because of the desire for functional independence of regulators. As will be seen from later comment in this Chapter, the desire for deference to regulators’ expertise and professionalism in their field as well as their ability to operate regulatory processes that meet both the technical demands of a complex financial industry as well as flexibility, the fast pace of development in financial services, does not sit well with more traditional methods of political accountability. Typically accountability to Parliament is the cornerstone of public life, however, the more independent an agency becomes the less meaningful accountability to Parliament becomes. Moreover because of the retrospective nature of traditional Parliamentary accountability, the extent to which Parliament can influence a regulatory agencies decision making becomes limited where individual cases are concerned [435] and gives rise to the appropriateness of traditional methods of legal accountability.

Legal accountability and individual claims

In a conventional sense legal accountability of grievances arising from losses caused by a public authority’s activities can be undertaken through actions in damages for compensation claims [436] . The English Courts have, however been generally been wary of imposing liability in respect of claims for economic loss concerning public authorities. In particular claims against financial regulators for failings in undertaking supervisory obligations have been unsuccessful. [437] The reasoning for rejecting such claims has included a series of public policy factors in the context of public authorities exercising a statutory discretion, including a fear that potential liability would prompt regulatory authorities to engage in defensive practices to avoid liability which might very well divert time and resource to avoid speculative claims. [438] Supporting such policy consideration, Lord Browne-Wilkinson has said “...the courts should proceed with great care before holding liable in negligence those who have been charged by Parliament with the task of protecting society from the wrongdoing of others..." [439] The common law restrictive position has however been supplemented by Section 19(1) Schedule 1, 2000 Act [440] allowing the FSA to discharge its regulatory functions with the benefit of a Statutory immunity from damages. Furthermore, recognising that the FSA’s functions are performed by individuals the immunity extends to any person who is or is acting as a member of the Authority’s staff for anything done or omitted in the discharge or purported discharge of the Authority’s functions and a person appointed to conduct investigations into complaints against the Authority. [441] At the Commons Report Stage, Melanie Johnson said in relation to the Statutory immunity, [442] 

“ This subject has aroused considerable interest and was considered in detail by the Joint Committee, which broadly approved the immunity proposed by the Bill, subject to certain proposals to strengthen the complaints arrangements… it is essential that we have a structure that allows the FSA to get on with its work efficiently and effectively…A strong and accountable regulator must be in the interests of the industry and consumers alike. Immunity is vital for delivering that aim. Without it, the FSA could be frustrated by potential law suits and red tape. It would be very easy to have frivolous litigation or to distract or hinder the regulator from carrying out its duties, which could have a detrimental impact on firms as well. The absence of immunity could make the FSA more risk averse and engender a more formalistic regulatory environment…We want the FSA to be a dynamic regulator, and that might mean taking some difficult or finely balanced decisions in cases where the answers are not black or white. The authority should not run the risk of beg sued as well…"

The wording of the Statutory immunity, does not however preclude a number of other alternative actions allowing the Courts to hold to account the FSA’s decision making where a non-damages remedy is sought, such as an injunction or Judicial review. (the FSA’s exposure for Judicial Review is explored further below). In two key respects however the immunity does not have effect where the act or omission can be shown to have been in bad faith or where it would operate so as to prevent an award being made in respect of an act or omission on the ground that it was unlawful as a result of S6(1) Human Rights Act 1998 [443] .

The impact of the common law and misfeasance in public office

The express exclusion of Bad Faith from the FSA’s statutory immunity exposes it to liability in the Tort of Misfeasance in Public Office. The Tort is an intentional one gives rise to a liability in damages, arising where public authorities such as the FSA or its officers commit malicious, deliberate or injurious wrong-doing [444] , thus requiring a certain state of mind. Given the FSA’s statutory obligations to regulate financial markets and protect the consumer there seems little doubt that it would be considered as a public authority for the purpose of the Tort. [445] 

Although liability for the Tort arises in situations where there is malicious abuse of power, deliberate maladministration and other unlawful acts causing injury, the basic essence of Misfeasance in Public Office is the wrongful discharge of a public duty motivated by malice [446] . Establishing such a malicious act is not alone sufficient. The tort is not one of strict liability and thus it is essential for a claimant to show proof of damage arising from the unlawful act. Confirming the need for proof of damage in Watkins v Home Office [447] , Lord Bingham stating, “...the primary role of the law of Tort is to provide monetary compensation for those who have suffered material damage...if public officers behave with outrageous disregard for their legal duties, but without causing material damage, there are other and more appropriate ways of bringing them to book..."

Although the existence of an unlawful act in the context of deliberate and malicious motivation suggest a high threshold, in order to show that the Tort has been committed a vital ingredient is showing knowledge (there are a number of instances in which claimants have been unsuccessful). [448] The detailed examination of Misfeasance in Public Office by the House of Lords in Three Rivers District Council v The Governors and Company of the Bank of England [449] set out a number of key observations and tests relating to the Tort. In that case the House of Lords confirmed that the Tort exists in two varieties. The first variety where there is targeted malice, exists where the public authority has actual knowledge that it is acting unlawfully. The second variety exists where the authority has knowledge that its unlawful acts would probably cause damage, which Lord Steyn described as ‘reckless indifference’ to the consequences in question. It is the this second variety which potentially creates the biggest threat to regulatory policy and decision making within a setting of wide discretion and selective risk-based enforcement as that operated by the FSA [450] , but which would require an appreciation of the meaning of ‘unlawful’ where the FSA is given discretionary powers within a statutory framework. [451] Testing whether a public authority has exceeded its lawful powers (Ultra Vires) are well defined in law [452] , however the question of whether an authority has unlawfully exercise its discretion is particularly challenging. Indeed the exercise of discretion often entails the FSA deciding the refrain from taking action and the House of Lords has considered that the Tort of misfeasance is concerned with preventing public officials from acting beyond their powers to the injury of the citizen, not with compelling them to exercise the powers they do have, particularly when they have a discretion whether to exercise them or not [453] . In Three Rivers Lord Millett stated “...The tort is misfeasance in public office, not nonfeasance in public office. The failure to exercise a power is not in itself wrongful. It cannot be equated with acting in excess of power..."

Providing the best analogy to the market abuse policy and enforcement activities of the FSA are cases against discretionary police powers. In R v Metropolitan Police Commissioner ex p Blackburn [454] it was confirmed that the Courts would only interfere in extreme cases where it could be shown that the police were neglecting their duty and in Adams v Metropolitan Police Commissioners [455] it was held that the Courts would not challenge the exercise of discretion unless it was not reasonably exercised. Finally, and in the context of the FSA’s risk based use of its limited resource [456] , in R v Chief Constable of Sussex ex p International Trader’s Ferry Ltd [457] the Court confirmed the police’s wide discretion concerning their operational decisions where finance or manpower limitations exist preventing continuous police protection.

It is perhaps the Courts deference to the operational and technical activities of financial regulators [458] that present the greatest challenge to anyone attempting to establish that the FSA has unlawfully exercised its discretion. Furthermore it is important to take into account that breach of duty is not the same as abuse of power as required in the Tort of Misfeasance in Public Office and it is unlikely that even a deliberate exceeding of the FSA’s powers is likely to be held by the Courts as an abuse of power. Confirming this point in Three Rivers Lord Millett “...a deliberate breach of trust is not dishonest if it is committed by the trustee in good faith and in the honest belief that it is for the benefit of those in whose interests he is bound to act, so a conscious excess of official power is not necessarily dishonest. The analogy is closer than may appear because many of the old cases emphasise that the Tort is concerned with the abuse of a power granted for the benefit of and therefore held in trust for the general public.." [459] 

The requirement for recklessness however would require that a claimant show that the FSA has acted more than just inadvertently or negligently. As expressed by Lord Steyn the public officer must act knowing that their act will probably injure the claimant, in the sense of not caring whether the consequences happen or not. [460] Although the FSA’s enforcement actions will be taken against one or more targeted persons, the consequences of such actions can have an impact on a wider audience such as third parties, investors, financial markets and exchanges. Furthermore the FSA’s market abuse policy making whether relating to the guidance and rules its sets in MAR or its criteria for taking enforcement decisions in DEPP and EG can if unlawfully set impact on the efficient operation of investment firms and investors. One has to question therefore the nature of the proximity between the FSA and claimant in order for a misfeasance claim to succeed. In Three Rivers it was held that the plaintiff must establish not only that the defendant acted in the knowledge that the act was beyond his powers but also that the act would probably injure the plaintiff or persons of a class of which the plaintiff was a member [461] and in Akenzua v Home Secretary [462] the Court of Appeal held that an action would be successful even if the identities of the eventual victims are not known, so long as it is clear that there will be such victims.

Individual claims under the Human Rights Act 1998

The exclusion from the FSA statutory immunity for claims arising from breaches of convention rights under the European Convention on Human Rights (ECHR) ensures the application of S8 Human Rights Act 1998 (HRA) and thus allows a Court to make an award against the FSA where its actions are incompatible with Convention rights. Although a number of ECHR convention rights (such as Art 8 which grants respect for a person’s private life) apply to the FSA’s information gathering and investigation powers, which is outside the scope of this thesis [463] , it is the FSA’s compliance with a person’s right to a fair trial within Article 6 that has the greatest impact on its market abuse enforcement decision making.

Under S8 HRA the English Courts may deal with breaches of Article 6 by making an award, including injunctive remedies where a person might seek to prevent the FSA from taking threatened action in breach of that right. In the Government’s White Paper ("Rights Brought Home") under "Remedies for failure to comply with the Convention": at 2.6 on the question of awards of compensation and the importance of a balance between the interests of the victim and those of the public as a whole, it was stated

“...What remedy is appropriate will of course depend both on the facts of the case and on a proper balance between the rights of the individual and the public interest. In some cases, the right course may be for the decision of the public authority in the particular case to be quashed. In other cases, the only appropriate remedy may be an award of damages…"

Damages, however, may only be awarded to persons that have suffered a loss as a result of FSA actions that have violated the ECHR if the Court is satisfied in all the circumstances that such an award is necessary to afford ‘just satisfaction’ to the affected person. The term ‘just satisfaction’ is derived from Article 41 ECHR. The English Courts are required by S8(4) HRA to take into account principles applied by the European Court of Human Rights which and although there are few reported cases has applied the term ‘just satisfaction’ in a way consistent with English law on damages in Tort, that is, to put victims in the position they would have been had their rights not been violated [464] .

Quantifying damages for procedural breaches of an Article 6 right can be difficult as often the decision being challenged before the Courts might not have been any different had a compliant procedure been followed. In R (Greenfield) v Home Secretary [2005] [465] Lord Bingham stated that the finding of a procedural violation is “...in itself, just satisfaction for the violation..." The requirement to show causation is an essential element of any claim for damages for a breach of a convention right and thus any FSA enforcement decision making in breach of Article 6, although affording the right to a claim under S8 HRA is unlikely to give rise to an award of damages.

The European Court’s willingness to depart from its practice of finding a violation of Article 6 to be, in itself, just satisfaction under article 41 has arisen only where it finds a causal connection between the convention violation and the loss attributable to the violation, such as loss of earnings or profits. Confirming this point, in Kingsley v United Kingdom [466] : "The Court recalls that it is well established that the principle underlying the provision of just satisfaction for a breach of Article 6 is that the applicant should as far as possible be put in the position he would have enjoyed had the proceedings complied with the Convention's requirements. The Court will award monetary compensation under Article 41 only where it is satisfied that the loss or damage complained of was actually caused by the violation it has found, since the State cannot be required to pay damages in respect of losses for which it is not responsible."

The extent to which the FSA is in practice susceptible to a claim for a breach of Convention rights is limited by the accountability machinery within the 2000 Act. S8(3) HRA makes it clear that in assessing an appropriate HRA award the Courts should take into account other available relief and remedies. In Anufrijeva v Southwark LBC [2003] [467] , Lord Wolf in order to encourage a proportionate resolution to damages claims set out a requirement that in an application for permission to commence HRA proceedings, claimants should explain why recourse should not be had to alternative remedies. Given the availability of recourse to the FSA’s internal Complaints Commissioner in relation to matters of conduct, the Tribunal in relation to individual market abuse enforcement decisions plus the difficulty in establishing causation in procedural violations one has to question the likelihood of HRA claims against the FSA being sustainable.

Judicial review in a statutory regime with fundamental protections.

Limiting the scope of the FSA’s Statutory immunity means that it is still exposed to Judicial Review. That is the review of the legality of what has been or is proposed to be done, which has traditionally been relied on to regulate and maintain accountability of Public Authorities including regulatory agencies [468] . It is settled law that Financial Regulators such as the Financial Services Authority, satisfy the public function test necessary to bring them within the scope of an application for review. [469] Even prior to the 2000 Act, Judicial Review was used to challenge the decision making of SIB and the Self Regulating Organisations including enforcement decision making of financial regulators [470] . The general grounds of review of the FSA’s Market Abuse decision making are that it has acted Ultra Vires or has operated with procedural unfairness, (also known as Wednesbury unreasonableness). [471] The unreasonable test, however has been a high one, presenting a particular challenge for those seeking to challenge a regulators decision making. Whilst the Courts have not been prepared to set aside an Authorities decision making because it considers it unreasonable, they have intervened if as Lord Green MR stated in Wednesbsury the decision was “...so unreasonable that no reasonable authority could ever have come to it..." [472] 

In Council of Civil Service Union v Ministers for the Civil Service [1985] [473] (the GCHQ case) Lord Diplock distilled the grounds for judicial review under the headings of ‘illegality’, ‘irrationality’, and ‘procedural impropriety.’ In fact Diplock divided the Courts review of public authorities acting Ultra Vires into the two categories of ‘illegality’ and ‘irrationality’ with the irrationality category being Diplock’s name for Wednesbury ‘unreasonableness,’ being a test that is applied in regard to a public authority exercising a power it does have but in an extreme manner [474] . In R v Ministry of Defence ex p Smith [1996] [475] the Court of Appeal in adopting the irrationality test confirmed that it was one which was applied based on the circumstances of each individual case [476] 

Moreover a significant characteristic of the law of modern Judicial review is the extent to which Judicial discretion is applied. Professor Adam Tomkins identifies strengths in the role of judicial discretion but also that it can give rise to a risk of judicial uncertainty. “The advantage of discretion is that it can facilitate valuable flexibility in the law. But if overdone such flexibility can easily descend into uncertainty, unpredictability and even arbitrariness" [477] . Given the inherent discretion of the Courts in Judicial Review and the strictness of the irrationality test, it is important therefore to consider the extent to which the Courts would exercise discretion in market abuse enforcement cases.

Theoretically therefore each of the strands of judicial review extend to areas of a regulators policy making and decision making and will likely be based on either irrationality or procedural impropriety. The extent, however to which individual market abuse enforcement warning and final decision are open to review is significantly curtailed by the Courts general deference to expert regulatory decision making and the availability of the Tribunal under it S127 2000 Act jurisdiction. In Wildman v Ofcom [478] the Court recognised the importance of a regulators expertise and considered that only in exceptional circumstances should it interfere with the regulators decision making. “...the Court must exercise a high degree of caution before interfering with a decision such as the present, and do so only if it is shown that there has been real unfairness to a candidate or a significant error of law or other error giving rise to the power, on judicial review, to quash the decision..."

Proportionality in Judicial Review

Domestic Courts have a duty to apply EU law principles and thus apply the test of proportionality in cases relating to a point of EU Law. In particular S6(1) of the Humar Rights Act 1998 provides that ‘it is unlawful for a public authority to act in a way which is incompatible with a Convention right.’ The Convention Rights set out in Article 6 have particular impact on the enforcement functionality of the FSA, raising issues regarding the right to a fair trial (Article 6 (1)), the right to a hearing within a reasonable time (Article 6 (1) ) and the question of the prosecutor needs to be ‘independent’ and ‘impartial [479] ’ The leading case on proportionality is that of R (Daly) v Secretary of State for the Home Department [2001] [480] in which it was identified that first the doctrine of proportionality may require the reviewing Court to assess the balance which the decision maker has struck, not merely whether it is within the range of reasonable or rational decisions. Secondly the proportionality test may go further than the traditional grounds for review inasmuch as it may require attention to be directed to the relative weight accorded to interest and considerations. Hickman in providing an analysis of different versions of the proportionality test [481] shows a three part formulation where the Courts consider [482] :

Whether the measure was suitable to achieve the desired objective,

Whether the measure was necessary for achieving the desired objective,

Whether it nonetheless imposed excessive burdens on the individual.

It is with cases relating to the FSA’s calculation of appropriate penalties individual cases and the exercise of its discretion in regard to the selection of cases for enforcement as well as its setting of its codes of conduct that might expose the FSA to claims for disproportionate treatment. Craig offers guidance on how proportionality can be applied in cases relating to a person’s rights, penalties applied and the exercise of discretion but generally observes that the Courts application of the proportionality test will result in them deciding how intensively to apply the aforementioned criteria and thus there might well be differing results depending upon the circumstances of the case. [483] 

It is unclear whether the Courts consideration of proportionality will in future be applied as an extension of the common law Wednesbury and GCHQ tests [484] or be limited to questions related only to the UK’s Human Rights obligations. Tomkins considers that the Courts will embrace proportionality relating to non-convention rights [485] and Craig considers that it is likely that proportionality will exist as an independent area for review within UK domestic law, amongst other things because the Courts application of the Wednesbury test is moving closer to proportionality and the EC and HRA will acclimatise the English Judiciary to the concept [486] . He further argues that it is advantageous for the same test to be used with claims under EC law, the HRA and non HRA domestic challenges [487] .

Self Contained legal accountability within the Financial Services and Markets Act 2000

In R v Davies and Ors v The Financial Services Authority [488] the Court of Appeal confirmed that the FSA’s functioning within a framework providing fundamental protections including the right to refer the FSA’s enforcement decision making to the Tribunal, means that only in exceptional circumstances will applications to review the impact of the FSA’s decision making procedures be entertained. Such reluctance to allow judicial review to interfere with the role of the Tribunal was followed in R (Griggs) v The Financial Services Authority [489] where an application was made following the FSA decision not to issue a preliminary finding letter prior to the issue of a Warning Notice. [490] Such process is set out in the FSA’s Enforcement Guide (EG). Mr Griggs was the director and Chief Executive of Pacific Continental Securities (UK) Ltd a regulated firm which went into liquidation in June 2007. The FSA was concerned that it might be unable to meet the S56 Statutory time limit [491] for taking enforcement action against Mr Griggs (an approved person) if it issued a preliminary findings letter. It issued him with a Warning Notice on 2 June 2008 and gave Mt Griggs only 13 weeks in which to provide written representations about the content of the Warning Notice. Mr Griggs applied for permission to apply for Judicial Review of the process followed by the FSA. Burnett J following the decision in R (Davis and others) v the Financial Services Authority said that the FSA’s concern about the S56 Statutory two year time limit was good reason for it adopting a practice other than that set out in EG and in any event the EG did not give rise to any enforceable legitimate expectation as in particular because EG made clear that issuing a Preliminary Findings letter and the opportunity to respond to it was not a practice that would be followed.

The enforcement decision making process established under the 2000Act, in creating a mechanism for a full review of the FSA proposed enforcement case by the Tribunal effectively excludes any exposure for the FSA’s enforcement decisions being subject to Judicial Review. Indeed, from an applicant’s standpoint the mechanism established by the 2000 Act establishes a regime that is likely to offer greater assistance for the Judicial intervention in individual cases as Judicial review, and as illustrated above, offers only a blunt instrument for challenging enforcement decisions, in part because the jurisdictions of the Courts limits the review to the decision making process of the regulatory agency as opposed to it being a full appeal of any decision. Moreover, applications for review by the time the time that an application for review is made, the regulator decision will already have been reached thus necessitating an additional injunctive application if the regulatory decision is to be suspended or stayed. Given the seeming advantages of the Tribunal’s role in individual enforcement cases, it is important to query whether Judicial Review applications have any future role to play in holding the Financial Services Authority market abuse decision making to account. Chapters 5, 6 and 7 consider the operation and impact of the Tribunals decisions. It is clear from this analysis that given the Tribunal has no inherent jurisdiction, then save where the Tribunal is able to give a formal recommendation to the FSA, that the affect of its decisions is limited to the outcome on individual enforcement cases.

Notwithstanding the Tribunal’s role, the FSA’s enforcement policy making and in particular its enforcement criteria, within EG and DEPP, its enforcement penalties policy within DEPP and the standards of market conduct behaviours set out in MAR, each of which impact the future decision making of the FSA are subject to Judicial Review. The consequence of such exposure may be significant. The considerable interplay between the standards and criteria set out in EG, DEPP and MAR, each of which are based on the FSA’s own interpretation of the standards that it and the market is required to meet, combine to influence the standards of behaviour adopted by the financial markets and whether or not the FSA determines to take action. Indeed as shown in Chapter 3, the FSA applies a risk based approach to enforcement, not always taking action in each and every case or indeed taking the same enforcement steps in like for like cases. The concentration of policy setting and enforcement decision making within the FSA presents considerable challenges to constitutional and human rights obligations and even though the separation of the FSA’s enforcement and supervisory functions (as discussed in Chapter 3) was designed to protect against criticism of a concentration of regulatory powers, there remains an argument that the FSA is responsible for setting the market abuse standards against which it determines to commence enforcement action. As discussed in Chapter 4, should the FSA be the person responsible for determining the financial market’s standards of behaviour and the solely deciding to take enforcement action or should that be the role of legislature and courts respectively . Indeed a breakdown in the FSA market behaviour standard setting and enforcement criteria can seriously impact the FSA’s reputation and confuse the financial markets and enforcement cases such as Parker [492] , Baldwin [493] and Morton and Perry [494] show that it is clear that the FSA’s enforcement division is not the arbiter of whether market abuse has occurred, and if it has, the most appropriate penalty.

Chapters 5 and 6 will show that references to the Tribunal are limited to a determination of the individual facts of that referral, however the guidance contained within MAR together with the content of enforcement Final Notices (even those which have been reached on the basis of an agreed settlement) act to influence the conduct of financial markets that is seeking to ensure it complies with its legal and regulatory obligations. It is submitted that given the potential within each of MAR and DEPP or an enforcement decision to impact on industry or market practice there should be grounds for interested parties to seek Judicial Review. Moreover, the Tribunal non-case specific powers following a S127 reference are limited to a recommendation to the FSA and there seems little mechanism within the 2000 Act to prevent the FSA from acting in same way again?

In the following Chapter we will consider the Tribunal’s functionality and assess the extent to which it provides accountability of the FSA’s activities in the Market Abuse regime.

CHAPTER 5: THE UPPER TRIBUNAL(TAX AND CHANCERY) JURISDICTION AND INDEPENDENCE IN ITS DECISION MAKING

“…in order to establish whether a tribunal can be considered “ independent" , regard must be had, inter alia , to the manner of appointment of its members and their term of office, the existence of guarantees against outside pressures and to the question whether the body presents an appearance of independence…" [495] 

Introduction

The following two Chapters provide an exposition of the legislative framework for the Upper Tribunal (Tax and Chancery Chamber) (the “Upper Tribunal" or the “Tribunal"), and its jurisdiction to hear references relating to those decisions of the FSA made under the Market Abuse regime. In this Chapter consideration is given to arrangements for the Tribunal’s governance and the extent to which in practice the Tribunal has been able to operate independently and without influence from the FSA.

The role of the tribunal and its early development

The Upper Tribunal is an independent tribunal created under S3 The Tribunals Courts and Enforcement Act 2007 (the “2007 Act") and having had transferred to it under para 2 Transfer of Tribunal Functions Order 2010 SI 22 the functions of the Financial Services and Markets Tribunal (FSMT) being originally established in Part IX of the Financial Services and Markets Act 2000. Such transfer of functions was effective from 6 April 2010 with the FSMT being abolished from that date. The Upper Tribunal was established following a review of the United Kingdom’s Tribunal system by Sir Andrew Leggatt. Following his report ‘Tribunals for Users — One System, One Service’, [496] the 2007 Act was enacted and provided for a unified juridical structure including a unified structure of appeals and oversight by the a great variety of statutory tribunals, including the FSMT. The Upper Tribunal provides a forum for the review of certain decisions of the FSA. In relation to its FSA jurisdiction [497] it is not an appellate body and like its predecessor the Financial Services and Markets Tribunal (FSMT), its role is to conduct fresh hearings of the matters referred to it from all the evidence available. [498] It has been held by the Tribunal [499] that the burden of proof in all referrals lays with the FSA, which for Market Abuse cases is consistent with Article 6.2 European Convention on Human Rights (which provides that anyone charged with a criminal offence is to be presumed innocent until proved guilty). [500] 

In all key respects, the new Upper Tribunal bears a significant similarity to its predecessor and throughout this Chapter and Chapters 6 and 7 reference is made to decisions of the FSMT for their persuasive authority on the jurisdiction and procedure of the Upper Tribunal.

Interestingly the combination of the FSA’s enforcement powers and the Tribunal’s jurisdiction creates an unusual model, whereby the FSA decision stands if no application is made to the Tribunal or an application is subsequently withdrawn, whereas the FSA decision has no effect during the period within which the matter may be referred to the Tribunal and once an application is made to the Tribunal [501] . Following its determination of an individual case the Tribunal is able to direct the FSA to take appropriate actions in relation to an individual case, [502] as well as make recommendations to the FSA considered appropriate from the issues considered during a particular reference. [503] 

In respect of Market Abuse, the Tribunal’s jurisdiction and decision making powers are limited being conferred on it by S127 and S133 of the Act and thus in relation to an individual reference it may only direct that the FSA take those actions available to it [504] . The Tribunal however has a wide discretion to regulate its own procedures [505] and moreover in respect of its authority to award costs it may take specific actions that Courts or Tribunals with an inherent jurisdiction are unable to take [506] . Specifically in relation to the Market Abuse regime the Tribunal may receive references under S127 of the Act to determine the FSA’s decisions to impose penalties in cases of Market Abuse under S123 of the Act. As shown in Chapter 2 and 3 of this thesis, the FSA’s market abuse enforcement, however, often relies on the application of other non-market abuse specific regulation [507] as either a more convenient alternative to the taking of Market Abuse proceedings or as additional action to complement Market Abuse proceedings. The latter for example, may be necessary to remove or qualify an individual’s approval to perform a Controlled Function were their abusive market conduct suggest they are no longer fit and proper to hold that approval. Hence the Tribunal’s jurisdiction extends to a series of matters that can impact on an individual’s status as well as a regulated firm’s ability to carry on investment business. In relation to the Market Abuse the Tribunal’s jurisdiction also covers:

1. The determination, under S55 of the Act, of matters relating to Business Permissions granted under Part IV of the Act. These would include

Applications for permissions,

Where the FSA seeks to impose requirements,

Variations and cancellations of permissions,

Variations to permissions at the FSA’s own initiative,

Variations to permissions following acquisition of control of a business,

Variation or cancellation at the request of an overseas regulator,

Prohibition and restrictions.

2. The determination of a reference made in relation to an FSA’s Prohibition Orders under S57 or S58 against individuals performing specified functions or activities under the Act.

3. The determination of a reference made under S208 of the Act in relation to an FSA decision to make public censures under S205, Financial Penalties under S206 and suspension or restriction of regulated activities under S206A

4. A reference may be made under S62 of the Act in regard to FSA decisions arising from applications for approval to perform a controlled function,

5. A reference may be made under S63 regarding FSA decisions to the withdraw approval to perform a controlled function

6. A reference may be made under S67 regarding an FSA decision to impose disciplinary measures against an Approved person

8. A reference may be made under S 393 regarding decisions made by the FSA that relate to Third Party rights.

The jurisdiction, procedure and constitutional basis for the Tribunal is considerably developed from that of the internal enforcement Tribunals and Panels within the Self Regulatory Organisations (SROs) that previously had responsibility for regulation in the City. Moreover, as considered in Chapter 1, although the previous regulatory regime had established under Chapter IX Financial Services Act 1986 the Financial Services Tribunal to review decisions of the Securities and Investments Board, its effectiveness as a tribunal was largely untested, perhaps because ultimately so few enforcement matters under that regime were taken outside of the SRO structure [508] . Unlike those previous self regulatory systems, where all enforcement cases were required to be heard by the individual SRO’s own internal disciplinary panels, under the 2000 Act only where FSA decision making is challenged, do cases have to be specifically referred to the Tribunal for determination. Indeed as discussed in Chapter 3, under the current regime it is open to the respondent to allegations of market abuse to settle the enforcement case with the FSA without the Tribunal ever having to be involved. Such an arrangement arguably provides the advantage of leaving the FSA to bring enforcement proceedings and reach agreement on the settlement of cases with the respondent quickly; and helps keep the cost of the Tribunal system down, allowing the Tribunal to only deal with those cases that are specifically referred to it.

The significance of the difference between the jurisdictions of the Tribunal compared with those of predecessor regulators has received little academic comment. Dr Edward Swann described references to the FSMT as not really being an appeal but a new hearing on the issues before a new and independent forum [509] . He points to the fact that the FSMT like the Upper Tribunal is as able to consider any relevant evidence even if the FSA had not considered it and may direct any decision which the FSA could originally have made. Whilst such comment provides an accurate overview of the Upper Tribunal’s role, it is submitted that it does not adequately take into account either the significance of the Tribunal’s role in the Market Abuse regime or the potential effect of the Tribunal’s decision making on the FSA enforcement cases.

Similar to the Upper Tribunal the essence of the FSMT’s jurisdiction was addressed in Legal and General v Financial Services Authority, [510] where in its written decision the FSMT explained its role in determining references made to it but stating: “We are not hearing an appeal against FSA's Decision but reviewing from the start the facts and matters which led to it." [511] The Tribunal under Section 133(5) of the Act (as amended) must ‘determine what, (if any) is the appropriate action of the authority... [the FSA] to take in relation to the matter referred... to it’. During the preliminary stages of the Legal and General case [512] the FSMT Chairman had directed that the word “matter" is to be read broadly and covers the FSA decision, the imposition of any penalty and the surrounding facts and it does not simply relate to the particular facts recorded in the FSA’s Decision Notice. The full extent of the Tribunal’s role, however can only be best understood when the interplay between the Tribunal and FSA Enforcement process is analysed. In evidence before the Joint Committee on Financial Services Mr Andrew Whittaker (then deputy general Counsel at the FSA) spoke of the FSA’s then desire of avoiding all enforcement cases having to be referred as a matter of course to an Independent Tribunal he eruditely put the role of the Tribunal in the context of the FSA and Financial Services Industries need to have a prompt and efficient method of bringing enforcement action but with the protection of ensuring that the process complied with European Convention on Human Rights Article 6, he stated [513] “We are all finding it difficult to accommodate the implications of there being a first instance tribunal". What is wanted is a system "which provides people with confidence that their decisions have been dealt with fairly but nevertheless by more speed than they might get with the Tribunal."

Needless to say because in financial services cases the Tribunal only deals with references relating to the FSA’s decision making, the legal basis on which the FSA’s enforcement process is based affects the very nature of the Tribunal’s function and role. During the Financial Services and Market Bill’s (the Bill) passage through Parliament a number of alternative enforcement and Tribunal models were promoted and critiqued by Members of Parliament and experts called to give evidence before the Financial Services Joint committee (The Joint Committee). In it first progress report on the Bill HM Treasury explained that the main focus of comment on the draft Bill has been on the disciplinary process and the perception that the FSA proposed internal procedures may lack fairness and transparency, or be unduly costly and burdensome, and that the FSA will be able to act as 'prosecutor, judge and jury' [514] It would appear that the Tribunal’s role in the FSA enforcement process was viewed as a significant element of ensuring that the FSA’s enforcement process and decision making could be challenged and held accountable and although the enforcement processes then proposed were modelled on those of the existing Self Regulating Organisations the consequences of them being transferred to a single statutory regulatory authority appeared as a frightening prospect. Indeed such concern was shared by the Joint Committee which reported its view that “the more power is vested in the FSA, the more those who may be affected by the exercise of such power will be concerned to see that the FSA's powers are tightly defined and controlled, and that the FSA can be held properly accountable." [515] 

Although it was recognised by Parliament that the FSA decision making would be subject to judicial review as well as challenge in the Courts under the Human Rights Act 1998 [516] there was concern that any such challenges might set up the FSA for defeat in the Courts leading to the potential for damage for the whole financial services sector and the international position of the City of London [517] . It appears that at the core of this concern was the importance of creating an enforcement model which could be viewed as being the preserve of the Financial Services Industry, with the ability to respond quickly to enforcement demands but at the same time striking a balance between accountability of the FSA’s enforcement model and reduced exposure to embarrassing criticism in the Courts when FSA decisions were challenged and set aside. Even with the initial model for the Tribunal eventually established, it is doubtful whether Parliament’s concerns have been or could ever be addressed. A series of early and significant FSMT decisions challenged fundamental elements of the FSA’s enforcement process as well as its application of the Market Abuse regime leading to significant negative press attention as well as major changes to the FSA enforcement policies and procedures [518] .

The Joint Committee laid out two proposed enforcement models each affecting the Tribunal’s role and jurisdiction. [519] The first model was referred to as a Quasi- Judicial Enforcement Model which the Joint Committee described as being the model originally intended by HM Treasury and where the Tribunal has the characteristics of an Appeal Tribunal. In this model, the FSA Enforcement Committee reaches decisions of a quasi-judicial character, as to guilt and penalty, from which the defendant can resort to the Tribunal. This appears to be roughly what the Treasury originally had in mind, as it indicated through its reference to the Tribunal in the draft Bill as being an “Appeal Tribunal." The Committee report explained an alternative model as a Non-Judicial Enforcement Model and in terms of the role of the Tribunal as one receiving references of all cases where there is a prima facie case to answer but where the Enforcement Committee has not been able to settle the enforcement cases by agreement. In this model the Enforcement Committee cannot make decisions of a judicial character and its role is akin to that of a prosecuting authority rather than a court. In evidence Clifford Chance advocated that the model would encourage defendants to "buy into the result" at the Enforcement Committee stage, so that most cases could be agreed and few need go to the Tribunal. At the same time, because the Enforcement Committee was not an adjudicator, it could dispense with the full rigour of natural justice, and deliver the "fast and efficient results" required by the regulators and by the industry [520] .

In consultation during the passage of the Bill, HM Treasury and the FSA proposed a Tribunal of first instance where the FSA enforcement committee would not operate in a quasi judicial manner but where there would be "a distinct separation between the regulatory procedures of the FSA, which are administrative in nature, and the judicial procedures of the Tribunal [521] ". In essence the FSA Enforcement committee [522] would take a role in determining enforcement cases referred to it. The enforcement committee together with a mediation process would operate to allow settlement when the enforcement committee would ratify the settlement reached. If no settlement was reached then the enforcement committee would determine if there was a case to answer and if so the FSA’s Decision Notice sets out that the enforcement committee is of the opinion that it believes there is a case to answer. This is a distinctly different outcome than the committee judicially determining that the case is proven. At this point the defendant would have the option of referring the matter to the Tribunal. According to HM Treasury, in this model the FSA’s decision is intended to be an administrative decision, for which the FSA must be held accountable, and which must be taken in a fair and reasonable manner. “If the defendant does choose to refer the case to the Tribunal then the FSA decision notice is set aside becoming the basis of the FSA's case before the first instance Tribunal". [523] 

The Joint Committee was concerned to ensure there was sufficient procedural fairness in the FSA’s enforcement committee process to ensure that the committee was clearly separate from the FSA operation and to provide to give confidence, but without so many safeguards that the Enforcement Committee duplicates the work of the Tribunal. It also considered it desirable that most cases should be settled at the pre-Tribunal stage, as is the case at present; too many cases going to the Tribunal would create a bottleneck and expose everyone to enormous costs.

The Tribunal has, however a key role in ensuring that the FSA is accountable for its enforcement decision making and that the FSA enforcement process and the Market Abuse regime comply with European Convention on Human Rights. In this respect the significance difference affecting convention rights between the Market Abuse regime and the FSA’s more general regulatory activities was recognised by the Government during the passage of the Bill through Parliament when significant similarities between the Market Abuse regime and the criminal offences of insider dealing and market manipulation in terms of scope, content and purpose was acknowledged [524] . In a memorandum from HM Treasury to the Joint Committee on Financial Services, HM Treasury confirmed its recognition of this point observing that the Market Abuse regime was not concerned with regulating the entry to a regulated community and the conduct and standards of that community. The memorandum stated that “the regime applies to anyone who participates in the financial markets, a potentially much wider group defined by economic activity rather than by the narrower test of having privileged access to an occupation which is regulated for the protection of the public as a whole." [525] . This thesis will turn once more to the impact of European Convention on Human Rights on the Tribunals decision making and in particular to the question of evidential standards of proof in Chapter 6.

Third parties

The content of an FSA decision notices might adversely identify a third party other than the direct recipients of the notices and rights in S393 of the 2000 Act allow for the third party to make representations to the FSA as well as make a reference to the Upper Tribunal [526] where either they are not satisfied with the FSA response or the FSA has not provided them with a copy of the relevant notice. The purpose of S393 was described by Lord Bach [527] ,

“The new clause on third party rights … rationalises the existing provisions dealing with the rights of third parties identified in warning or decision notices in a way that is prejudicial to them. These provisions were designed to deal with cases where there is some wrong-doing alleged on the part of a third party who is not himself the subject of action by the FSA…The provisions give third parties, who are identified in prejudicial terms in the reasons for a warning or decision notice, the right to receive a copy of the notice, and to make representations or refer the matter to the tribunal in the same way as the person who is the subject of the FSA’s proposed action. We took the view that although these rights create an administrative burden for the FSA, they are necessary to give the third party the right to defend himself against any implied blame arising from the reasons given for the action."

In respect of the right to make a reference to the Upper Tribunal, S393(9) makes provision for references in respect of both the FSA decision and any opinion expressed by the FSA in relation the third party [528] . There may be occasions where the FSA considers that it has no obligation to provide a person with a copy of a relevant notice, but the third party disagrees. In such circumstances the Third Party may make a reference to the Tribunal under S393(11) which provides:

A person who alleges that a copy of the notice should have been given to him, but was not, may refer to the Tribunal the alleged failure and-

(a) the decision in question, so far as it is based on a reason of the kind mentioned in subsection (4); or any opinion expressed by the Authority in relation to him

The FSMT has dealt with two applications in respect of Third Party Rights: Jan Laury v the Financial Services Authority and Sir Philp Watts v Financial Services Authority Ltd [529] In the Sir Philip Watts reference the application turned on S393 (4) and in essence, whether Sir Philp was ‘identified’ in the Notice by virtue of the external publicity about him following the events that led to the FSA’s market abuse enforcement against Royal Dutch Shell Corporation [530] arising out of the problems with the Royal Dutch Shell Groups calculation of its oil and gas reserves. Sir Philip Watts had been the Chairman of Royal and Dutch Shell. On 9 January 2004, Shell announced a re-categorisation representing 3.9 billion ‘barrels of oil equivalent’ of its proved hydrocarbon reserves. This was 20% of its proved reserves at that date. Following the announcement, Shell’s share price fell 7.5%. In mid-April, after further adjustments, Shell announced that the total re-categorisation was about 4.3 billion ‘barrels of oil equivalent’. Sir Philip Watts was given written notice of the FSA’s investigation on 27 May 2004 as an additional subject of the investigation for the purposes of section 170(2) of the 2000 Act. He had been subject to extensive adverse comment in the media. In the reference Watts asserted his rights as claiming that under S393 even if he was not explicitly identified in the relevant notice, he was entitled to the statutory rights of a third party if he was identifiable by reference to publicly available sources as the individual responsible for the matters complained of.

The FSMT concluded that the proper construction of S393(4) affords third party rights to a person who is identified in the decision notice itself, and not as Watts had argued, to a person identified in the ‘matter’ as ascertained by looking at external sources. In reaching this conclusion the FSMT determined that the term “matter" as used in S393 relates to the matter of the decision taken by the FSA as defined in the relevant notice and not to a wider context in which the individual may by identified or criticised. The FSMT considered that this construction is consistent with other instances where the term “matter" is used in the 2000 Act. It provided a series of examples to illustrate this point, in particular S127(4) which states ‘if the Authority decides to take action against a person [for market abuse], that person may refer the matter to the Tribunal.’ It considered therefore, that there was no reason to give the term ‘matter’ a wider meaning in section 393(3). In the context of s. 393(4), The FSMT considered that the use of the term ‘matter’ serves to make it clear that identification can be found from the entire notice, and not from the reasons alone, or one of them. In its decision in the Philip Watts case, the FSMT stated at para 50 , “…There is no reason in our view why a market abuse allegation directed at a company must necessarily be taken to impute criticism to particular individuals…"

This application of the term matter contrast, however, with the FSMT in the decision of Legal and General v Financial Services Authority [531] where the Tribunal Chairman had directed that the word “matter" in relation to applicants rights to refer matters to the Tribunal under S208 of the Act is to be read broadly and covers the FSA decision, the imposition of any penalty and the surrounding facts and it does not simply relate to the particular facts recorded in the FSA’s Decision Notice. The rights of Third parties, however, are perhaps clarified by other provisions of s. 393 which suggest that the section envisages that identification will be in the decision notice. By way of example subsection (6) provides that a copy need not be given to the third party under subsection (4) if the FSA issues him with a separate decision notice at the same time as it issues ‘the decision notice which identifies him’.

Tribunal independence

In this section we will consider the Tribunal’s constitution, including its panel member selection, its decision making procedure, and the extent to which it operates independently from the FSA.

Tribunal governance and constitution

The value of the Independence of the FSMT was discussed at length during the Financial Services and Markets Bill passage through Parliament. Opinion was expressed to the affect that it would be impossible to secure the FSMT’s credibility unless it was totally independent from the FSA [532] . Not only is the Upper Tribunal’s independence imperative to ensure that it meets the rights to a fair trial in Article 6 European Convention on Human Rights, but also to ensure that both the public and regulated sectors impression of the Market Abuse enforcement regime was one whereby they would be able to receive a fair and unbiased hearing.

The obligation for the Lord Chancellor and other ministers of the Crown to uphold the independence of the Judiciary of the English Courts is enshrined in S3 Constitutional Reform Act 2005, which by virtue of S1 and para 1(1) Sch 3 to the 2007 Act incorporates the Senior President of the Tribunals, [533] President of the Upper Tribunal Tax and Finance Chamber, judges of the Upper Tribunal and other members of the Upper Tribunal. Furthermore such independence is further enshrined through the overriding objective set for the Upper Tribunal rules of procedure in paragraph 2(1) of the Tribunal Procedure (Upper Tribunal) Rules [534] which provides ‘The overriding objective of these Rules is to enable the Upper Tribunal to deal with cases fairly and justly"

The 2007 Act sets out requirements for the Tribunals governance and panel membership in S3-8 and Schedules 1,3,4 and 7 decision making and the rules of procedure in s22 and 23 and Schedule 5. These arrangements in essence allow for the independent oversight and control of the Upper Tribunals functions so that its operations and function may not be captured by the FSA or persons subject to FSA regulation. This Chapter will turn to the effectiveness of the independence of Tribunal membership further below.

Members of the Upper Tribunal are appointed on the recommendation of the Lord Chancellor and comprise judicial and expert members [535] . The Judicial members are drawn from a variety of Upper Tribunal appointments including the Tribunals Senior President, A judge appointed under Paragraph 1(1) Schedule 3 or deputy judge appointed under paragraph 7 Schedule 3 to the 2007 Act, a judge or deputy judge transferred S31(2) of the 2007 Act and a Chamber President or deputy President [536] . Each of the Judicial appointments must satisfy the relevant legal expertise eligibility requirements set out in S50 and 51 to the 2007 Act [537] which are subject to specific appointment and qualification conditions set out in Schedule 3 to that Act.

Paragraph 4 of Schedule 3 to the 2007 Act specifies the terms of office for Judicial and no judicial member who is required to hold and vacate office in accordance with the terms of his appointment [538] and who may only be otherwise removed by the Lord Chancellor on grounds of inability or misbehaviour. The non-judicial members of the Upper Tribunal appointed under S5 of the 2007 Actmust meet strict qualification requirements set out in regulations [539] and although such membership is drawn from a wide range of non financial expertise, it does include reference to professional accountants, and substantial expertise in regulatory, consumer affairs or in an industry, trade or business sector and the matters that are likely to arise as issues in the course of disputes with regulators of such industries, trades or businesses. [540] The objective of the Upper Tribunal’s procedures in Paragraph 2(d) of the Tribunal rules, to use any special expertise of the Upper Tribunal effectively, acts to ensure that the composition of a Tribunal will reflect the substantial experience need to adequately dispose of Market Abuse referrals and recognising the need for the proper deployment of expertise, Paragraph 13 Schedule 4 of the 2007 Act requires the Upper Tribunal President to adopt and publish a policy regarding the assignment of members to Tribunal chambers in accordance with such expertise. Furthermore the President of the Upper Tribunal is required to select appropriate Tribunal member to be assigned to each case but in accordance with the requirement for Tribunal composition set out in the First Tier and Upper Tribunal (Composition of Tribunal) Order [541] which specifies that subject to the President having regard to the need for members of tribunals to have particular expertise, skills or knowledge [542] , the Tribunal may comprise a Judge sitting alone [543] or a Tribunal or two or three members where the senior president will select how many of those members may be judicial and other members. [544] The Senior President must appoint one of the appointed members to chair the Tribunal [545] 

It has to be questioned, however, whether the very essence of the Tribunal’s expertise and resulting proximity to the financial services industry, propounded as a way of ensuring that the Upper Tribunal has sufficient expertise to deal with the complexities of the financial services industry, can ever mean that the Tribunal’s decision making is truly independent. Arguably though, it is not the Tribunal’s own procedures that exposes it to a lack of independence, but the pool from which its expert non-judicial membership is drawn. Such risk to independence manifested early on in the life of the FSMT where its reputation as an independent panel of first instance was threatened during the early stages of the Paul Davidson Market Abuse reference [546] through the conduct of one of its Panel members. Although the legislative structure supporting the Upper Tribunal has arguably distanced it from the FSA its reliance on Industry experienced non-judicial members, exposes it to the risk of an over concentration of industry knowledge and over familiarisation with market participants. This concern is compounded when one takes into account that the membership of the FSA’s Regulatory Decisions Committee (RDC) membership also has a heavy concentration of industry practitioners. This professional proximity can lead to a suggestion that the City of London’s ‘Club’ like atmosphere still exists albeit shrouded by a veil of artificial structural independence. In the current regime, regulated firms and market participants can rub shoulders with RDC members who in turn can rub shoulders in the City with Tribunal Panel members. Paul Davidson had made an application to the FSMT following a decision of the FSA to impose a penalty of £750,000 for market abuse following the placing of spread bets on the price of shares in the company Cyprotex. The hearing of Mr Davidson’s reference began on 14 June 2004 before a Tribunal chaired by the President with one other member selected from the panel of chairmen and two other members selected from the FSMT’s lay panel.

On 17 June 2004 the FSA informed the FSMT that it had come to its attention that on the evening of 15 June 2004 a conversation had taken place between Mr FitzGerald the chairman of the FSA’s Regulatory Decisions Committee and Mr Mowschenson QC the member of the FSMT selected from the panel of chairmen. It was subsequently reported that the RDC chairman on the doorstep of his London home had chatted with the Deputy Chair of the FSMT, and was quoted as saying: "…When I saw him walking past my house with his dog, I called out to him and asked him how the tribunal was going. I certainly said nothing that might have influenced him in any way..." [547] 

Although Mr Fitzgerald had not chaired or taken part in the RDC meetings that had decided to impose a financial penalty on Mr Davidson the late night conversation was clearly sufficiently embarrassing for the FSA and the FSMT, during the sensitive stages of a significant Market Abuse case, in an early case in order to demonstrate that the FSMT process was seen as fair and independent. It was subsequently revealed that the extent of conversations between Mr Fitzgerald and Mr Mowschenson QC had been much wider and had been the final part of a longer sequence of conversations between the two men. It was revealed in fact that the two men being personal friends had talked about the case in the past [548] and it later transpired that in fact details and opinions about the case had been discussed with Mr Mowschenson telling Mr Fitzgerald that one lay member of the FSMT was doubtful whether Mr Davidson was guilty of market abuse and that Mr Mowschenson was "amazed" at this view but noted that the positions of the first lay member were having an effect on the FSMT’s second lay member.

As a consequence of this information the hearing of the reference was then adjourned and on the 18 June 2004 the chairman of the RDC tendered his resignation with immediate effect. Furthermore on 24 June 2004 the member of the FSMT selected from the panel of chairmen hearing the reference withdrew himself from the reference and following an application from Mr Davidson on 28 June the remaining three members of the FSMT withdrew themselves on the basis that the fair minded and informed observer would not be able to exclude the real possibility of unconscious bias, presumably because of the publicity that had arisen from both the RDC Chairman’s resignation and withdrawal of the FSMT member. Thereafter a newly constituted FSMT was selected. Mr Davidson made an application for his wasted costs and in its decision on that application the FSMT concluded that it was clear that the Chairman of the RDC had acted unreasonably, although there was no criticism of the FSMT chairman member, which is surprising given the reported facts of the fateful conversation, although such lack of self criticism is likely because under the original FSMT costs rules Mr Davidson application could only be made in respect of the FSA’s unreasonable conduct [549] .

The extent of potential public concern arising from the seeming close proximity between members of the FSA’s RDC and the FSMT was expressed by Mr Davidson [550] where he alleged: "The FSA has abused the process. They have given me a fine without interviewing me and then they put a mate on the board that is deciding the appeal." In a press statement the FSA stated that it viewed the actions of its then RDC chairman as inappropriate and that its overriding concern was to preserve the independence and impartiality of the FSMT, although it pointed out that the decision on what happens in respect of hearings was entirely for the FSMT itself [551] . The Department for Constitutional Affairs, however, which selected the FSMT members, rejected claims that the events leading up to the tribunal’s recusal should lead to a review of its appointment procedures. They defended the relationship between the RDC and the FSMT by stating that "Lawyers often know each other. There is nothing you can do about that." [552] Such a comment, however, does not address the underlying importance of the Tribunal being not only physically separate from the FSA but also being seen to be independent and impartial.

It is submitted that such requirement for independence has become more important because of the relative small size and previous club like nature of Financial Services regulation in the UK.

Independence arising from Tribunal decision making

The Tribunal’s power to determine references is specially drafted in order for it to effectively deal with decisions that will have already be taken by the FSA. Section 133 (6) [553] of the 2000 Act makes clear that the Tribunal’s power, in giving effect to its determination of a reference, is to remit the matter back to the FSA with such directions (if any) as the Tribunal considers appropriate. Where the Tribunal finds in favour of the FSA its decision will be a direction that the relevant FSA Notice is to have effect or where it finds in favour of the applicant it takes the form of a direction that the FSA do not take the action in the relevant notice. Ss133A(1) [554] of the Act does importantly limit the extent of the directions that the Tribunal is able to make to the FSA, ensuring that it can not direct the FSA take any action that it had not previously warned the applicant that it may take. [555] Under S133 (7) [556] FSA is obliged to act in accordance with the Tribunal’s determination and any directions.

FSMT decisions rejecting two high profile FSA Market Abuse decisions serve to confirm the operational independence of the Tribunal’s decision making. [557] . Indeed the UK press viewed these two FSMT decisions as undermining the FSA’s attempt to crackdown on Market Abuse and revealed the clash of evidence evaluation between the FSA’s Regulatory Decisions Committee and the FSMT [558] . The ability of the FSMT to reach decisions, contradicting the FSA does tend to show that the Tribunal reference process is objective, fair and transparent, even though the downside of the two particular cases may have made it difficult for the FSA at the relevant time to know what they had to do to make robust enforcement decisions. Although not reported, the FSA is believed to have struggled internally, perhaps knowing the difficulties with the FSMT to find evidence to bring Market Abuse cases against John Mayo for his part in the near bankruptcy of Marconi and Sir Phillip Watts Shell Groups Chief Executive Officer for his role in the misstatement of the groups Oil reserves [559] . Nonetheless the FSA’s public response at the time appeared more sanguine. Margaret Cole FSA director of enforcement said in interview [560] “We won’t stop pursuing difficult cases. We prepare our cases rigorously, but inevitably if you pursue the most difficult ones you may not win them all." That response however does not reveal the true challenge for the FSA. In case analysis terms there are differences in approach between the Tribunal and the FSA’s RDC. Unlike the RDC the Tribunal is able to consider any reference afresh, having access to new material not necessarily enjoyed by the FSA, is in a position to re-evaluate evidence put before it in more detail and reach decisions without the regulatory motivations and political pressure faced by the FSA to meet its Statutory Objectives. It is perhaps this latter point coupled with the administrative nature of the RDC that helps ensure the divide between the decision making of the FSA and the Tribunal. What also seems clear, however, from the written decisions in the Paul Davidson and Baldwin cases [561] is that the Tribunal panel members do not necessarily share the FSA’s assessment of the law relating to Market Abuse, staying away from any tendency towards the proposition that the FSA knows best. Once again the Tribunal freed from the internal influences and conditioning of the FSA is in a stronger position to objectively assess what is reasonable behaviour rather than what the FSA views as reasonable behaviour.

Rules of procedures for the decision

A decision of the Tribunal may under paragraph 8 The First-tier Tribunal and Upper Tribunal (Composition of Tribunal) Order 2008 [562] be taken by a majority or where the votes are the Tribunal are divided equally the Tribunal Chair has a casting vote and the Tribunal is required under Paragraph 40 (2) of the Tribunal Procedure (Upper Tribunal) Rules 2008 [563] must provide to each party as soon as reasonably practicable after making a decision that finally disposes of all issues in proceedings a decision notice stating its decision and a notification of any rights of review or appeal. Under paragraph 40(3) [564] the Tribunals decision must contain a statement of the reasons for the decision. The Tribunal may make its decisions orally at a hearing and on the basis that the Tribunals written decision and reasons are classified as ‘Documents’ as defined in the Procedure Rules then under Paragraph the Tribunal may make an order [565] prohibiting the disclosure of the decision to another person if it is satisfied that such disclosure would likely to cause serious harm to that person or another person and, having regard to the interests of justice it is proportionate to give such direction.

Tribunal Recommendations

The Tribunal may, pursuant to Section 133A (5) 2000 Act on determining a reference, in addition to any direction it gives to the FSA make recommendations as to the FSA’s regulating provisions or its procedures [566] . The question of making recommendations to the FSA [567] came close in the matter of Legal and General v Financial Services Authority [568] where the FSMT stated that,

“We also have the power to make recommendations as to FSA's regulating provisions or procedures under Section 133(8) [569] of the Act. This is not a power which we will exercise unless at least one party urges us to do so and both parties then make submissions about what if any those recommendations should be."

The criticism of the FSA in the FSMT’s decision nonetheless led to a full FSA review of its enforcement process and ultimately changes to the way in which FSA managed investigations and enforcement actions by its Regulatory Decisions Committee. [570] 

Independence in the Tribunal’s decision is an essential requirement to ensure that the FSA’s decision making process and the Tribunal’s constitution is fair and transparent and meets Article 6 European Convention on Human Rights. The Tribunal’s independence of thought also helps contribute to the FSA’s accountability. The Tribunal’s role is not however, successful if its decisions against the FSA are not translated into improved or modified FSA behaviour. It is within the Tribunals’ jurisdiction to make formal recommendations relating to FSA policies and procedures, although to date the FSMT fell short of making formal recommendations to the FSA even in those cases resulting in major criticism of the FSA’s ability to deal with complex Market Abuse cases. Publicly, there is little evidence to suggest that the FSA analyses and learns from the issues concerning its approach raised by Tribunal decisions. At times all that can be seen is seemingly politically driven comments from the FSA attempting to suggest that with the Tribunal like any system of dispute system some cases are won and others are lost. It is submitted that the true value of the Tribunal’s independence will come if the FSA is bold enough to learn from the cases it loses and capitalise on the cases it wins by educating the market place. Without such action it is submitted that in future FSA decisions will routinely be challenged with damaging publicity arising from the reference to the Tribunal notwithstanding the outcome of the case.

Review and appeals

The streamlined Tribunal system within the 2007 Act is intended to provide a self contained judicial framework including the rights of appeal. Paragraph 9 of the Governments Explanatory Note to the 2007 Act provided “...Now there is a unified appeal structure. It is not yet complete. … But in any event it is clear that the appeal provisions of TCEA give effect to a strategic reorganisation of the law administered by statutory tribunals." S13 of the 2007 Act sets out the basis on which appeals may be made from decisions of the Upper Tribunal to the Court of Appeal, in Scotland to the Court of Session or the Court of Appeal in Northern Ireland [571] . Appeals may only be made on a point of law and require the permission of the Upper Tribunal, Court of Appeal or Court of Session [572] . The provisions are markedly similar to those relating to the FSMT from which Appeals were made by the applicant in the market abuse case of Wintefloods v the Financial Services Authority [573] an appeal relating to the interpretation of S118 of the 2000 Act and by the FSA in Fox Hayes v the Financial Services Authority [574] 

Paragraph 44 of the Upper Tribunal Rules sets out the process of applying to the Upper Tribunal for permission to appeal, which requires that applications be made in writing not later than fourteen days after the written notice of decision [575] Written applications must identify: the decision of the Tribunal to which the application relates; the alleged error or errors of law in the decision; and state the results the party making the application is seeking. [576] At this point it would be important where the appellant is the applicant of the reference for him to apply for a direction under Paragraph 5 of the Upper Tribunal rules to suspend the effect of the decision on the case pending the outcome of the appeal.

If on an appeal the Court of Appeal or Court of Session considers that the decision of the Tribunal was wrong in law then it may under S14 (2) of the 2007 Act set aside the Upper Tribunals decision and either remit the matter to the Tribunal for re-hearing or itself make a determination of the case. Preserving the notion of the independence of the Upper Tribunal’s decision making, where the Court of Appeal decides to remit the case for rehearing then it may under S14(3) (a) direct that the persons chosen to reconsider the case are not the same as those that made the decision that is set aside. If the Court of Appeal makes a determination in the case then under paragraph 14 (4) it may only make a decision that the Upper Tribunal could have made if it were deciding the case.

S10 of the 2007 Act furthermore provides for the Upper Tribunal in certain cases to review its own decision and in appropriate cases re-decide the case [577] . The power arises under Paragraph 43 (1) of the Upper Tribunal rules a procedural error has occurred (such as the non delivery of document or non-attendance of witnesses) when it may re-decide the case if it considers it is in the interest of justice to do so, or on appeal where under paragraph 45(1) of the Tribunal rules, it considers it had overlooked a legislative provision or binding authority; or since its decision a Court has made a decision which is binding on the Upper Tribunal. Such a review may under paragraph 46(2) of the Tribunal rules give rise to a right for a re-hearing and the parities to make further representations. The availability for such review overcomes the additional costs associated with a full appeal and allows for correction to be made where grounds of appeal may not exist. Confirming the benefits of such an approach, paragraph 100 of the Governments Explanatory note to the 2007 Act provides: ... “This is intended to capture decisions that are clearly wrong, so avoiding the need for an appeal. The power has been provided in the form of a discretionary power for the Tribunal so that only appropriate decisions are reviewed. This contrasts with cases where an appeal on a point of law is made, because, for instance, it is important to have an authoritative ruling …."

Notwithstanding the supposed self contained Appeal systems described above and the Upper Tribunal’s classification in S2 of the 2007 Act as a superior court of record, the Upper Tribunals remains exposed to Judicial Review particul;ary in relation to the operation of its procedure and its jurisdiction.In R (Cart) v Upper Tribunal[2010] [578] the Court of Appeal held, “…In our judgment, as in that of the Divisional Court, the supervisory jurisdiction of the High Court, well known to Parliament as one of the great historic artefacts of the common law, runs to statutory the tribunals both in their old and in their new incarnation unless ousted by the plainest possible statutory language. There is no such language in TCEA [2007 Act]. The statute invests with standing and powers akin to those of the High Court a body which would otherwise not possess them precisely because it and the High Court are not, and are not meant to be, courts of co-ordinate jurisdiction…"

Legal assistance scheme

The legal assistance scheme established under S134 of the Act to support applicants of limited means in relation to certain FSA’s decision relating to Market Abuse allows for the funding of legal services in Market Abuse cases brought before the Tribunal. [579] During the Financial Services and Markets Bill passage through parliament, there was much concern expressed about whether the Bill would be compliant with the European Convention on Human Rights. Legal advice given to Parliament was that the Market Abuse regime bore the hallmarks of criminal law with the Convention and that in order ensure compliance with Article 6 ECHR, criminal law protections should be applied. [580] In particular there was concern that the regimes extension to cover all users of the Financial markets and not just authorised persons required that additional protections would be necessary to ensure the Market Abuse provisions would be compliant. In response the Government decided to import the ECHR criminal protections into market abuse penalty proceedings. In evidence, Patricia Hewitt Economic Secretary to Treasury stated,

“…The Convention requires legal assistance to be made available where that is necessary in the interests of justice. I think what that suggests is clearly one has to look at the means of the person, the individual or the company, against whom market abuse fining proceedings are being brought. One also has to look at the complexity of the case and whether or not it is actually reasonable to expect the individual concerned to put his own case or whether legal representation is going to be required in order for that person to have a fair hearing. …If you have proceedings against somebody who is extremely wealthy, then the same thing probably applies, but if you do have proceedings against someone who, although those proceedings have not been concluded, has nonetheless been dismissed from his firm and does not have substantial accumulated wealth, then I think you probably need to take a different view, and that is what we are looking at in order that we can come forward with an appropriate scheme for subsidised legal assistance…" [581] 

The legal assistance scheme is a free standing scheme with its funding provided under S136 2000 Act by contributions made by both Parliament and the FSA to the Lord Chancellor. (special provision is made in S136 for the repayment to the FSA of any sums received by the Lord Chancellor in excess of the monies expended on the legal assistance scheme in a determined period). Regulations made under S134(1) 2000 Act set out the operation of the Scheme. The Financial Services and Markets Tribunal (Legal Assistance Scheme- Costs) regulations 2001 SI 3633 provide for the method of calculation of assistance, expenses, interim payments, staged payments, final payments. The Financial Services and Markets Tribunal (Legal Assistance) Regulations 2001 SI 3632 set out arrangements for applying for legal assistance, eligibility, assessment and contributions. Applications for legal assistance are made to the Tribunal under Rule 4. The Tribunal is required under rule 8 to grant legal assistance to an individual if it is satisfied that it is in the interests of justice to do so and the individuals financial resources are such that he requires assistance in meeting the legal costs he would be likely to incur in relation to the proceedings before the Tribunal. A series of tests are set out in the regulations allowing the Tribunal to take into account not only the applicants financial position but the position of persons supporting the applicant [582] .

The Tribunal, may order legal assistance for all or part of the anticipated legal costs of the applicant and in deciding what legal assistance to grant it is required to take all relevant factors into account, including those required by rule 37(2), that is: whether the case appears to involve substantial, novel or complex issues of law or fact; whether the case is exceptional compared with the generality of such cases; and,the number and level of advocates instructed on behalf of the Authority.

The reported cases before the Tribunal suggest that to date few Market Abuse references have benefited from funding from the legal assistance scheme. This might be as a result of the personal wealth of those persons against whom the FSA has chosen to action. Indeed following the successful reference by Paul Davidson of the FSA’s decision to impose a civil penalty of £750,000 for market abuse, his application for costs received comment [583] suggesting a general unease that privately funded applicants have no automatic right to recover their costs where the basis of the FSA original decisions falls short of the vexatious or unreasonable behaviour required under the current rules. Davidson’s cost application was successful and the Tribunal found that the FSA had acted unreasonably in issuing a decision notice for market abuse. It was reported [584] that at the cost hearing Davidson claimed he was owed tens of millions of pounds by the FSA because of the damage that the case did to his reputation and that it pursued the penalties before getting the views of expert witnesses. Although Davidson’s cost application in the main revolved around FSA decision making regarding specialist understanding Public Offers and Spread Betting it does highlight the issue accountability of the FSA in individual enforcement cases. The position is made more problematic when the administrative and informal role of the FSA’s Regulatory Decisions Committee is considered. As discussed above the RDC although a separate and independent committee of the FSA operates a system of case analysis that lacks the intense evidential scrutiny of enforcement cases required by the Tribunal. [585] Whilst such informality helps ensure that the RDC does not take on a Judicial role and ensures that its decision making is speedy, it can lead to a situation where cases are decided against firms or individuals that would not stand up to the rigorous judicial scrutiny of the Tribunal. The only opportunity that a person has to ensure that the FSA decision making in such situations rectified is to meet the cost of a reference to the Tribunal. The situation is more pronounced when the publicity associated with any Tribunal reference is also considered.

In the next Chapter consideration will further be given to the Tribunal’s rules of procedure and how its evidential standards and cots effected market abuse enforcement.

CHAPTER 6: THE TRIBUNAL RULES OF PROCEDURE AND THE IMPACT OF EVIDENCE AND COSTS

“...As a matter of English law, criminal charges must be proved beyond reasonable doubt; civil actions are decided on the balance of probabilities. On the face of it, therefore, designating a regime as "civil" rather than "criminal" advantages the prosecutor by making it easier for him to get a favourable result. This raises the question whether using the civil burden of proof would fall foul of the ECHR in relation to provisions which are criminal for that purpose..." [586] 

Introduction

Having explored in the previous Chapter the arrangements in place to ensure the Tribunal’s independence, this Chapter will go onto to analysis how the Tribunal’s rules of procedure operate to affect the making of a reference and ultimately the FSA’s market abuse decision making. [587] From a practical standpoint, a major element of any judicial hearing concerns the evidence need to prove a case. Chapter 5 addressed the nature of the Tribunal references and that the burden of proof rests on the FSA. [588] In Chapter 3, consideration was given to the RDC’s approach to evidential standards when making enforcement decisions. [589] The standard of proof before the Tribunal is however framed on more traditional lines, although as discussed below that has not prevented questions of evidential standards from being addressed before the Tribunal. During the passage of the Financial Services and Markets Bill, considerable time was devoted to the question of the evidential standard required before the Tribunal and the impact those standard would have given the view that he market abuse regime would be classified as ‘criminal’ for the purpose of Article 6 European Convention on Human Rights. This Chapter and Chapter 7 will show that the application of the civil standard of proof in Market abuse cases has in part contributed to the shaping of market abuse enforcement policy. This Chapter will then go onto consider the vexed subject of costs in Tribunal cases and then analysis the extent to which Market abuse decision making can give rise to liability in damages. Chapter 5 explored the Tribunal’s legal assistance scheme established to ensure that market abuse proceedings before the Tribunal were compliant with Article 6, however this chapter will consider who has responsibility for meeting the costs of cases brought before the Tribunal which were recognised by Parliament [590] as potentially being considerable for both an applicant and the FSA, and whether the allocation of costs has impacted market abuse enforcement. In this Chapter all reference to ‘Rules’ relate to the Tribunal Procedures (Upper Tribunal) Rules 2008 [591] , unless the context otherwise requires.

Beginning the reference

The process and Time limits

To make a reference to the Upper Tribunal the applicant must file with the Tribunal no later than twenty eight days from the date of the FSA’s decision notice, was given to the applicant a Reference Notice stating the issues the applicant wishes the Tribunal to consider. [592] The applicant is also required to file with the Reference Notice a copy of the FSA notice to which the reference relates [593] The applicant is also required to send a copy of that notice to the FSA [594] . Following issue of a reference the FSA is prohibited under S133A (4) the 2000 Act [595] from taking the action specified in a decision notice until the reference, and any appeal against the Tribunal's determination, has been finally disposed of.

The FSA’s statement of case and document disclosure

Once the applicants reference has been sent The Upper Tribunal will enter details of it in a formal register it is required to maintain and will issue a notification of the reference to the FSA. [596] Within twenty eight days [597] from the date it received the notification from the Tribunal, the FSA is required under Schedule 3 Rule 4(1) of the Tribunal rules to send a written statement of case which must under Schedule 3 rule 4(2) of the Tribunal rules, identify the statutory provisions providing for the referred action; state the reasons for the referred action; and set out all the matters and facts upon which the Authority relies to support the referred action. In Philippe Jabre [598] as a preliminary issue the Tribunal held that it was open for the FSA in its statement and thus within the Tribunal’s jurisdiction to contend that Tribunal determine the matter otherwise than in accordance with the FSA decision notice

The FSA is obliged to undertake full disclosure of documents that both support and might undermine the FSA case. The FSA is required by Schedule 3 Rule 4 (3) of the Tribunal rules to submit with the statement of its case a list of: the documents on which the FSA relies in support of the referred action; and the further material which in the opinion of the Authority might undermine the decision to take that action. Having received the FSA’s statement of case the applicant under Schedule 3 rule 5(1) is then required within twenty eight days to file with the Upper Tribunal a reply stating the grounds on which the applicant relies in the reference; identify all matters contained in the statement of case which are disputed by the applicant; and state the applicant's reasons for disputing them.

Furthermore the applicant’s reply must in accordance with Schedule 3 rule 5 (3) be accompanied by a list of the documents on which the applicant intends to rely in support of its case and having received the list the FSA is required under Schedule 3 rule 6 to deliver any further material which might reasonably be expected to assist the applicants case. The process for the exchange of lists of documents disclosed by the FSA under Schedule 3 rules 4(3) and the applicants under Schedule 3 5(3) appears to be designed to ensure that all documents supporting both the FSA’s decision and the applicants reference are revealed to the parties early in the Tribunal process. There is particular emphasis on the disclosure of documents that might reasonably assist the applicants case. During the compilation of both parties lists the question as to whether certain documents must be disclosed often arises. Certain documents may be particularly sensitive or be subject to privilege. Disciplinary cases in particular may rely on evidence in material relating to third parties and consumers the disclosure of which may reveal sensitive and personal financial data about those third parties.

Applying to both the applicant and FSA as respondent the phrase “document" is defined widely in Rule 1 of the Tribunal Rules meaning “anything in which information is recorded in any form..." Schedule 3 rule 7, however sets out a number of exceptions to the general obligation of disclosure and the FSA need not disclose in its lists any documents relating to a case involving a person other than the applicant which was taken into account by the FSA in the applicant's case only for the purposes of comparison with other cases. Rule 7(2) provides that neither the applicants list nor the FSA’s list of documents need contain any documents that are material and the disclosure of which for the purpose of or connection with any legal proceedings is an intercepted communication as prohibited by S 17 Regulation of Investigatory Powers Act 2000.

Finally the parties may apply to the Upper Tribunal under Schedule 3 rule 7(4) for directions on whether documents are required to be disclosed and importantly at rule 7(4) provides that any party may apply to the Upper Tribunal for a non disclosure direction where disclosure would not be in the public interest or would not be fair having regard to the likely significance of the documents to the applicant and the potential prejudice to the commercial interests of a person other than the applicant.

Withdrawal of reference

Rule 17 of the Tribunal rules sets out the procedure for withdrawal of a reference. Should either the applicant or the FSA wish to withdraw their case at any time before the substantive hearing they may do so with without permission of the Tribunal by filing a notice to that effect. Where the decision is taken by the applicant to withdraw the reference during the hearing itself the Tribunal's permission to do so is required under Rule 17(1)(b). Neither the Tribunal rules or the 2000 Act make any provision for when a hearing of the reference begins. The question of what is meant by “before the hearing" under Rule 17(1)(a) was considered by the FSMT in the case of Eurolife v Financial Services Authority 2002 [599] . In that case the hearing was listed to start on 2 September 2002, but before the hearing started the parties asked for further time to see if they could agree to certain matters. The FSMT agreed to this but by 4.00pm on 3 September the parties had still not reached an agreed position and asked in open court for further time. The FSMT consented to this further application on the basis that the FSA would open its case at 10.30am on 4 September. At 10.30am on 4 September in open court but before the FSA had commenced its opening, the applicant’s representative handed the FSMT a letter from the applicant dated 4 September withdrawing its reference. The FSMT concluded that until the FSA opens its case the determination process will not have begun and the expression "the hearing of the reference" is directed at the time from which the hearing has effectively begun. The FSMT considered that it is not required to give its permission for the withdrawal of a reference when as in the instant case all that has happened is that an application for further time has been successfully made. The FSMT had a Statutory obligation under the then S133(4) of the 2000 Act (this provision is now replicated in the amended S133 (5)) to determine the appropriate action (if any) for the FSA to take in relation to the matter, including where the reference has been withdrawn. Such determination might be necessary to ensure that the terms of the FSA’s decision notice which may have been suspended by direction under the then Tribunal rule 10 (the power to give such a direction is now contained in rule 5(5) Upper Tribunal rules) is given effect. This latter point will be of particular importance under rule 17 in relation to withdrawals by the FSA following which it will be necessary for the Upper Tribunal to determine the reference, either to direct that the terms of the FSA’s decision notice are not to take effect. [600] 

Directions

The applicant may include with the reference notice an application for directions on the case. Appropriate directions from the Upper Tribunal are a necessary and essential element of proper preparation of the parties’ case. They will serve to guide the parties on the steps they should take, setting time limits, assist the Upper Tribunal to determine the issues and generally to ensure the just, prompt and economical determination of the reference. Certain directions may be given as a way of dealing with matters to ensure that the case is ready for a hearing. Directions may be applied for by either party or given by the Upper Tribunal on its own initiative. Rule 5 Tribunal rules sets out certain case management directions that may be given by the Upper Tribunal dealing with matters, such as extending time limits, the disclosure of certain documents, consolidating cases, dealing with issues as preliminary issues in a case For an example see Winterfloods v Financial Services Authority [601] ) and in appropriate cases directing to suspend the FSA’s action being subject to the application, pending the determination of the case. Such an application was considered by the FSMT in Theophilus Folagbade Sonaike trading as Ft Financial Services v Financial Services Authority [602] . The reference in that case arose out of the FSA on 19 May 2005 issuing two notices directed to the Applicant. Mr Sonaike, had been a sole trader carrying on business in the name of “FT Insurance Services", and had had permission, in accordance with Part IV of the 2000 Act to carry on various regulated activities, in advising on and arranging investments and mortgages. The first notice, a Supervisory Notice given in accordance with section 45 of the 2000 Act, removed all of the regulated activities from Sonaike’s permission, with immediate effect. The second, a Warning Notice, also given under section 45, indicated an intention to cancel Sonaike’s permission altogether. The FSA’s supervisory notice arose out of Sonaike’s conviction at Manchester Crown Court on 26 January 2004, of five counts of furnishing false information, (false accounting) contrary to section 17(1)(b) of the Theft 10 Act 1968. Although he had pleaded not guilty to each count, he had been convicted by the jury and sentenced to a Community Punishment Order. Sonaike referred the notices to the FSMT asking it to consider whether the effect of the Supervisory Notice should be suspended pending the final determination of the reference. In considering the application the FSMT stated [603] ,

“Our task at this stage in the reference is not to evaluate the evidence with a view to determining the merits of the opposing cases, but to undertake a balancing exercise. We must weigh the protection of the public – the primary focus of the Act – against the burden to the Applicant of his being deprived of his livelihood pending the final determination of the reference, bearing in mind the risk that the temporary closure of a sole trader’s business may lead to its demise even if the reference is ultimately decided in his favour. But in carrying out the balancing exercise we must keep very much in mind the fact that the power to suspend a person’s authorisation immediately was given to the Authority by the Act for good reason, namely that a delay in withdrawal may itself be prejudicial to the public."

The FSMT considered that that in principle a recent conviction for an offence of dishonesty necessarily gives rise to serious doubts about the fitness of the person concerned to be authorised for the purposes of the Act. It was of the view that in this case the balancing of the need to protect the public against depriving the applicant of his livelihood lead to the conclusion that the Supervisory Notice should not be suspended pending determination of the reference. It stated [604] “There must, we think, be some compelling reason in a case of this kind before the tribunal might come to the opposite conclusion."

The parties may applying for directions as set out in Rule 6 Tribunal rules. An application for directions may be applied for orally at a hearing or must be filed with the Upper Tribunal and under Rule 6(3) include the reasons for making that application. The Upper Tribunal will send a copy of the application for directions to the other party and under Rule 34 the Upper Tribunal may exercise its general discretion to reach a decision on the directions with or without a hearing. Rules 6 (5) permit a person to whom a direction is given to subsequently apply to the Tribunal showing good cause why the direction should be varied or set aside. Where such an application is made and it relates to a direction applied for by the other party the Tribunal will notifying that other person and give them an opportunity to make representations.

Cases before the tribunal

Preliminary hearings

The Tribunal may direct under Rule 13(1) that any question of fact or law which appears to be in issue in relation to the reference be determined at a preliminary hearing. Such as direction may help ensure that material issues, that have a bearing on the reference, can be determined both early and without the need for a full hearing. Indeed it is possible that the outcome of a preliminary hearing will dispose of the reference which has arisen as in cases such as Phillippe Jabre v FSA [605] and Winterfloods and ors v FSA [606] 

Under Rule 13 (2) if, in the opinion of the Tribunal, the determination at the preliminary hearing substantially disposes of the reference, the Tribunal may treat the preliminary hearing as the hearing of the reference and may make such order disposing of the reference as it thinks fit.

Witnesses and evidence

The Upper Tribunal has a wide discretion under Rule 15 as to the issues on which it requires evidence, the nature of that evidence and whether or not it requires that evidence to be given orally at the hearing or by written submission or witness statement. Generally, confirming the lower formality in Upper Tribunal proceedings, it has the discretion to admit evidence whether or not it would be admissible in a civil trial (and it is assumed this will include hearsay evidence) and evidence that was not available to the FSA as decision maker [607] . Rule 16(1) of the Upper Tribunal Procedures [608] authorises the Tribunal to require by summons any person to attend as a witness, or order any person to answer any question at such time and place as is specified in the summons, as well as produce within the time specified in the summons, any document in his possession or control which relate to any issue in the proceedings [609] . The Tribunal may under Rule 16(4) following an application of the person to whom the witness summons is addressed, direct that the witness summons be set aside or varied and the Upper Tribunal may order pursuant to Rule 14 prohibiting the disclosure or publication of a document if under Rule 14(2) it is satisfied that disclosure would likely to cause a person serious harm or having regard to the interest of justice that it is proportionate to give such a direction.

The 2007 Act has ensured that evidence and testimony before the Upper Tribunal is regarded in the same way as the Courts. Section 25 of the 2007 Act grants the Upper Tribunal the same powers as the High Court to compel the attendance of witnesses or the production and inspection of documents and during any hearing the Tribunal may under Rule 15(3) take evidence on oath. It is further an offence under S133B (2) of the 2000 Act for a person to fail to attend , give evidence, or alter, destroy, suppress or refuse to produce documents following the issue of a witness summons.

Hearings and publicity

Although oral hearings comply with Article 6 of the European Convention on Human Rights, the threat of the oxygen of publicity arising from a public hearing resulting publicity can act as a disincentive for those objecting to an FSA decision thus providing an incentive for persons to opt for settlement (as explored in Chapter 3) and the ability to exercise an element of control over the conclusion of their case. Moreover the prospect of being subject to a detailed analysis of alleged failings even if subsequently proven not true can threaten a person’s reputation

Hearings

Paragraph 37(1) of the Tribunal rules provides the general safeguard that all hearings of the Upper Tribunal must be held in public. Furthermore Paragraph 5(3) (g) of the rules provides the Upper Tribunal with the general power to decide the form of any hearing, and under Paragraph 5(10 the Upper Tribunal has discretion to regulate its own proceedings. Evidence may be admitted by the Upper Tribunal whether or not it would be admissible in a court of law and whether or not it was available to the FSA when taking the referred action [610] . In general, hearings before the Upper Tribunal are conducted orally and are held in public, although the Tribunal may under Paragraph 34 (1) of the Tribunal rules determine a matter without a hearing provided that it has had regard to any views expressed by the parties. Furthermore, the Upper Tribunal has the general power under Paragraph 38 of its rules to proceed with a hearing notwithstanding a party’s failure to attend, if it is satisfied that the party has been notified of the hearing or that reasonable steps have been taken to notify the part of the hearing and that it is in the interest of justice to do so.

Paragraph 37(2) provides that the Upper Tribunal may give a direction that a hearing, or part of it is held in private, indicating that the Tribunal, even when so satisfied, is not bound to order a private hearing, but has a wide discretion as the whether the hearing should be held in public or private. The question on whether to hold a hearing in private might arose in the FSMT reference of Eurolife v Financial Services Authority 2002 [611] which was in regard to paragraph 17 of the FSMT rules that then applied. [612] That rule provided that all hearings of the FSMT were to be held in public, save where on the application of all of the parties, the FSMT was satisfied that that a hearing in private would not prejudice the interests of justice, or on the application of any of the parties the FSMT was satisfied that a hearing in private would not prejudice the interests of justice.

Eurolife’s application was made on two grounds: first that a public hearing would cause irreparable damage to Eurolife’s reputation, whatever the outcome, and second that the consequential damage to Eurolife’s business would be so disproportionate as to be unfair. In support of its application Eurolife claimed that the reaction to a public hearing would, be an immediate lack of confidence in all the companies comprised in the Eurolife Group. It also predicted that Independent Financial Advisers would no longer be able to recommend Eurolife products and new business would dry up with the consequence that Eurolife Group would cease to be viable and given the relative small size of the Eurolife Group, damage to any part of the group would, it believed, impact unfairly on other parts of the group. The FSMT rejected Eurolife’s application. In reaching its decision it addressed the requirements that had to be satisfied in the then Tribunal rule 17 application [613] as well as the fundamental requirement for court hearings to be held in public.

Unfairness to the applicant

The Tribunal was asked to make a judgment under the terms of the then rule 17 as to whether reputational risk arising out of a public hearing gave rise to unfairness or not. It concluded that it is necessary to consider the circumstances of each particular case. In the circumstances of the Eurolife case it did not consider that the reputational risk was such to give rise to unfairness, but it did not go as far as saying that reputational risk can in certain situations give rise to unfairness to the applicant. In its judgement it gave an example of the reputational damage occurring during the progress of the hearing such as to destroy the applicant's business. The suffering of disproportionate damage would be unfair.

The FSMT pointed out that the prospect of unfairness or prejudice does not arise simply through knowledge of the action or decision taken by the FSA as in many cases the existence of the proceedings will already be a matter of public knowledge, prior to the hearing taking place. In addition after the hearing the FSMT’s decision will normally be made public. An application under rule 17(3) was confined specifically to the unfairness or prejudice that might result from the holding of the hearing in public and the concern is likely to be with the effect of publication of allegations or evidence during the hearing itself and in the period up to the publication of the Tribunal's decision. The FSMT gave examples of when such concerns might arise, “such concerns may arise because press reporting may not always succeed in being accurate, or because during the hearing the allegations are more prominently reported than the applicant's answers to them, or because a decision by the Tribunal in the applicant's favour after the conclusion of the hearing may not in practice be sufficient to undo the damage done by the publicising of the allegations. There may also be concerns over other matters, such as unnecessary public disclosure of commercially sensitive or other confidential information." [614] 

The FSMT found that it must be satisfied that the risk of unfairness or prejudice resulting from holding the hearing in public makes it "necessary" to hold the hearing in private. To reach this decision it stated that it must weigh both the likelihood and the seriousness of the possible unfairness or prejudice and consider whether, in the circumstances, a private hearing is really needed.

Interest of justice

If the FSMT was satisfied that a hearing in private is necessary having regard to any unfairness to the applicant or prejudice to the interests of consumers that might result from a hearing in public, the FSMT considered that it might still only direct that all or part of the hearing shall be in private if it was satisfied that a hearing in private would not prejudice the interests of justice. The FSMT was guided by the judgement in The European Court of Human Rights case of Diennet v France (1995) [615] in which it was said:

"The Court reiterates that the holding of court hearings in public constitutes a fundamental principle enshrined in Article 6. This public character protects litigants against the administration of justice in secret with no public scrutiny; it is also one of the means whereby confidence in the courts can be maintained. By rendering the administration of justice transparent, publicity contributes to the achievement of the aim of Article 6(1), namely a fair trial, the guarantee of which is one of the fundamental principles of any democratic society, within the meaning of the Convention."

Article 6 of the European Convention on Human Rights does, however sanction the exclusion of the public where (among other things) publicity would prejudice the interests of justice. Lord Diplock said in Attorney-General v Leveller Magazine Ltd [1979] [616] 

"... since the purpose of the general rule is to serve the ends of justice it may be necessary to depart from it where the nature or circumstances of the particular proceeding are such that the application of the general rule in its entirety would frustrate or render impracticable the administration of justice or would damage some other public interest for whose protection Parliament has made some statutory derogation from the rule."

The FSMT considered that, if the unfairness or prejudice condition is fulfilled, the interests of justice in the particular case are likely to be better served by the holding of the hearing in private. However it was concerned to stress that it must keep in mind the important public interest in open justice. It is therefore submitted that before the Upper Tribunal makes an order under Paragraph 37(2) of the Upper Tribunal rules it must in every case be satisfied also that the interests of justice in this more general sense will not be prejudiced.

Proof and evidence

As discussed in Chapter 5, cases before the Tribunal are not appeals but are hearings afresh of the FSA decision in dispute and thus legal the burden of proof rests with the FSA, as respondent, to prove to the Tribunal’s satisfaction that its decision is correct [617] .

The Civil Law regime in which the Upper Tribunal operates was established in part to complement the desired civil nature of the Market Abuse regime. One aspect of hearings that provoked debate prior to the introduction of the regime was the applicable standard of proof in referrals to the Tribunal and proof of Market Abuse was regarded as being required to the Civil Standard of a balance of probabilities. Although as will be illustrated below that the Courts have over time developed a notion that an evidential ‘sliding scale’ applies in Civil cases that notion has recently been challenged by Lord Hoffmann in the House of Lords decision of Re B [2009]. [618] Before returning to that case it is useful however to provide some analysis of the prior law. Given the serious nature of Market Abuse allegation, the Tribunal in Hoodless and Blackwell v FSA [619] endorsed the judgment in Re Dellow's Will Trusts, Lloyd's Bank Limited v Institute of Cancer Research [1964] [620] which very simply provided that the more serious the matter alleged the greater the evidence required to prove the allegation. Ungoed-Thomas J at para 773 set out the extent of evidence required in civil cases, he stated, "The more serious the allegation, the more cogent is the evidence required to overcome the unlikelihood of what is alleged and thus proven." Further confirming such ‘sliding-scale’ approach in Re H [621] where Lord Nicholls said “When assessing the probabilities the court will have in mind as a factor…, the more serious the allegation, the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability". In the first full Market BAuse regiem referral to the Tribunal in Arif Mohammed [622] the Tribunal confirmed that although Market abuse was required to be proven on a balance of probabilities, it would apply the ‘sliding scale’

The impact of the requirements of Article 6 of the European Convention on Human Rights does however need to be overlaid upon the UK’s market Abuse regime [623] . In B v Chief Constable of Avon and Somerset Constabulary (2001) Lord Bingham of Cornhill [624] stated that the jurisprudence of the European Court of Human Rights did not, require member states to apply what United Kingdom courts called the criminal standard of proof if the standard of proof was sufficiently strong in the eyes of domestic law to establish what has to be established. Lord Bingham [625] in essence confirmed the view of Ungoed-Thomas J in Re Dellows Will Trust by stating that the civil standard of proof did not invariably mean a bare balance of probability; it was a flexible standard to be applied with greater or lesser strictness according to the seriousness of what had to be proved.

In Han v Customs and Excise Commissioners [2001] [626] EWCA Civ 1040 which concerned a civil penalty for dishonest evasion of tax. The Court of Appeal was required to consider whether such a civil penalty was a criminal charge for the purposes of Article 6. Potter LJ identified [627] three criteria routinely applied by the European Court of Justice when determining whether an applicant was the subject of a criminal charge. The first criterion is the categorisation of the allegation in domestic law. Potter LJ stated, that is no more than a starting point and even if the offence is not criminalised by the national law, the court determines whether it is nonetheless criminal in character for the purposes of Article 6 by proceeding to the second and third criteria. Potter LJ stated [628] that, under the second criterion, the court considers whether or not the offence is one which applies generally to the public at large or is restricted to a specific group. If the former, then despite its decriminalisation by the national law, it is apt to be regarded as criminal. The third Criterion relates to the severity of the penalty. If a punitive and deterrent (as opposed to a compensatory) penalty is attached, it is likely to be regarded as criminal in character, even in cases where the penalty is a fine rather than imprisonment.

In the Davidson reference [629] the FSMT decided that it was clear from the wording of S127 of the 2000 Act that as decision notices about penalties for market abuse are referable to the Tribunal and are not within the jurisdiction of the criminal courts then the first criterion in Han was not satisfied, however, it was satisfied that given that the market Abuse regime applied to the general public as users of the financial markets and not just authorised persons then the regime met the second criterion and that given the potential penalties are of a substantial, punitive and deterrent nature rather than of a compensatory nature the third criterion was met. The FSMT did, however partly distinguish the Market Abuse regime from the third criterion in Han, as it considered that a negative Market Abuse finding did not give rise to a criminal record. For the reasons given below it is submitted that although technically correct, the recording of Market Abuse finding and the regard with which it is held by the FSA, (which is after all a government regulatory agency), results in a finding against a person that is analogous to a criminal record.

Although in Davidson the Tribunal concluded that the Market Abuse regime was Criminal in nature for the purposes of Article 6 ECHR, it noted that Article 6.3 does not mention the standard of proof and thus adopted the principles established by the Court of Appeal in Han v Customs and Excise Commissioners [630] that, even if proceedings are criminal for the purposes of Article 6, it does not follow that, for other domestic purposes, they are to be treated as criminal. It concluded that the standard of proof in Market Abuse cases was the civil standard but although there is a single civil standard of proof on the balance of probabilities it is flexible in its application. It confirmed that the more serious the allegation, or the more serious the consequences if the allegation is proved, the stronger must be the evidence before it could find the allegation proved on the balance of probabilities. The Chairman of the Tribunal stated: “We regard the allegations of market abuse, the subject of these references, as very serious allegations indeed. We also note that if the allegations are proved the consequences will be very serious also" [631] .

It is difficult to see whether the arguments regarding the standard of proof in Market Abuse cases before the Tribunal are in fact academic only, in B v Chief Constable of Avon and Somerset Constabulary (2001) Lord Bingham expressed the view [632] that in a serious case, the difference between the criminal standard and the civil standard was largely illusory and could be indistinguishable. In R v Mental Health Review Tribunal (December 2005) [633] in the Court of Appeal Richards LJ stated [634] that the civil standard of proof is flexible in its application and enables proper account to be taken of the seriousness of the allegations to be proved. He stated [635] that the more serious the allegation, or the more serious the consequences if the allegation is proved, the stronger must be the evidence before a court will find the allegation proved on the balance of probabilities. Richards LJ concluded that [636] , although there remains a distinction in principle between the civil standard and the criminal standard, the practical application of the flexible approach means that they are likely in certain contexts to produce the same or similar results.

Despite these cases, The Supreme Court and House of Lords has recently qualified the law on standards of proof in civil law matters, challenging many of the preconceptions that have developed regarding a so called ‘heightened’ standard of proof or evidential ‘sliding scale’. Returning to the House of Lords decision in Re B [2009] Lord Hoffmann confirmed [637] that to refer to the Civil standard of proof as being on a sliding scale or in certain cases(within which Market Abuse might fall) there being a ‘heightened’ standard of proof is wrong. “the time has come to say, once and for all, that there is only one civil standard of proof and that is proof that the fact in issue more probably occurred than not."Lord Hoffmann in highlighting that there is just one civil standard of proof analysed the law thus. He pointed out that if a legal rule requires a fact to be proved there is no room for a finding that it might have happened. Pointing out that the law operates a binary system in which the only values are zero and one, he stated that the fact either happened or it did not. [638] In Hoffmann’s view the civil standard is concerned with balancing of inherent probabilities rather than any heighted or sliding standard. In reaching this decision he regards many of the previous authorities on the subject as confused and confirmed the judgment of Lord Nicholls in Re H[ 1996] [639] that “...When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence... It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established..."

The House of Lord’s decision thus leaves open the question as to whether the Tribunal is likely in future to evaluate evidence in market abuse cases differently. As explored above in Arif Mohammed the Tribunal made reference to it applying the sliding scale, however given the tone of its decisions in subsequent cases such as Parker and Davidson (as discussed above) it has focused on the standard or proof in the context of the seriousness of an allegation of abuse and it is submitted that any reference to a sliding scale is a vernacular unlikely to have influenced the Tribunal’s decision making.

The question of costs

The Joint Committee on Financial Services first report on the draft Financial Services and Markets Bill [640] observed that members of any regulated community already face a significant disincentive against contesting regulatory action, since win or lose they must continue to live with the regulator if they are to stay in the industry and the cost of such actions make this matter worse [641] . Furthermore, underlying professional regulation exists the proposition that absent bad faith or dishonesty regulators of professional bodies should not be ordered to pay the costs of a professional against who it has brought disciplinary proceedings even where the professional has succeeded in defending the action brought [642] .

The Joint Committee also recommended that HM Treasury should consider whether the FSMT’s power to award costs either way should be restricted to cases of frivolous, vexatious or unreasonable behaviour. During evidence given to the committee varying concern regarding the recovery of costs was expressed. The FSA conceded that the costs to a defendant of taking an action to the Tribunal are likely to be great, [643] an in evidence taken before the committee the Council on Tribunals expressed its concern that costs of referring a matter before the Tribunal might deter people from pursuing their remedies [644] . The FSA, argued, however [645] , that in general, the FSA should not be required to pay the costs of a respondent, except where it acted unreasonably in bringing the proceedings, it did however consider it necessary that if it were not able to recover its costs from an unsuccessful applicant then the FSA's costs would fall to be paid by all compliant firms through the FSA's fee levies. The Joint Committee was sufficiently concerned about the consequence of the question of cost to deter authorised firms and individuals from pursuing their remedies both because of the prospect of their own costs and those of the FSA. It had particular concern for the impact on individuals. It recommended at paragraph 218 of its report that: The FSA should be expressly prohibited from including its own costs in the amount of any fine, and the Treasury should consider whether the Tribunal's power to award costs either way should be restricted to cases of frivolous, vexatious or unreasonable behaviour. [646] 

Although the establishment of Tribunals is viewed as a cost effective and speedy way to administer justice, such systems nonetheless require funding to cover their cost of establishment and operation. In addition parties using Tribunals will experience their own costs in preparing and having their case heard. The later may be a particular concern for specialist cases before the Tribunal [647] . The resources necessarily devoted to a reference by the Tribunal can be extensive and in order for the applicant to effectively prepare and present their case, they too may very well have to incur considerable expense. Moreover, the very nature of Market Abuse proceedings, which can if proven have a significant effect on a firm and individuals reputation, the importance of allowing an applicant to afford the cost of professional and experienced representation should not be underestimated.

Unlike Court proceedings where, as a general rule, the successful party can make an application for its costs, to be paid by its opponent, Rule 10 of the Tribunal rules allows the Upper Tribunal to make an award of cost only where: it considers that a party or a representative has acted unreasonably, in defending or conducting the proceedings or if it considers that the FSA’s decision in respect of which the reference was made was unreasonable. Such an approach to cost awards can have the effect of ensuring that persons aggrieved by a decision of the FSA are not put off from making a reference to the Tribunal through fear of the cost consequences for them should their reference be unsuccessful. As will be seen, however, the Tribunal’s discretion is limited to certain types of behaviour and persons making successful references, may feel that although the Upper Tribunals decision has vindicated them, they have incurred unnecessary and unrecoverable costs in dealing with a decision that the FSA could not sustain.

The unreasonableness test for costs in the Upper Tribunal Rules has moved away significantly from the costs provision available to the FSMT which gave the FSMT a discretion to make awards of cost and expenses where one of the parties has acted vexatiously, frivolously or unreasonably [648] . In Baldwin and WRT Investments v Financial Services Authority Ltd, [649] the FSMT clarified whether the unreasonableness test applying to the FSA related to its conduct in the proceedings or in reaching the decision to which reference related. The FSMT concluded that it is entitled to take into account conduct taking place before the reference was made and the proceedings commenced. Although it determined that the conduct must have some bearing on the proceedings. That is the Tribunals discretion can only be exercised on the basis of facts connected with or leading up to the proceedings, as contrasted with conduct wholly unconnected with the proceedings.

The costs application in Baldwin also considered whether a decision of the FSA was unreasonable following a successful reference of the FSA decision to impose on the applicants a financial penalty for market abuse. The application was made regarding allegations concerning the FSA’s investigation of the case and the nature of the FSA decision. The FSA’s original decision turned on there having been a phone call during which price sensitive information was disclosed. The Tribunal determined that there was no evidence that such telephone call had been made and found in favour of the applicants that they were not guilty of market abuse and that no penalty should be imposed. The applicants argued that the FSA investigation into the alleged market abuse and its decision to impose a financial penalty were unreasonable. In the case the Tribunal observed [650] “[it] has no general power to award costs to exonerated parties. The hardship suffered by [the applicant] might impel us towards exercising our discretion in his favour, but the discretion only arises if we first find that there was unreasonableness in the relevant sense."

The FSMT, considered the appropriate test for unreasonableness in Associated Provincial Picture Houses Limited v Wednesbury Corporation [1948] [651] where Lord Greene MR stated that a decision is “Wednesbury unreasonable" if it is “…so unreasonable that no reasonable authority could ever have come to it…" In Council of Civil Service Unions v Minister for the Civil Service [1985] [652] , Lord Diplock stated that Wednesbury unreasonableness “…applies to a decision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it…" In Baldwin [653] , the FSMT determined, however, that the Wednesbury test was not appropriate because it was operating under a general discretion to award costs. It stated that “…The Tribunal, unlike the court in the Wednesbury case, is expressly directed by [paragraph 13 [654] to make its own judgment of what is reasonable…" In its decision the Tribunal also followed the decision in Secretary of State for Education and Science v Tameside Metropolitan Borough Council [655] , HL and gave the reminder that judging whether something is reasonable or unreasonable is wholly distinct from judging whether it is right or wrong: a decision may be wrong without being in the slightest degree unreasonable. The FSMT found that the FSA had not acted unreasonably and rejected the application for costs. The decision made clear that the right approach is to ask whether the Authority s decision was unreasonable, given the facts and circumstances which were known or ought to have been known to the FSA at the time when the decision was made. In the Baldwin case the FSMT followed the decision in Legal and General v Financial Services Authority [656] where the Tribunal determined that FSA should not be expected or compelled to follow procedures, or to express its conclusions, as required of a court. In Baldwin the Tribunal appeared to acknowledge that the accepted informality in the FSA decision making process creates a higher standard test of what might be unreasonable it stated [657] “In taking this approach, we remind ourselves that the process leading to the FSA’s decision was not a full judicial hearing of the kind conducted by the Tribunal…" Subsequently, however, in the Paul Davidson costs application [658] where the FSMT continuing to accept the relative informality of the Regulatory Decisions Committee suggest that given the serious impact of its Market Abuse decision making the Regulatory Decisions Committee should balance cogent evidence [659] .

In that case the question of the unreasonable conduct of the FSA came before the FSMT in an interlocutory application specifically, in respect of the costs incurred by the Applicant and thrown away as a result of the withdrawal of the original Tribunal members on 28 June 2004. One of the questions before the Tribunal was whether the actions of the Chairman of the FSA’s regulatory decisions committee were the actions of the FSA when determining whether the FSA’s actions were unreasonable. On the facts mentioned The Tribunal concluded that it was clear that the chairman of the Respondent’s Regulatory Decisions Committee did act unreasonably. His actions had been described by the FSA as inappropriate and they led to his resignation with immediate effect. On the application for costs the Tribunal stated [660] “At the time the chairman of the Respondent’s Regulatory Decisions Committee was an employee of the Respondent and his actions were, therefore, those of the Respondent. However, I would like to emphasise that in all other respects the Respondent behaved correctly, especially in drawing the conversation to the attention of the Tribunal."

With regard to the cost application the FSMT considered it important to keep in mind the broader picture and not to over-emphasize the significance of any individual feature of the FSA’s investigation. It considered that even though the investigation may have made mistakes in balancing the evidence available to it that was not necessarily make the investigation unreasonable. It also pointed to the fact that while the investigation was part of what led to the proceedings, the FSA’s Regulatory Decision Committee’s decision was critical in the FSA’s decision to issue a decision notice and the Tribunal having found that the FSA’s decision was not unreasonable and it did not consider it right on the facts to award costs against the FSA on the basis of the criticisms of its investigation.

The current system exposes the FSA to very little pressure from the threat of covering the costs in the event of a successful reference against its decision making. Such limitations are starting to encourage disquiet amongst the regulated sector that have made successful references against the FSA. By way of example Ravi Manchanda was successful in overturning the FSA decision that he was not fit and proper to be a mortgage broker because of concerns that he was implicated in a securities fraud prosecuted in the USA as well investigated by the Serious Fraud Office. The Tribunal overruled the FSA decision stating that “…it is striking to us that there should be so little evidence…no complaints of professional misconduct have been made, no civil proceedings bought and while individuals are due to stand trial next year Mr Manchanda has never been interviewed by the SFO let alone arrested or charged…" Mr Manchanda claimed that he had to spend £200,000 to fund his legal action none of which he can recover under current Tribunal rules. He has argued for a change in the law to those who are successful in their references to recover their costs. [661] 

CHAPTER 7: THE IMPACT OF THE TRIBUNAL ON THE MARKET ABUSE REGIME AND THE PROTECTION OF FINANCIAL MARKETS

“Theories of adjudication have become more sophisticated, but the most popular theories still put judging in the shade of legislation. The main outlines of this story are familiar. Judges should apply the law that other institutions have made; they should not make new law..." [662] 

In Chapter 5 the analysis of accountability models identified a distinction between those models that affect individual cases and those that might influence the wider regulated community. Chapter 2 explored the extent to which the FSA Code of Market Conduct’s (MAR)legal affect on the standards of compliance with behaviours described in the 2000 Act as constituting Market Abuse and in this Chapter consideration is given to the extent to which the Tribunal’s decided cases have impacted both the FSA’s enforcement process and the Market Abuse regime. This Chapter will further consider whether the Tribunal’s jurisdiction and powers allow for its decisions to influence MAR in appropriate cases and whether given the ‘Principles’ nature of many FSA rules, the Tribunal’s decision making and influence is in any way curtailed.

The extent of tribunal references in market abuse cases

Since the introduction of the 2000 Act, the outcome of [46] civil market abuse or market abuse related enforcement cases have been published [663] but of these only 28% have been determined following a reference to the Tribunal. Indeed further analysis of that data intriguingly reveals peaks and troughs in Tribunal references, with no Tribunal referred Final Notices published in 2002, 2003,2004, 2007 or 2008 but with a 60% Tribunal involvement in cases published in 2006, being the year in which the Davidson [664] and Baldwin [665] cases were determined by the Tribunal, and [55%] involvement in 2010. Although the relatively low number of Market Abuse cases impact these statistics, further analysis shows that it is more likely that the Tribunal will deal with references from approved persons than authorised persons and that is least likely that a reference will be made by a member of the public. Over the same period Approved Person overall 43.75 percent of approved person market abuse cases were referred to the Tribunal compared with 33% of authorised person cases and 16.6% of member of the public cases. [666] This data suggests that it is more likely that Tribunal references will be made from sole practitioner businesses or individuals possibly motivated by the prospect of reputational damage or business loss arising from FSA decisions.

The enforcement case analysis in appendix Table 2 reveals that despite the overall referral rate the FSA’s success before the Tribunal in Market Abuse cases is good with only four cases being lost, with those being confined to 2006 and once again being the applicants in the Baldwin and Davidson referrals. As discussed in Chapters 3 and 6, during the Baldwin case the Tribunal commented that there was likely to be a mismatch between the way the FSA Regulatory Decisions Committee and the Tribunal evaluate evidential material and the FSA’s success in Tribunal cases since 2006 suggests that its decision making and the work of the RDC has perhaps closed the gap in the evidential analysis performed between it and the Tribunal. The extent, however of the Tribunals involvement in high profile cases has been limited with all three of the highest financial penalty market abuse related cases being settled by the FSA as decision maker. [667] The highest penalty case in which the Tribunal has been involved is that related to Winterflood Securities [668] and although that case is significant the matter was determined by the Tribunal and subsequently the Court of Appeal on a preliminary issue of MAR interpretation rather than any direct question of the quantum of the penalty. Once again the Tribunals involvement in high profile cases against individuals is more significant, although without there being any suggestion of the Tribunal influencing the size of the penalty. The largest penalty imposed by the FSA against an individual for market abuse stands at £2.8m is against Simon Eagle [669] an approved person, a case that was initially referred to the Tribunal but subsequently withdrawn. The third largest individual penalty stands at £750, 000 against Phillippe Jabre [670] an authorised person, but once again is a case dealt with by the Tribunal on a preliminary issue without any consideration of the penalty.

The nature of the tribunal’s influence

Notwithstanding the few high profile cases determined by the Tribunal, cases of some significance have contributed to clarification of the Tribunals rules of procedure, [671] the FSA’s enforcement process, and of legal aspects of the Market Abuse regime. Furthermore, the Winterflood Securities [672] referral, which resulted in a failed appeal of the Tribunals decision to the Court of Appeal, provides some support of the strength of the Tribunals own decision making. We have seen in the cases of Baldwin [673] and Davidson [674] that the Tribunal has not felt curtailed in deciding references in favour of an applicant and even an award of cost, resulting in criticism of the FSA. It may be safe to assume, that with the benefit of hindsight those two cases arose during the early development of the Market Abuse regime although they have arguably contributed to enhancements in the way both the Tribunal and the FSA conducts disputed enforcement cases.

Although there is no single seminal Market Abuse Tribunal case, many of the early Tribunal decisions attended to fundamental issues concerning the legal provisions in the Market Abuse regime and the Tribunals jurisdiction. In Chapter 6 consideration was given to the standard of proof before the Tribunal in Civil Market abuse cases an issue that was clarified in particular by the Tribunal in the Davidson [675] and Parker [676] decisions, with the Tribunal’s decision in Parker also addressing the approach to the calculation and imposition of financial penalties in Market Abuse cases.

In Chapter 3 the significance of the FSA’s code of Market practice was considered. The Tribunal referral in Winterflood Securities [677] has allowed for judicial confirmation that the FSA Code of Market conduct did not import that an ‘actuating purpose’ or intention is a requirement for Market Abuse to mislead or distort financial markets where the Tribunal said Judge said “...had the draftsman of the Code sought to provide that the absence of an actuating purpose ensured that behaviour could not amount to market abuse he would have provided an express safe harbour provision to that effect..." [678] and the referral in Philippe Jabre where the Tribunal stated “...The behaviour that constitutes market abuse as described ... does not require the identification of any particular shares as being the qualifying investments to which the behaviour relates...The abusive behaviour, irrespective of where it is taking place, has to relate to the UK market, hence the requirements ... that the qualifying investments should be traded on a market to which the section applies, i.e. the London market..." [679] provides the important confirmation that the UK market abuse regime has jurisdiction over trades in securities on a prescribed market even where the abusive trade in question is placed on a non-prescribed market.

Perhaps the most significant referral to the Tribunal although not relating to abuse on the financial markets resulted in a major review and adjustment to the FSA’s enforcement process and thus is worthy of analysis because of the impact that such procedural adjustment has had on how the FSA now manages all enforcement cases. In 2003 The FSA issued a decision notice to Legal and General Assurance Society (LGA) in connection with alleged failings in LGA’s review of the sale of endowment policies. LGA referred the decision to the FSMT claiming that the FSA’s enforcement process had not been fair. The substantive hearing lasted between 13 September and 21 October 2004, and necessitated the examination of 40,000 pages of documents. The Tribunal reported that the FSA’s closing argument alone amounted to 171 pages with 2 appendices. The outcome of the hearing appeared to be something of a draw with the FSMT not fully vindicating LGA and, questioning the independence of the FSA’s enforcement process. The Legal and General case serves to illustrate the role the Tribunal plays holding the FSA’s decision making to account even where its decision falls short of making formal recommendations under S133A 2000 Act. In the written reasons of its decision the Tribunal identified what it saw as weaknesses in the FSA’s enforcement decision making, stating [680] ,

“...It is for FSA to establish its case and produce the evidence it relies on. The existence of delays and what FSA may see as unreasonableness on the part of the party challenged are no doubt frustrating if not infuriating. They are not however a justification for reaching a conclusion that FSA is "obliged" to rely on evidence as being "strongly indicative" and arriving at its conclusions "accordingly". We see no such obligation. The issue should be - what is the evidence and what conclusions do we draw from it? If more evidence was needed FSA should have obtained it..."

Arguably it was that criticism that lead to the FSA’s wide ranging review of it enforcement processes which included the question of the RDC’s independence. [681] In an indication of how influential the threat of the Tribunal’s statutory recommendations might be, the FSMT stated [682] ,

“...On 2nd February 2005 FSA announced a Review of its Enforcement processes. This led us to suggest at the hearing on 21st February that it might not be useful or productive for us to make recommendations. That view is strengthened now that we have seen details of the proposed Review. In the course of our Decision and this Further Decision we have expressed views about this particular case which may or may not be relevant to the Review. If however the Tribunal is to contribute to that review with more general recommendations, those should come through its President who can draw on the experience of other cases as well as this one. As FSA is now conducting a Review of its enforcement processes we will make no formal recommendation in this case..."

Consequently, and as highlighted in Chapter 3, the FSA put in place arrangements to have a distinct separation of the preparation of an enforcement case from those who make decisions. The RDC now has its own dedicated legal function in place and the FSA Enforcement Division no longer gives legal advice to the RDC, although it does make submissions about the case which are also automatically disclosed to the firm or individual under enforcement. As series of other changes to the process have been made including: legal reviews now being carried out on all cases before the RDC stage by lawyers who have not been part of the investigation team, straightforward uncontested case are now dealt with by a an RDC panel of fewer than three members, introduction of a transparent scheme to give a discount on financial penalties where there has been early settlement, and FSA executive now agrees settled cases, leaving the RDC to decide contested cases.

Tribunal decisions and the justiciability of principles based enforcement

Of the [46] Market Abuse and related cases brought by the FSA, [ 3 ] have been concluded outside of the S118 Market Abuse regime, solely reliant on breaches of the FSA’s high level principles. Final Notices in cases such as Roberto Chiarion Casoni [683] and Deutsche Bank AG [684] show as explored in Chapters 2 and 3 that the FSA when dealing with authorised and approved persons will consider enforcement by reference to breaches of high level principles and failures in systems and controls obligations rather than by reference to allegations of specific breaches of the Market Abuse regime [685] .

Although the FSA generally relyies on high level principles to enforce compliance [686] it was not until its decision against Citigroup Global Markets Limited (CGML) [687] in June 2005 that it relied on high level principles rather than specific provisions of the Market abuse regime to take enforcement action against abusive conduct in the financial markets. [688] As explored in Chapter 2 the FSA’s Final Notice recorded that four traders on CGML’s European Government bond desk had developed a trading strategy on European government bond markets involving the building up and rapid sale of long positions in government bonds resulting in a temporary disruption to the volumes of bonds quoted and traded, as well as a drop in bond prices and a temporary withdrawal by some participants from quoting on a certain trading platform. The FSA Final Notice focused on breaches of High Level Principles 2 due skill, care and diligence; and Principle 3 organisation and control. There was press comment following the Final Notice implying that the FSA had chosen to take the action by reference to high level principles as a means of facilitating a speedy resolution to a complex set of issues. [689] It has to be remembered, however that since the bond markets in question were not prescribed for the purpose of S118 of the 2000 Act, then the FSA could not have taken specific Market Abuse regime action. The flexibility that high level principles based enforcement offer the FSA is exemplified in enforcement cases concerning abusive behaviour despite the conduct falling outside the Market Abuse regime as in cases such as Deutsche Bank AG [690] in April 2006 under High Level Principles 2 and 5 where the conduct in question occurred on a market that was not prescribed under S118 of the 2000 Act and Pignatelli [691] in November 2006 under Principle 2 and 3 for Approved Persons where the FSA took action against an equity salesman who relayed information conveying the impression that it was insider information when in fact it was not.

The development of FSA market related enforcement cases infer that FSA is dealing with Market Abuse at source by addressing issues arising within firms’ organisational systems and controls. Indeed in its Market Watch 21 [692] the FSA stated that where firms identif Market Abuse issues they should notify it before beginning their own investigation. Many of the FSA’s rules on system and controls take the form of general principles of conduct rather than detailed or prescriptive rules

Many FSA rules of conduct, high level principles and provisions in the Market Code (MAR) are expressed in a manifestly open way using words and phrases such as ‘reasonable’, ‘appropriate’ and ‘skilful’. Dworkin argues against the notion that vagueness in the law means that with certain legal questions there will no right answer. There has been academic debate about whether or not it is possible for there to be so called ‘gaps’ in the law and whether judges have discretion in so called ‘hard cases’ [693] Dworkin, however argues that the occasions where there may be no right answer in legal cases is rare and in his argument draws a distinction between vagueness and a concept that admits different conceptions. [694] Academic debate has persisted about the extent to which so called ‘hard cases’ or those with variable factors mean they are inherently non-justiciable. [695] Dworkin argues however that although a case may be subject to a binding principle a case need not be decided in accordance with it because competing principles must be weighed against each other. [696] Dworkin did however distinguish between legally binding principles and legal policy, the latter not being binding. [697] Those parts of the FSA’s rules classified as guidance or setting out criteria could certainly be treated as analogous to Dworkin’s non-binding ‘policy’ and there is certainly recognition by the Tribunal in Parker [698] that such provisions only have persuasive authority. It is certainly the case that in Judicial Review the Courts, mindful of the need to maintain a separation of powers have recognised that as a matter of public policy certain cases should be left to the executive’s determination and are thus not justiciable [699] . It is thus important be mindful that Parliament in prescribing in S133(5) of the 2000 Act a positive duty for the Tribunal following a reference to determine the appropriate action if any for the FSA to take in the matter, has in essence determined the justiciability of FSA decision making. There is thus on the face of it at least, in appropriate cases, a role for the Tribunal to assess the intended meaning of the regulatory obligations created by high level principles. Judicial adjudication does take place within a structure of reasoned decision making according to rules and norms together with well established cannons of interpretation. Hart recognised the rational process of decision making demanded a standard of giving like cases like treatment which presupposed a standard against which ‘like’ could be measured. [700] In reality, however, not every case will have been dealt with previosuly and judges will no doubt apply social considerations to help interpret vague terminology. Barnett observes that in Human Rights cases judges are conscious of a boundary between those matters on which they a regard themselves as competent to adjudicate and those matters which are left for democratically elected government. [701] It is important to consider whether there is any extension of such Judicial deference or competence to cases involving financial services regulation and the courts ability to determine the FSA’s view of the application of principles based regulation in individual cases. Put very simply the answer is provided by the very rational for the Tribunal as a specialist adjudicator which in complex cases will rely upon the finance industry experience of its non-judicial members. [702] Further consideration is given below to the Tribunal’s experience of dealing with the interpretation of principles.

The FSA believes an approach focused more on outcomes, ie the spirit of regulation as opposed to the letter, will allow it to achieve its regulatory objectives in a more efficient and effective way and will lead to an increased focus on principles-based enforcement action [703] . This undoubtedly presents challenges to the Tribunal which in referrals of such cases will find itself in a position of having to satisfy itself of the standards expected in meeting such principles of behaviour equally for both users of the market and authorised and approved persons. Furthermore, the impact and challenges of its risk-based approach to regulation is now added to through the emergence of the FSA’s principles based regulation which is resulting in the removal of detailed rules and regulations and establishment in high level principles. Although such principles no doubt will have the intended effect of allowing the application of regulation to flex to meet the challenges of the day and allow firms to determine how to shape a compliance approach to suit the size, type and complexity of their own business, it will in all but very clear cut cases, present challenges to FSA in proving whether a firm or individual has breached a high level principle and moreover whether a person has a duty to comply with a principle as it applies to market abuse at all.

This point is not lost on the FSA, which recognises the importance of a regulatory environment in which authorised persons understand what is expected of them and that the Principles based regime encourage an exercising of judgement about how to comply with Principles in terms of how they conduct their business. [704] In addition it has promoted the importance of firms being able to predict reasonably, at the time of the action concerned, whether the conduct would breach the Principles. However, rather than establishing a legal test of predictability, the FSA indicates that it will not take enforcement action unless it was possible to determine at the time of an alleged breach that the conduct fell short of FSA standards. [705] In part to overcome such difficulty FSA has announced that it will through a formal process recognise industry guidance on compliance with high level principles and will take into account when firms follow such guidance in determining whether or not compliance failures have occurred. Addressing the question of enforcement of compliance with principles, the FSA has taken two initiatives within its enforcement division. First it has appointed enforcement strategy managers, located in enforcement directors office, to oversee coherent approach to cases. Second it has ensured a concentrated effort to devote more enforcement resource in consideration of cases before reference is made to the enforcement division aimed at bringing skills of investigators and lawyers earlier with aim of improving quality of referrals and the speeds at which cases are brought [706] . FSA has not, however, had an easy ride with principles based regulation enforcement. Although not a Market Abuse cases, the Tribunal’s first decision on Fox Hayes [707] was critical of the FSA due to insufficient guidance on the subject matter of the enforcement case.

Article 7(1) of the ECHR sets out a prohibition on retrospective criminal provision and has been interpreted as including the principle that an offence must be sufficiently clearly defined in law so that an individual may foresee the legal consequences of his actions [708] . This was of particular concern during the Financial Services and Markets Bills passage through parliament. [709] Without supporting and appropriate FSA guidance on how to comply with a high level principle, one has to question the extent to which the RDC or the Tribunal will accept the FSA’s say so that its view on a rule breach is always the acceptable or correct view.

Justiciability before the tribunal and the code of market conduct

The challenges of principles based enforcement and case analysis by the Tribunal explored in the previous section, applies in many respects to the way in which the FSA’s Code of Market Conduct may be interpreted. Partly in response to this need, the FSA points to the roles played by its guidance as well as any formally recognised industry guidance. [710] In terms of the Tribunals responsibility of analysing alleged breach of regulatory duties contained within the S118 behaviours, MAR, contains significant elements of guidance and is drafted in terms that may be classed as “principles based" such that the FSA and authorised persons may focus more on the outcomes gained by compliance with principles rather than how to comply with prescriptive rules. The legal effect of the provisions of MAR and the circumstances when they would be binding was provided by the Tribunal in the case of Parker where it stated [711] , “...[In our view correctly]...if a particular kind of conduct is said by the code not to amount, in the Authority’s opinion, to market abuse that opinion is conclusive in favour of a person engaging in that conduct... if the code indicates that any kind of conduct does, or may, amount to market abuse, or is to be taken into account in determining whether a person has engaged in abusive behaviour, that indication may be relied on (and is important and persuasive guidance) but it is not conclusive against a person whose conduct is under consideration..."

The clear distinction between industry guidance and industry practice is worthy of note as it is possible that business practice within a particular sector even though widespread can fall below the standards expected by the FSA and result in enforcement action for individual industry participants. [712] Guidance is not however binding on authorised persons and the advantages of a Principles based regime allows authorised persons to develop approaches to regulatory compliance that are appropriate for their business in the context of its size, type and complexity provided of course that the underlying regulatory requirements are met. Analysis of guidance can however provide firms with a degree of predictability and the extent to which guidance is followed will be used by the FSA in its enforcement work. Indeed the FSA state at DEPP 6.2.1 (4) that it will not take action for behaviour it considers is in line with guidance or other materials published by the FSA in support of its rules or FSA confirmed Industry Guidance, which was current at the time of the behaviour in question. As explored in Chapter 2, the reference in DEPP 6.2.1(4) to “other materials" raises the profile of the extent to which authorised firms should or can take into account so called “soft" guidance published by the FSA, in documents such as FSA speeches, discussion and consultation documents and Final Notices. The specific reference to “supporting materials" in the FSA’s enforcement guide, [713] suggests that such other material can provide useful material, provided that authorised firms recognise that it can only be used to supplement the FSA formal guidance and the firm’s own assessment of how it should meet its regulatory obligations. Furthermore as discussed in Chapter 2 in relation to the Tribunal decision Legal General Assurance Society [714] the determination of standards of behaviour derived from broad requirements of "best endeavours", "due skill care and diligence" is based on those considered acceptable at the time rather than by judging a past problem with today’s standards was not appropriate.

In Chapter 4 when considering legal accountability of FSA decision making, it was identified that traditionally save in situations of unreasonableness, procedural defects or questions of proportionality, the Courts are reluctant to overturn regulatory agency decision making, preferring to defer to the agencies experience. [715] It is important to consider therefore , whether the Tribunal’s case assessment in circumstances where it is required to consider a FSA decision making regarding breaches of high level principles will give rise to similar deference. It is thus important to consider the Judicial reasoning employed by the Tribunal and whether that current practice conforms with the approach of the Courts. In Winterflood Securities v Financial Services Authority [716] , the FSMT confirmed that it would approach interpretation of MAR by giving expressions contained therein their ordinary meaning. As discussed above the breadth of the wording of FSA high level principles often includes reference to terms such as ‘reasonableness’ and words and phrases such as ‘reasonable care’, ‘due skill care and diligence’ and ‘market practice.’ Typically such phrases can be interpreted in an objective or subjective way and the correct interpretation of such words will be treated by the Courts as a question of law. [717] On appeal in the Winterfloods case, the Court of Appeal [718] although not considering how to interpret words in the code, did confirm (albeit without specific reference to the case) the legal effect of the guidance in that MAR in a manner consistent with the prior Tribunal decision in Parker. [719] In Parker the FSMT as discussed above, confirmed that MAR operated to provide safe-harbours of conduct but where it set out the FSA’s guidance on market abusive conduct that guidance would be considered by the Tribunal as only having persuasive authority. There have been decisions such as that in Davidson [720] where the Tribunal has not agreed with the FSA application of the criteria in MAR or approved person principles and has interpreted the ‘regular market user test [721] ’ differently to the FSA. In reaching its decision in Davidson the FSMT applied the facts of the case to the question of whether the FSA Principles had been breached and heard evidence from two expert witnesses to help in its determination of the standards of behavior the market would expect. A similar approach of factual assessment was taken by the FSMT in the case of Fox Hayes v the Financial Services Authority [722] , which although not a market abuse cases involved an FSA decision concerning breaches of high level principles. The FSMT decision in that case was subsequently appealed by the FSA and in its decision on the application for permission to Appeal the FSMT confirmed that a finding of fact not supported by any evidence raises a pint of law and that the interpretation of words and phrases in relevant FSA high level of principles and the question of whether the Tribunal should have applied a subjective or objective interpretative approach was also a matter of law. Although ultimately the Court of Appeal did not consider whether the high level principles relied on by the FSA had been breached by Fox Hayes, it did apply an objective assessment (that is what investors would have expected) to the meaning of the words and phrases used in the FSA’s applicable conduct of business rules. [723] What is also apparent from the Court of Appeal judgment in Fox Hayes is an acceptance of the purposive effect that the FSA’s guidance and evidential provisions have on the interpretation of FSA rules. [724] The Court of Appeal in Winterfloods does however a hint at the possibility of certain legal limitations over the effect of FSA guidance and evidential provisions (albeit restricted to the effect of the code in MAR). Lord Justice Moore-Bick doubted whether the FSA had the power to identify in MAR safe-harbours (behaviors that did not amount to market abuse) by implication or without identifying them as such, stating [725] 

“...The safe harbour provisions are all identified in MAR 1.1.10G. It would be surprising if the FSA had intended through the medium of the Code to provide other safe harbours by implication and without identifying them as such. In any event, I do not think that it has power to do so. Section 122(1) refers to behaviour that is described in the Code and is stated not to amount to market abuse. Section 122(2) does not have the same effect in relation to other kinds of behaviour, whether expressly described or identified only by implication, however persuasive in evidential terms the Code may be in relation to them…"

In conclusion, the FSA continues to make it clear that its work to reduce the trading on price sensitive information is a critical part of it meeting its Statutory Objectives [726] There has been speculation that following FSA cases such as Citigroup [727] and Deutsche Bank [728] that the FSA would develop a preference for framing regulatory enforcement cases against authorised persons around breaches of high level principles rather than breaches of detailed provisions of S118 of the 2000 Act and MAR. [729] While there may be advantages in using principles to frame enforcement cases as confirmed by Margaret Cole [730] thus, “One of the objectives of principles based enforcement is to enable the FSA to respond flexibly to the circumstances of a particular case in a manner that reflects the prevailing regulatory and market conditions." The history of Market Abuse enforcement cases, as shown in Appendix Table 1 does not indicate this to be the case however. Notwithstanding this low level of market abuse principles based enforcement, it must remembered that many of the provisions in Mar are framed as general concepts. It is submitted therefore, that in light of the justiciability considerations given above there remains a very real challenges should a Tribunal reference ever require analysis of the certainty allowed by the provisions of MAR or the FSA high level principles. The Joint Committee reported “the legislation by which it is created must satisfy Article 7 of the ECHR, which has been interpreted as meaning that the nature of a criminal offence must be stated with sufficient certainty to enable a person to be able to foresee the legal consequences of his actions," [731] and the advice received by the Committee recorded that the disciplinary arrangements in the Act would comply only comply with Article 7 provided that the FSA’s statements of principle and other 'requirements under the Act' are not themselves hopelessly vague"

Actions in damages arising from enforcement

Although much of the FSA’s market abuse work is concentrated on the intergrity of UK financial markets, certain market abuse behaviours can give rise to investors losses arising from either over or under valued securities. Indeed, Insider dealing not only offers the insider opportunities for profit but gives rise to losses for those persons who are on the other side of the trade or bargain even to the extent that ordinary members of the public can be affected. “…it is most likely our pension funds and our savings held through insurance companies that were directly or indirectly on the other side of the trades that made the alleged insiders their profits." [732] 

Compensation for trading losses is not easily accommodated by the FSA’s administrative enforcement actions and although the FSA tries to ensure that its financial penalties fit the crime, those penalties are returned back to the FSA. While it is certainly the case that the FSA has the power to order authorised persons to compensation investors, no such power is easily available against members of the public where action has been taken under the civil market abuse regime. FSA state at paragraph 11.1 of its Enforcement guide that it will exercise its formal restitution powers on rare occasions only and of the [46] Market Abuse cases in Table 1 [ ] included within the financial penalty an element of disgorgment of profits but [ ] included reference to the compensation of investors.

It is therefore important not to overlook that the conclusion of FSA enforcement proceedings may not be the end of liability for a respondent and that in certain circumstances the FSA’s Final Notice can act as an alert as an opportunity to pursue a claim for any losses suffered, by customers of third parties such as market counter-parties. [733] In many abuse cases, breaches of FSA rules may have given rise also to a breach of a duty owed in law to a customer, which in turn has led to the customer having suffered a financial loss. Whilst customer detriment arising from rule breaches might be dealt with by the FSA as part of its enforcement cases (For example the FSA might make an application to the Courts for a restitution order or it may, as part of any settlement terms reached with an authorised persons, agree that the person is to investigate potential customer detriment and provide compensation where loss is identified), where enforcement proceedings remain silent on the matter of customer liability, customers might consider it appropriate to pursue other available legal remedies. From a practical standpoint, the likelihood of cases being commenced in the Courts by retail customers is minimised by the availability of the Financial Ombudsman Service [734] , often being a customer’s preferred route for resolution of any claim they may have. Nonetheless, the likelihood of Court proceedings cannot be discounted and for many reasons, customers may chose to pursue their legal remedies through the Courts [735] .

While customers may have a a right of action arising from a number of legal duties owed to them (such as those arising in contract, tort and arising from a fiduciary relationship) in the context of liability arising from proven breaches of the FSA rules, consideration should be given to rights of action that arise under S150 FSMA, which provides at S150(1) “A contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty. [736] " It is submitted that the consequence of the decision in Cale and Wireless is that investors and shareholders are in a stronger position where there is a criminal prosecution for Market Abuse than where Civil proceedings or no proceedings at all

The position has, however, to some extent been limited by the decision in Hall v Cable and Wireless plc [2009]. [737] In August 2009 Cable and Wireless sold its holding in a mobile telephone company to Deutsche Telekom. As part of the transaction, Cable and Wireless gave Deutsche an indemnity for the mobile telephone company’s tax liabilities and in order to support the value of that indemnity Cable and Wireless agreed that if its debt rating fell below investment grade it would either provide Deutsche with a £1.5bn bank guarantee or pay that sum into escrow. Following a prolonged fall in the value of Cable and Wireless shares on 6 December 2002 its debt rating fell below investment grade and Cable and Wireless issued a press release disclosing the rating clause and the value of its shares fell further. Four former Cable and Wireless shareholders claimed damages for Market Abuse, breach of the listing rules, misrepresentation and negligence because of Cable and Wirelesses’ failure to disclose the ratings clause to the market before 6 December 2002. [738] 

In the case Teare J stated [739] that there was a clear indication that Parliament did not intend that market abuse or a breach of the listing rules would give rise to a cause of action at the suit of a private person and to hold otherwise would interfere with the scheme and modes of enforcement provided in the 2000 Act, concluding that shareholders did not have a cause of action for breach of Statutory duty.

S150 of the 2000 Act provides in essence private persons [740] with an action in damages where an authorised person [741] has contravened an FSA rule. S150(1) and (4) does however limit the category of rules for which a S150 action is available and in particular at S150(1) does not include rules that specify that contravention does not give rise to a right of action [742] . This specific exclusion, places to some extent, control of the foundation of S150 liability in the hands of the FSA which may prescribe which rules are covered by S150 and those which are not. Of particular importance, in the context of FSA enforcement proceedings, is the fact that the FSA’s principles for business as well as the FSA rules relating to systems and controls in SYSC 2 to 18 are excluded from S150. Given the increasing grounding of enforcement cases on breaches of high level principles, the usefulness of a final notice supporting a S150 claim, appears limited. Moreover the extensive use of FSA and industry guidance, which although designed to support compliance of FSA rules is not a formal rule and thus is not within the scope of a S150 claim in damages. Even where an enforcement case identifies a clear contravention of FSA rules, successful claims will not follow. S 150 does not create a duty of strict liability and the fact that there has been a breach of FSA rules does not mean that either the breach caused the customers loss or that the customer will be successful in a claim for damages. S150 (1) specifically provides a requirement for causation as well as a number of defences. First it provides that the rule breach is only actionable where the private person has suffered a loss as a result of the contravention. In market abuse cases, in can be difficult to show that it was the identified abusive behaviour that lead to the claimants loss. While in large scale abusive activity it might be apparent that the abusive behaviour directly led to an artificial valuation in securities, in smaller scale cases, although the person acting in contravention of the market abuse regime may have profited or avoided a loss, it may will be extremely difficult to show that any loss was caused to a third party by the abusive behaviour. Secondly S150 (1) requires that the contravention is subject to defences and other incidents applying to actions for breach of statutory duty. Such defences include the occurrence of an intervening act, their being contributory negligence by the customer and that there was a co-existent breach of duty by the firm and the claimant customer [743] .

Although S150, can have some application to customers that have been victims of market abuse , insider trading or other similar market misconduct, it’s use has to considered as limited. Its application only to rule breaches by authorised persons excludes from its scope unregulated users of the market who are otherwise subject to the Market Abuse regime. Furthermore, even where a matter relates to an authorised firm, the FSA’ increasing reliance on breaches of high level principles, being specifically excluded from the category of rule subject to S150, can act to restrict the availability of this right of action.

The tribunal’s contribution to the FSA’s ‘credible deterrent’ and emphasis on criminal prosecution

The notion that the FSA’s enforcement work should provide a credible deterrent has gathered momentum as the effects of the financial crisis have been revealed. Most notably the reaction to abuse in the markets as banking failures emerged and the emergence of worldwide financial fraud disguised by buoyant financial markets [744] rekindled the argument that traditionally the United Kingdom had a poor reputation for tackling financial crime, leading to calls for a major strengthening of the enforcement in the United Kingdom. In February 2009 Ken MacDondald QC, writing in the Times newspaper, opined that no-one in the United Kingdom was confident that fraud in the banks will be prosecuted and the country needed a financial regulatory and enforcement agency that inspires respect [745] . The FSA’s reaction to calls for reform has been to strengthen its enforcement tactic and demonstrate that it is a regulator to be feared. Effect Deterrence became a key priority for the FSA in 2006 [746] but specifically in relation to Market Abuse emerged at the time of evidence given by the FSA to a Treasury select committee enquiry into market abuse in 2008 when it stated that the FSA did not consider that the City took market abuse seriously. [747] The FSA generally considers that the threat of civil fines has not worked as well as it would have liked and considers that the threat of a custodial sentence is a much more significant deterrent. [748]  

It is unclear whether the emergence of the FSA credible deterrent has any correlation with its early difficulties in securing its administrative Market Abuse decisions in the cases of Davidson and Tatham [749] and Baldwin [750] At the time of these cases the FSA’s failure to secure a decision before the Tribunal in Davidson was widely regarded as having undermined its attempts to deal with market abuse cases [751] and damaging to the need for the financial markets to have a respected city policeman able to operate without a threat to its authority [752] . There are certainly indications that the Davidson case was a blow to the FSA and acted to highlight to the FSA that Tribunal cases could not easily be won and that there were cost consequences for the FSA if its handling of cases were not considered to satisfy standards of reasonableness. Margaret Cole stated some time after the case that, “…We have looked long and hard at the decision and the lessons that we can learn from it. In this instance we decided not to appeal but to get on with the difficult challenges that we face in the future..." [753] Moreover there is now a clear recognition that cases that the enforcement division take to the RDC the carry more risk for the FSA and will take longer to bring to conclusion. [754]  

The FSA believes that financial penalties need to be bigger and if they are not hurting they are not working as well as now promoting the use of a criminal conviction is an effective deterrent. [755] FSA history of enforcement difficulties might be creating an enthusiasm for more criminal prosecutions, given the Governments plans to introduce scope for pleas bargaining. Prosecution and the threat of custodial sentences will offer FSA the ultimate deterrent and the FSA has begun to apply greater focus on the deterrent effect of the criminal prosecution [756] . Along the way, however, there are indications of the FSA enforcement departments more assertive approach faltering as in the matter of Morton and Parry [757] two Dresdner Kleinwort bond traders relating to market abuse insider dealing under S118 Financial Services and Markets Act 2000 which indicates a difference in decisions making between FSA staff and the FSA’s RDC. The two traders in question had fought the case before the FSA’s RDC rather than agreeing to settle the case receiving just a public censure as opposed to the fine and prohibition sought by the FSA [758] .

In part the FSA has demonstrated enforcement as a credible deterrent through an increased number of enforcement cases, including an increase in the prosecution of market abuse and Insider Dealing [759] offences as well as the publicity associated with higher profile investigation such as its arrest, during the week of 22 March 2010, of seven individuals from major UK financial institutions in connection with suspected Insider Dealing [760] . Since 2008 as shown in Table 6 the FSA has prosecuted [ ] with successful prosecutions in [ ] Insider dealing offences, the most notable being the Insider Dealing prosecution of Malcolm Calvert a retired partner at Cazenove and who was seen as a senior industry figure [761] . Secondly the deterrent is highlighted in the FSA’s decision to promote a policy of increasing the level of administrative fines in market abuse and putting in place formal procedures for the calculation of the disgorgement of profit from abusive behaviour [762] .To a large extent developing the deterrent effect of its enforcement work the FSA is illustrating a desire to ensure that criminal abuse in the financial markets is seen as cheating and that there is a chance that people committing offences see that there is a real chance that they will get caught. This point was confirmed by Jamie Symington, the FSA’s Head of Wholesale Department, although he also makes clear that the FSA will continue to bring cases under the civil market abuse regime after taking into account public interest considerations as well as offering more leniency towards persons who agree to cooperate. [763] To support its prosecution activity the FSA has appointed a team of criminal prosecutors that provide the FSA with the necessary experience to allow for successful prosecutions. Serving to illustate what the FSA means by its credible deterrent Margaret Cole, in a speech on 27 April 2009, “It’s about making people realise that they can suffer meaningful consequences if they break the law and if they don’t improve their standards of behaviour..." [764] 

In the next Chapter consideration is given to a number of Criminal Offences available to the FSA for dealing with abuse in the financial markets and the scope for abusers to be caught by other parallel enforcement proceedings.

CHAPTER 8: COMPARISON WITH THE GENERAL LAW AND PARALLEL PROCEEDINGS

“…So the objective is to up the stakes for people who might risk committing market abuse so that they are deterred by the fact that they face a real prospect of a spell in prison and the publicity and stigma of a criminal conviction…" [765] 

In this chapter consideration is given to whether the specific criminal offences of Insider Dealing under Part v Criminal Justice Act 1993 and Misleading statements under S397 Financial Services and Markets Act 2000 as an alternative to the market abuse regulatory proceedings so far discussed. In offering this analysis consideration will also be given to the FSA’s experience of criminal prosecutions as well as any indications of its motivations for dealing with cases of Market Abuse under either the criminal or civil law to date. [766] By making such an assessment an understanding can be reached about whether the criminal law provides a supportive layer to the enforcement of abuse in the markets or whether by being free from the interpretation challenges and influence of the Tribunal, the criminal law provides a better opportunity for the efficient handling of market abuse cases [767] . Finally, the Chapter will conclude by considering the prospect of alternative regulatory proceedings such exchanges and whether such cases offer a credible solution to enforcement where the FSA does not take action.

Introduction

As seen in previous Chapters and from the data shown in Appendix Table 1 traditionally much of the FSA’s focus on Market Abuse enforcement has revolved its civil Market Abuse powers in S118 of the 2000 Act together with its general regulatory enforcement powers against authorised and approved persons. Chapters 3 and 7, however, considered the FSA’s work of using enforcement to create a credible deterrent and since the inception of the 2000 Act, the FSA has commenced [twenty one ] insider dealing prosecutions and from the nine cases that have gone to trial it has secured six convictions. Similalry in respect of criminal market abuse it has commenced seven prosecutions of which three cases have to date gone to trial from which it has secured two convictions. The FSA general market abuse prosecution tactic appears however to be accelerating and although by 2005 the FSA had only commenced one market related prosecution, a battery of cases emerged from 2009 onwards. [768] If one takes into account the time taken to investigate and charge defendants it seems likely that the increase in FSA prosecution work is tied into its policy of credible detterrence explored in Chapter 7. What is also revealed from analysis of the prosecutions the FSA has commenced since 2009 ( see appendix table 7) is an increasing emphasis on the prosecution of approved persons and city professionals with convictions being secured in 2010 against high profile people such as Malcolm Calvert a retired Cazenove partner, the trial (an susequent acquittal) of two city solicitors [769] and the charging of invetment bankers and print room workers.

Notwithstanding the evidential standards in criminal prosecutions, the FSA might consider that in contentious cases it stands a better chance of success with the common sense applied by a jury rather than the legal approach to the assessment of evidence applied by the Tribunal [770] . Furthermore, the profile of the criminal prosecution as an effective deterrence in market abuse cases has gradually gathered support and it is now viewed by the FSA as an essential tool in its enforcement armoury. In September 2007, Hector Sants now Chief Executive of the FSA , wrote to Compliance Officers reminding them that it was a criminal offence for anyone to disseminate false information to manipulate and create a false market in shares. Since the UK’s 2008 financial crisis, the criminal prosecution in market abuse has also gained political momentum with politicians demanding that the FSA takes a tougher stance. As the UK’s banking crisis emerged David Cameron, the leader of the Conservative Party argued “FSA and the SFO should be following up every lead, investigating every suspect transaction. And the government should be urging them on, because we need to make it one hundred percent clear: those who break the law should face prosecution..." [771] 

Margaret Cole, FSA Director of Enforcement has noted a close synergy between FSA’s financial crime objective and its objective to ensure orderly, clean and fair markets. In addition Cole has confirmed that in tackling market misconduct they will utilize a blend of civil enforcement and criminal prosecutions. “We will use all of the options at our disposal in an enforcement context, administrative proceedings under S118 of FSMA, criminal prosecutions under the Criminal Justice Act and the use of our principles, specifically Principle 5" Indeed the appropriateness of Criminal prosecution for Insider dealing rather than administrative regulatory proceedings was confirmed by the Court of Appeal in R v McQuoid (2009) [772] with Lord Judge stating “...If there was ever a feeling that insider dealing was a matter to be covered by regulation, that impression should be rapidly dissipated. The message must be clear: when it is done deliberately, insider dealing is a species of fraud; it is cheating. Prosecution in open and public court will often, and perhaps much more so now than in the past, be appropriate..." [773] 

The Market Abuse regime in the 2000 Act was not intended to override or replace the existing criminal law but rather to work alongside it. [774] S52Criminal Justice Act 1993 (the 1993 Act) makes it an offence under for a person who has inside information to deal in securities that are price affected by that information. Furthermore S397 [775] of the 2000 Act makes it an offence for a person to induce or encourage investment decisions by; knowingly or recklessly misleading false or deceptive statements, or; concealment of material facts, or; creating a false or misleading impressions of the market price or value of any investment. It should be noted that no defence to civil Market Abuse will excuse any activity that contravenes criminal law and consequently even where a person’s behaviour does not constitute market abuse it could still be in breach of other market related criminal law.

FSA’s prosecution powers

In addition to the FSA pursuing criminal prosecutions as an alternative to administrative actions, the Courts too have shown a willingness to recognise wide powers of prosecution for the FSA. The FSA role as prosecutor has however developed over time and the resolve to prosecute now shown by the FSA has not always been evident. In its April 2000 consultation paper on “Money Laundering: the FSA’s new role" [776] , the FSA emphasised an intention to co-operate with other criminal law enforcement bodies and did not suggest that it could exercise prosecutorial powers in relation to money laundering offences. Furthermore in early versions of its Enforcement Manual [777] the FSA referred only to its power to prosecute under the 2000 Act. By August 2007, however the FSA’s position had changed and in its Enforcement Guide the FSA stated for the first time that, although it had powers of prosecution under sections 401 and 402 of the 2000 Act, it “may also prosecute criminal offences for which it is not the statutory prosecutor, but where the offences form part of the same criminality as the offences it is prosecuting under the Act" [778] The FSA’s role as prosecutor is not, however, without criticism. Although the FSA’s operations are funded exclusively by the financial community [779] rather than the tax payer, it can and does prosecute members of the public for insider dealing, leading to accusations that there is something unfair about the State outsourcing transferring its responsibilities to a private organisation. [780] 

S401(2) of the 2000 Act, provides that proceedings for offences under the Act [781] , such as criminal Market Abuse under S347, may only be instituted by the FSA or by HM treasury [the secretary of state] or by or with the consent of the Director of Public Prosecutions (DPP) [782] . S402 (1) (a), extends the FSA’s powers of prosecution [783] to the offence of Insider Dealing under Part V Criminal Justice Act 1993. Although 61(2) of the 1993 Act provides that proceedings for offences under Part V “shall not be instituted except by or with the consent of (a) the Secretary of State or (b) the Director of Public Prosecutions". As will be seen below, the Courts have in effect interpreted the FSA’s S401(1)(a) insider dealing prosecution powers as overriding the DPP consent requirement in S61(2) of the 1993 Act. Such Statutory interpretation makes perfect sense reflecting both the chronology of the Statutory material and implicit intention of Parliament’s statutory drafting. The FSA’s ability to commence, without consent, criminal proceedings for Insider Dealing was recognised by the Divisional Court in R (Uberoi) v City of Westminster Magistrates’ Court and Others [2008] [784] and confirmed by the Court of Appeal in R v Rollins and R v McInerney 2009 [785] . The Judge in the former case held that the effect of section 402(1)(a) is to empower the FSA to bring proceedings for an offence under Part V without the need for it to obtain consent. In reaching that decision, the judge Sir Anthony May PQBD conclusion was reached through the implication within S401 of Parliaments original intention for FSA’s powers of prosecution. He stated [786] ,“In my judgment the structure and content of the 2000 Act amply demonstrate that it must have been the Parliamentary intention that the FSA would be able to institute proceedings under Part V of the 1993 Act without consent from outside. In the light of section 61(2) of the 1993 Act, and not overlooking paragraph 4 of Schedule 1 to the 1987 Act and the absence of such provision in the 2000 Act, section 402(1) is not tightly drawn. But the implication is to my mind abundantly plain. It is achieved by reading the words ‘may institute’ in section 402(1) as having the same meaning and effect as the same words in the passive voice ‘may be instituted by’ in section 401(2), so that the FSA may institute proceedings under section 402(1) on their own initiative and without the antecedent need to obtain the consent of the Secretary of State or the DPP. If a narrow argument or literal construction might not lead to that result, in my judgment the narrow argument is overwhelmed by the obvious general Parliamentary intention and the specific intention to be derived from those two sections."

The question of whether the FSA had any wider power to commence criminal proceedings was considered by the Court of Appeal in R v Rollins and R v McInerney 2009 [787] . In that appeal the defendants in two separate matters challenged the FSA’ s power of prosecution arguing at first instance and on appeal that the FSA’s powers of prosecution were defined and limited by the 2000 Act. The Court of Appeal considered the extent of the FSA’s powers of prosecution, first whether the effect of the drafting of S401 and S402 was to restrict the FSA powers of prosecution to only offences in the 2000 Act and second whether the FSA had any power to commence a private prosecution. One of the arguments before the Court of Appeal was that the 2000 Act set out a complete code within which the FSA must operate, precluding the bringing of any prosecution for offences outside the regulatory functions conferred on the FSA by that Act. The Court did not support this view and found clear indications in the 2000 Act that Parliament had not contemplated that the FSA’s role should be restricted to those matters set out in the Act. In particular it found that Section 1(4), which refers in the context of the Banking Act 2009 to functions of the FSA “whether generally or under this Act", plainly contemplates that the FSA has wider functions. On the question of the FSA’s power to act as a prosecuting body it saw no reason why the FSA could not commence private prosecutions.

There are a number of legal authorities that confirm the basis for regulatory agencies to commence criminal prosecutions at common law. In R (Ewing) v Davis [2007] [788] it was held “if the right of private prosecution is to be taken away or subjected to limitation, it is for Parliament to enact and not for the courts by decision to achieve." Furthermore the Court in R (Hunt) v Criminal Cases Review Commission [2001] [789] supporting the Inland Revenues ability at Common Law to bring prosecutions addressed the question of why a regulatory agency might be denied an opportunity to bring a private prosecution when an ordinary member of the public might be able to stated: “Great importance has always been attached to the ability of an ordinary member of the public to prosecute in respect of breaches of the criminal law. If an ordinary member of the public can bring proceedings for breaches of the criminal law, it would be surprising if the Inland Revenue were not in a similar position." Finally, confirmation that the right of private prosecution can be exercised by a corporate body was confirmed by the Divisional Court in R (Gladstone plc) v Manchester City Magistrates’ Court [2005] [790] 

The Court of Appeal in Rollins and R v McInerney [791] could find no reason why the general right of private prosecution had been restricted and should not be enjoyed by the FSA. In reaching this point of view it considered the general common law relating to private prosecutions but in the context of the 2000 Act together with the powers conferred on the FSA by its Memorandum of Association, which were considered wide enough to cover the institution of criminal proceedings within the scope of its objects [792] . Generally, the Court stated that it made good sense that where offences formed part of the same criminality as offences the FSA had power to prosecute under the 2000 Act, it should be capable of being included in the same indictment and that the FSA should be able to act as the single prosecutor rather than having to bring in another prosecuting authority. Although the appeal in Rollins and McInerney was brought mainly to address specifically the FSA’s prosecution of Money Laundering offences, they are nonetheless significant because of its confirmatory stance in relation to other offences including conspiracy whether at common law or under section 1 of the Criminal Law Act 1977, which falls outside the powers of prosecution expressly conferred by sections 401 and 402 of the 2000 Act. The Court observed, “... That would be a highly unsatisfactory position and cannot have been the legislative intention." [793] 

The decision to prosecute

Commenting on the Court of Appeals judgment in Rollins and R v McInerney [794] Margaret Cole explained her view that there are clear advantages of skill and specialism for the FSA acting as a prosecutor. “...Our interest is always primarily to make sure that criminal offences are prosecuted by the right authority – and by that I mean the prosecutor with clear remit and mandate, skills, specialisation and resource..  The FSA is able to prosecute insider dealing and market abuse in the criminal courts... Such cases are however rare compared to the cases it brings through its own regulatory proceedings There are a variety of reasons for regulatory cases making up such a large majority of our cases, but I see the main reasons as being the greater scope they offer for establishing breaches, the lower evidential standards that apply and the consequent lower (but not low!) litigation risk they involve and the greater prospects of settlement they hold out..." [795] 

The factors the FSA has indicated that it may take into account in considering whether to initiate criminal proceedings for market misconduct rather than impose a sanction for market abuse are set out in a non-exhaustive list at EG 12.8. These include the seriousness of the misconduct, the effect of misconduct on the market and whether dishonesty is involved. The FSA may take civil or regulatory action such as applying for an injunction or seeking restitution where criminal proceedings have been commenced or will be commenced [796] . In determining whether such proceedings should be taken, the FSA may take into account whether the taking of regulatory action might unfairly prejudice the prosecution or proposed prosecution of criminal offences, whether the defendants might be unfairly prejudiced in the conduct of their defence and whether it is appropriate to take such action having regard to the scope of the criminal proceedings and the powers available to the criminal courts [797] . Notwithstanding these comments and the wide prosecutorial jurisdiction acknowledged by the Court of Appeal in Rollins and McInerney it is evident that the FSA currently has no intention of acting as a prosecutor in every area of financial crime it might identify and indeed there is acknowledgement of its need to refer matters to other prosecuting bodies that have more appropriate skills. Confirming this position, Margaret Cole has said “...We are not, and do not aspire to be, a general fraud prosecutor. Very often frauds that we discover, for example, investment frauds, are more suitable for another prosecutor, usually the SFO or the Fraud Prosecution Unit of the Criminal Prosecution Service (CPS).  And we regularly refer cases to them and assist them in the preparation of their cases..." [798] 

Underlining this confirmation the FSA has agreed guidelines with the other authorities in England, Wales and Northern Ireland who have an interest in prosecuting criminal offences, as set out at Annex 2 of the Enforcement Guide. The FSA will apply the principles set out in the Code of Crown Prosecutors when considering whether to bring criminal proceedings or to refer the matter to another prosecuting authority [799] .

 

Misleading statements as criminal market abuse

A series of offences set out in S397 the 2000 Act have the effect of criminalising certain conduct relating to relevant investments. [800] Similar to the Civil Market Abuse regime, the offences apply to all persons and are not reserved only for the conduct of Authorised Persons. It has become common for the offences in S397 to be referred to as being an offence of “Misleading Statements" or that of “Criminal Market Abuse." Analysis of S397 reveals, that its constituent offences cover behaviour that extends beyond the making of misleading statements and occur in relation to the giving of misleading statements, concealing of material facts, as well as market manipulation. Furthermore a comparison between the offences and the Market Abuse behaviours in S118 of the Act, [801] reveal, save in respect of Insider Dealing, a considerable overlap between the conduct or behaviours contemplated by the Civil regime and the Criminal offences in S397, thus providing, in theory at least, the FSA with a framework of civil and criminal powers when dealing with market abusive behaviour. Notwithstanding such proposition neither the 2000 Act nor the FSA present the S397 offences in a way that suggests that it provides a criminal law alternative to the Civil Law regime. Indeed it is unclear from the FSA’s Enforcement Guide and Decision Making Policies and Procedures manual whether the FSA applies the S397 offences in a way that would allow for a prosecution to be considered as an alternative to Market Abuse. There now follows a comparative analysis between the S397 offences and the Civil Law Market Abuse behaviours in S118 of the 2000 Act [802] demonstrating that the FSA has available through a combination of the offences in S397 together with the offence of Insider Dealing in Part V of the 1993 Act viable criminal law alternatives to the those administrative sanctions that flow from a finding of civil Market Abuse.

Misleading Statements

Price adjustment in the financial markets is a reflex response to the release of information about both individual securities as well as market conditions. Conversely markets can be controlled, albeit improperly, if information is withheld or distorted. [803] The need for information transparency, including the timeliness of the release of information is fundamental to the proper functioning of financial markets and the requirement is supported by Art 6 of the Market Abuse Directive [804] and as discussed in Chapter 2 regulatory action is taken by the FSA against those that use transactions or information to manipulate markets. In certain circumstances making misleading statements to induce others to make decisions regarding investments is a criminal offence under Ss 397 (1)-(2). Arguably the section creates three separate offences, with two offences relating to the making of misleading statements and one offence relating to the concealment of material facts. The first of the misleading statements offence, in S397 (1) (a), arises where a person makes a statement, promise or forecast which he knows to be misleading, false or deceptive in a material particular. The requirement for materiality creates a high threshold for the offence, meaning that even where a statement is misleading, false or deceptive and that it has induced another to invest, if the statement is not material, no offence will have occurred. S397(1) (c) makes it an offence to make a misleading, false or deceptive statement where the statement is a made recklessly notwithstanding whether or not it is made dishonestly. Comparative analysis shows that the offences of misleading statements generally apply to the same conduct contemplated by both the Sixth Market Abuse behaviour under S118(7) of dissemination of information which gives or is likely to give a false or misleading impression as to a qualifying investment and the Seventh ‘Regular User’ behaviour in so far as it applies to statements, promises or forecasts that are either likely to give a regular user of the market a false or misleading impression as to the supply of, demand for or price or value of, qualifying investments, or where the statements would be, or would be likely to be, regarded by a regular user of the market as behaviour that would distort, or would be likely to distort, the market in such an investment [805] . The third offence in S397 (1) (b) addresses concealment. Extending beyond the two misleading statement offences, it arises in circumstances where a person dishonestly conceals any material facts and can arise whether in connection with a statement, promise or forecast made by him or otherwise. Once again for the offence to occur factual materiality is a prerequisite.

What is critical in each of these three offences is that the offence will only arise where the statement or factual concealment operates for the purpose of an inducement for another to invest or take decisions about their investments. S397(2) does not require, however that any person has actually been induced to invest or taken action, but rather requires the prosecution to establish that a defendant’s purpose in making the statement was for it to operate as an inducement or that the person was reckless as to whether it may so induce another person. For the offence of concealment the requirement for dishonesty ensures that mere unintentional failure to disclose information is not criminalised even where the person responsible for the concealment is reckless as to whether that failure might induce another person to invest. Once again and in line with the two misleading statement offences the facts concealed are not required by S397 (1) (b) to be directly concerned with the relevant investment provided that it can be shown that they are material facts. For example a listed oil and gas Company with a substantial oil well drilling project in a developing country is likely to be concealing a material fact for the purpose of S397 (1) (b) if it conceals information about raised security threats in the location of the Well threatening the viability of drilling in that region.

Although similarities can be found in the S397 (1) – (2) offences and each of the Sixth and Seventh Civil Law Market Abuse behaviours, a number of distinctions are sufficient to ensure that not all misleading statement behaviour can be dealt with under both the Civil and Criminal Law. First the language used in S118 (6) and (7) avoids any reference to the materiality of the statement made in the context of the investment in question, but rather requires that it must be shown that the information disseminated must create a misleading impression. The materiality [806] requirement in S397 suggests that the statement made must be fundamental or central to the market or investment in question. In R v Rigby and Bailey2005 [807] , the conduct in question related to the annual accounts of AIT Technology plc which contained false information rather than merely information that was inaccurate. Such a position suggests that the falsity of the financial information was an important factor in demonstrating materiality. (the facts of this case are further set out below). The defendants in that case had caused the Company to report a value for contracts that it had supposedly secured when in fact that had not been the case. Furthermore, as is discussed below the absence from S397 of any requirement to go on and show that the Misleading Impression did induce another to act distinguishes it from civil Market Abuse cases under S118 (7) where it is the behaviour of the alleged abuser together with the impact of the dissemination on the market that is to be shown rather than the consequence that behaviour has or might have.

Manipulation as criminal Market Abuse

The fourth, fifth and sixth Market Abuse behaviours of manipulating transactions manipulating devices and the regular user test of distortion respectively (each set out in S118 (5) –(7)) are complemented with the criminal offence of manipulation set out S397 (3) of the 2000 Act, which describes the offence as where a person does any act or engages in any course of conduct which creates a false or misleading impression as to the market in or the price or value of any relevant investments [808] . The offence in S397(3) focuses on the defendant’s activity or conduct rather than the provision or suppression of information as is the case with S397(1) and therefore will apply in circumstances where a market participant’s conduct manipulates the market.

The offence is conditional, however, in the sense that the act or course of conduct will only be an offence if it is done for the purpose of creating that impression and of thereby inducing another person to acquire, dispose of, subscribe for or underwrite those investments or to refrain from doing so or to exercise, or refrain from exercising, any rights conferred by those investments. Similar to the misleading statement offences in S397 (1) the manipulation offence does not require the prosecution to show that a person has been actually induced and such a noticeable distinction between the criminal and civil regimes operates to ensure that determining how to pursue an enforcement case under the criminal or civil law can be a technical as well as a policy decision.

Connection between the misleading statement or manipulation and the investment in question

Unlike the S397 offences the civil Market Abuse behaviours do not contain any requirement to show that the behavior acted as an inducement to another to take act, as either a direct or likely consequence of the behaviour. Both S397 offences require however, that the statement is made to induce a person to invest or take decisions regarding an investment, the Misleading Statement offence is far wider in application. Nothing in Ss397(1)-(2) requires that the statement made must be specifically about the investment in question but rather that it can arise in the context of broader statements of inducement. This has the effect of the offence occurring in sales situations where statement can be made about the financial markets general, market conditions or even predictions of the future performance of a market. What is critical to the offence is that the statement made induces a person to invest or take decisions about an investment hey hold. Conversely, the manipulation offence in S397 (3) is narrower, requiring that the misleading impression must be made about the market or investment that is the subject of the inducement.

Defences to S397 offences

The importance of price stabilisation rules for the orderly operation of financial markets accords an appropriate defence to proceedings for misleading statements under S397 (1) (a) and Market manipulation S397 (3) where a defendant can show that such a statement, promise or forecast or the act or conduct was made in conformity with price stabilising rules or control of information rules [809] . It is also a defence to the Market and price manipulation offence, if it can be shown that the defendant reasonably believed that his act or conduct would not create an impression that was false or misleading as to the matters mentioned in S397(3)

Territorial Jurisdiction and S397 offences

Like the jurisdictional requirements of Civil Market Abuse under S118A (1) (a)-(b) and S118A (2) [810] The offences in S397 are only committed where there is a connection with the commission of the offence and the United Kingdom. S397 (1)-(2)requires a connection with the United Kingdom and either the statement being made, that is the misleading statement, promise or forecast under S397(1) (a) or (c) or the concealment of facts s397(1) (b) must be made in or from the UK or the investment agreement induced to be entered into or rights exercised must be in the United Kingdom. The jurisdictional exclusions under S397 (3) are similar in that the offence occurs both where the act is done or the course of conduct is engaged in, in the United Kingdom or the false or misleading impression is created in the United Kingdom [811] . Neither of these jurisdictional requirements stipulate that either participant or victim be present in the United Kingdom being consistent with the school of thought that it is the financial markets that are victims in market abusive behaviour as well as any individual investor victim [812] . The jurisdictional elements to S397 offences further introduces an international dimension to Criminal Market Abuse allowing the prosecution to commence proceedings against persons based overseas that target their behaviour towards persons based in the United Kingdom or persons based overseas but where only the Investment Agreement is located in the United Kingdom. It is the potential for the offence to be committed where only the investment agreement itself is based in the United Kingdom, that might challenge the FSA. In the contemporary Global Financial Market place it is not inconceivable for both market traders and sales persons based outside of the United Kingdom to sell or transact United Kingdom based Investments to Investors outside of the United Kingdom, This is of particular relevance for investment activities conducted across the European Union in accordance with the so called “passporting" rights conferred generally by the Markets in Financial Instruments Directive [813] , although the activities of cross border investments activity under the Directive confer regulatory and supervisory responsibility upon the host state regulator. Nonetheless, the jurisdictional nature of S397 allow for consideration of the criminal behaviour in the market place irrespective of the location of the perpetrator or victim. and introduces a “long arm" jurisdictional element to this offence often associated with financial crime offences of the United States of America. [814] 

Prosecuting experience of market manipulation

To date there has been limited use of S397 to prosecute for criminal market abuse. With minimal reported prosecutions under S397 predecessor in S47 Financial Services Act 1986, [815] to date the FSA has only two successful S397 prosecution under its belt, although it has in 2010 commenced a prosecution in a second case against four defendants. The FSA made much of the significance of its first S397 prosecution in R v Rigby and Bailey [816] which related to misleading financial forecasts released to the market by AIT Limited a company which developed, supplied and maintained software programmes for financial businesses. Although each of three defendants were charged under both Ss 397 (1) (a) for knowingly and S397(1) (c) for recklessly making misleading statements, the conviction was ultimately secured against two of the defendants for the recklessness making of statements. The convicted defendants, Carl Rigby and Gareth Bailey were at times material to the prosecution the Chief Executive Officer and Chief Financial Officer of the Company. AIT Limited was admitted to trading on the Alternative Investment Market of the London Stock Exchange and on the 2nd May 2002, as it was obliged, issued a trading statement representing that its turnover was expected to be in the order of £47m and that it expected a profit of £6.7m. These figures were in line with what the market expected. The trading statement was however false and misleading in that it included the value of three contracts which had no in fact been entered and which between them contributed £4.8m to the predicted profit of the Company. The three contracts, and their revenue and profit should not have been taken into account. Carl Rigby and Gareth Bailey had however assured the AIT Board that these contracts had been entered into, although it was found that side letters which had been suppressed had been written to each of the three putative contracting parties relieving them from any obligation to proceed with the contracts. Following the 2nd May 2002 statement, AIT's share price rose [817] , although the illusory nature of the three putative contracts soon became clear and on 31st May 2002, AIT made a corrective market announcement regarding one of the contracts with a second similar announcement being made for the second putative contract on 13th June 2002. Upon each of these announcements, AIT’s share price fell dramatically. The FSA’s the failure to secure a conviction showing actual knowledge might be illustrative of the challenge it faces in proving actual intent in criminal market abuse where there is no compelling evidence that defendants had knowingly mislead the market.

It is unclear why the FSA has not relied on the S397 offences more frequently. Although the FSA has increasingly promoted the deterrent effect of criminal prosecutions, many market abuse cases that appear on the facts to be caught by S397 or indeed the offence of Insider dealing, continue to be dealt with by way of administrative penalty or not proceeded with at all. The FSA following an investigation chose not to take any action against Regal Petroleum, an AIM traded company, which had released to the financial markets misleading information about its financial position [818] , dealt with Royal Dutch Shell’s over statement of its hydro carbon reserves under the S118 Civil Market Abuse regime and the market conduct of certain traders at CitiGroup Global Markets as a breach of high level principles, whereas on the facts cases of this type would appear to be covered by the S397(1) offence of misleading statements. What is unclear from the Citigroup case in particular is whether or not the FSA considered that the facts of the case did not allow it to show that the impression created by the trading strategy’s false or misleading impression induced another person to acquire, dispose of, subscribe for German Treasury Bonds or to refrain from doing so or to exercise, or refrain from exercising, any rights conferred by those investments as is required in S397(3). What is clear, although for no apparent reason is that there has been no prosecution under S397 between Rigby and Bailey in 2005 and 6 January 2010 when the FSA began criminal proceedings against four previous directors of iSoft plc a software company that was once a major supplier to the NHS programme of Information Technology development [819] . The prosecution relates to a misstatement to the stock market of iSoft’s financial position in 2006 which resulted in a loss of almost ninety percent of the value of Isofts shares. Indeed reports so far reveal that the matter had been self reported to the FSA by Isoft in July 2006 after the company’s auditors had discovered errors in the Company’s accountants for the financial years of 2004 and 2005 caused by profits being recorded in the company’s accounts as soon as contracts were awarded rather than after payment had been received by the company. The error required Isoft to restate its accountants by some £174m [820] . Arguably the complexity of many market cases result in them not being proceeded with due to evidential difficulties. The failure to proceed with certain cases, however, does have the effect of inferring a sense of arbitrariness to the FSA’s choice of cases.

Criminal law and insider dealing

The offences

Traditionally, criminal law enforcement of market misconduct has focused on the offences that constitute Insider Dealing, set out in Part V Criminal Justice Act 1993. Although the Civil Market Abuse regime sets out behaviours that amount to Insider dealing, there is a sense of feeling that Insider Dealing is better left to the Criminal law. In R v McQuoid (2009) Lord Judge said “...those who involve themselves in Insider dealing are criminals, no more and no less..." [821] Successfully establishing the commission of an offence of Insider Dealing is notoriously difficult with the prosecution needing to establish each of the layers of the offences, in the context of the offences of disclosure and encouragement the defendants knowledge (which will be discussed) and to overcome statutory defences in S53 relating to the defendants state of mind. S52 of the 1993 Act prescribes three distinct offences [822] . First and perhaps the most commonly understood, it is an offence under S52 (1) for a person who has insider information to deals in securities that are price affected in relation to the information [823] . Secondly S52 (2) (a) criminalises encouragement, occurring where a person who has insider information encourages another person to deals in securities that are price affected, knowing or reasonably expecting them to deal in those securities. Third it is an offence under S 52(2) (b) for a person to disclose information he has as an insider to another person, other than in the proper performance of his employment office or profession. In establishing each of the offences it is important to have a proper appreciation of each of the requirements of the offence as well as the statutory defences appearing in S53 and special defences in Schedule 1 of the 1993 Act [824] . A failure to do so will undoubtedly present the prosecution with difficulties.

An Insider

The definition of insider provided in S57 of the 1993 Act introduces a requirement linking the alleged insider’s state of mind to the supposed inside information. It is this “state of mind" requirement that creates one of a number of challenges for the prosecution and so even where a person has inside information and trades on it, he will not for the purpose of S57 be an Insider and thus the offence will not have taken place where it cannot be shown that he knew that the information was inside information. S57 (1) provides that a person has information as an Insider if and only if (a) it is, and he knows that it is, inside information, and (b) he has it, and knows that he has it, from an inside source. It can be seen that the definition of insider further relies on two other key phrases first a person can only be an Insider if they have inside information (the Statutory definition of Inside Information is discussed below and second the information must come from an inside source. By using the phrase “a person has information from an inside source if and only if" S57 (2) operates to provide an exhaustive list of insider sources which cover: the insider’s connection with the issuer of securities as a director, employee or shareholder; the insiders access to the information through employment, office or profession: or the insider’s source of the information which may be directly or indirectly obtained but which must be from someone either with the connection to the issuer or professional access described above.

Information

It is not satisfactory to show only that a person is an insider and in possession of information that is not publically available. For an offence of Insider Dealing it is necessary to show that the information on which trading or disclosure relates is price affected. The offence is made complicated by the necessity to show the existence of an interplay between the securities which are required by S52 (1) and (2) to be price affected securities (which is considered further below) and the price sensitivity of the information itself. In defining Inside information S56 (1) (a) – (d)of the 1993 Act establishes four requirements creating a nexus between the information and security, the specificity of the information, whether the information has been made public and the affect the information has on the price of the securities. It is the requirements relating to specificity and affect of the information on the price of the securities that give rise to a number of analytical issues.

Price affected in relation to the information

S56 (2) provides that securities are "price-affected securities" in relation to inside information, if and only if the information would, if made public, be likely to have a significant effect on the price of the securities. A strict interpretation of this provision and the use of the phrase “if and only if" means that securities can only be considered price affected in one set of circumstances, that is where the inside information is likely to affect the price of those securities in a significant way. A position supported by the FSA , although relating to the UK listing rules, in its case against Woolworths plc. [825] 

The approach taken by in S56 (2) requires the prosecution to establish both the significance of the information on the price movement and the financial markets likely reaction to the inside information. It is submitted, that in the majority of Insider dealing cases where the prosecution is taken after the Insider Dealing takes place then the prosecution is able to show the market’s actual reaction to the information once it is published. There may however remain a residual argument about the question of significance. First was it the information and only the information that caused the price movement and secondly was the price movement significant. Although addressing the question of significance from the perspective of the civil market abuse regime, MAR 1.2.10 – 1.2.19 may provide some persuasive authority.

Problems arise, where the defendant deals on information they believe to be price sensitive, which is subsequently proven not to be. In cases where such a person discloses the supposed information to others and encourages them to deal, there is certainly the possibility that in markets for smaller capitalised companies that the increased trading could cause a sudden movement in the company’s share price. In such cases, the defendant’s state of mind reveals an intention to deal as an insider and gives rise to questions about that persons integrity, however the absence of any price sensitivity linked to the information means that the offence of Insider dealing has not occurred. Although not dealt with by the criminal law, the FSA enforcement cases against Sean Pignatelli [826] a Credit Suisse First Boston (Europe) Ltd US equity salesman serves to illustrate the issue. Upon receiving an analyst’s e-mail in which there were warning signals that it might contain inside information Mr Pignatelli immediately relayed the information by telephone to a number of people including four clients in a way that in FSA’s view gave the impression to clients that it was inside information. The email did not contain inside information, however the FSA’s concern was that Pignatelli failed to address his mind to warning signals that the analysts email might have contained inside information.

The criminal law’s requirement for a market based assessment differs however to the approach taken in relation to Market Abuse Insider dealing under SS118(2) 2000 Act which in S118C (6) applies a regular market user response test in assessing the significance of the information. For the purpose of S118 (2) how the market is likely to react to the information is irrelevant, but what is essential is to show that the information is of a kind which a reasonable investor would be likely to use as part of the basis of his investment decisions. [827] 

Securities

The Insider dealing offences only apply to those types of securities which are prescribed under Schedule 2 of the Criminal Justice Act 1993. HM Treasury may also by Order amend Schedule 2. Furthermore such Securities must satisfy any conditions applicable under an order of HM Treasury. Initially reflecting that Insider Dealing was considered as an offence relating to Company holdings, Schedule 2 prescribed as securities shares or debt instruments [828] in Companies or Company derivates that are referred to in the Act as instruments representing rights or an interest in a Company share or debtor relating to a security.

This extended definition covering instruments such as Options, Futures, Warrants and Contracts for Difference, in part ensures that obligations relating to price affected information cannot be avoided by trading on such information through share or debt derivatives. The ease in which substantial profits can be made by insider trading in Contracts for Difference products was illustrated In R v Asif Butt and others 2004 [829] The case is believed to be the only UK instance of an insider dealing prosecution against a senior member of a banks compliance department. Asif Butt was prosecuted by the City of London Police in 2004 for conspiracy to commit insider dealing contrary to S52(1) Criminal Justice Act 1993 and S1 Criminal Law Act 1997. Asif Butt worked in the compliance department of Credit Suisse First Boston, (an investment bank) where he had free access to a central record of confidential inside information relating to companies in which the bank and its staff were involved. It was the prosecution’s case that for a period of three years, Butt used inside information relating to certain companies, by entering into spread betting contracts [830] . To avoid detection he forwarded the information to four co-accused (friends outside of the bank), who placed the bets so that the transactions did not appear in his name. The profits from the bets were shared between them although the major share of any profit, which averaged nearly 80 per cent was allocated to Asif Butt. The Prosecution established that Butt and his co-accused had undertaken nineteen spread betting transactions with seven involving advance knowledge of profits warnings (for example, that a company was about to become the object of a hostile bid or recommended takeover) and twelve concerned confidential information regarding bids for companies [831] . It was calculated by the prosecution that the co-accused ‘s gain from the conspiracy was £287,807 with Asif Butts share being in excess of £237,000. In defence Butt, claimed that he had found a loophole in that he considered that spread betting was not an investment falling within Sch 2of the 1993 Act. Each of the other co-accused claimed that they had not realised that spread betting on price sensitive information was a criminal offence. These technical arguments were rejected by the Judge. In passing sentence Judge Elwin stated that at the heart of the conspiracy was a flagrant, calculated and deliberate breach of trust on the part of Asif Butt and that it was difficult, if not impossible, to think of a more serious situation than the setting up of a conspiracy of this kind with, at its centre, the compliance officer of a prominent investment bank. [832] .

Dealing

Both of the offences of Insider dealing and encouragement rely on the existence of dealing in securities in order for an offence to be committed, although in the case of the offence of encouragement actual dealing need not take place or be attempted as it is the act of encouragement to deal that is criminalised rather than the dealing itself. S53 states that the dealing or trading in the securities must take place on a regulated market or that the person dealing relies on a professional intermediary or is himself a professional intermediary.

For both offences, however S55 (1) (a) defines dealing as where a person either acquires or disposes of a security or in S55 (10) (b) procures directly or indirectly another person to acquire or dispose. While the straightforward activity of a person buying (or selling) a share in their own name is, as would be expected, defined as dealing under S55 (1), the section importantly recognises through the definition of the words “acquisition", “disposal" and “procure" that dealing also take place when a person agrees to acquire or dispose of a security [833] as would be the case with an order placed with a stockbroker and where a person enters into or brings to an end a contract to create a security as would be the case with a derivate contract such as an option to purchase a share in a company, which can be traded independently from the underlying asset. Furthermore it is the definition of procurement that ensures that a person dealing on inside information cannot circumvent the offence by using the services of another such as a brokerage firm placing trading orders on an agency basis and going on to hold those shares as nominee [834] .

Territorial scope

The territorial jurisdiction of insider dealing, requires at S62 of the 1993 Act that either the defendant was located in the United Kingdom at the time of the dealing, encouragement or disclosure, or the recipient of the inside information, including the market professional if used for dealing, was located in the United Kingdom. In addition, the offence of dealing will have occurred where, the market on which the dealing takes place is one which has been prescribed as regulated in the United Kingdom.

Defences to Insider Dealing

Even where the prosecution is able to prove the constituent elements of an offence of insider dealing, the defendant has available a number of general statutory defences in S53 and special defences in Schedule 1 to the 1993 Act. The general defences in particular address the defendant’s state of mind at the time of the dealing. It is this introduction of this mental element which when combined with the technical areas of the offence (which have been considered above) that render difficulties for the prosecution to secure a conviction. With regard to the offences of dealing and encouraging an individual is not guilty of the offence if under S53 (1)(a) and (2) (a) they did not at the time expect the dealing to result in a profit attributable to the fact that the information in question was price sensitive information in relation to the securities. This ‘non-profit’ defence introduces a clear linkage between the belief of no profit and the price sensitive information thus eliminating from the equation any profit secured on the dealing which the defendant may have thought they would derive from another source or event. It further a defence under S53(1) (b) and (2) (b) if the defendant believed on reasonable grounds that the information had been widely disclosed enough (or would be disclosed, in the case of the offence of encouragement) to ensure that other dealing would not be prejudiced by not having the information. Here it can be seen that it is the defendant’s state of mind concerning the disclosure of information that is in issue rather than proof of actual disclosure, which would counteract the price sensitivity requirement in S56 of the 1993 Act. The defence also provides that the extent of the disclosure the defendant reasonably believes has taken place is to be measured against the circumstance of the other persons in question, suggesting that persons with specialist markets experience might be expected to receive disclosure of information more readily than the general public. Third, the offences will not have been committed where an individual can show that under S53(1) (c) and (2) (c) they would have dealt or encouraged another to deal even if he did not have the information. It is submitted that this third defence requires the defendant to show more than that the price sensitive information did not influence their dealing but that they had a taken a prior decision to deal or encourage another so to do. The weight of such proof is likely to have been increased following the European Court of Justice decision in Spector Photo Group NV v Commissie voor het Bank-, Financie- en Assurantiewezen (CBFA) (2009) [835] which concluded that the prohibition against insider dealing creates a presumption that a person in possession of inside information that acquires or dispose of financial instruments to which the information relates has “used the information." The Court confirmed that in rebutting such a presumption the defendant should be able to place reliance on relevant guidance from the FSA.

The offence of disclosure under S52 (3) is not committed where an individual did not expect at the time another person, because of the disclosure, to deal in the securities. It is submitted that this particular defence links the defendant’s expectation about another person’s dealing with the actual disclosure and thus might be available where there was not an expectation that dealing would take place, or that there would be dealing by another but it was not expected to be derived from the information disclosed. Second and similar to ‘dealing’ and ‘encouraging’ a non-profit expectation defence is available under S63(3) (b).

Special Market Abuse Defences

The special defences in Schedule 1 apply to defined activities including market making [836] and price stabilisation [837] which while technical in nature present little analytical challenge. Schedule 1, paragraphs 2 – 4 provide a defence to dealing and encouraging another to deal in connection with the use of market information including in connection with certain acquisitions. The wording in such paragraphs is general in nature applying where a person has acted reasonably in his position despite being in possession of inside information. The application of such a reasonableness test to the use of market information undoubtedly provides challenges to a proper interpretation of the market information defence and it has been suggested that it is appropriate for reference to be made to the rules and principle of the Model Code and FSA regulation [838] . It is suggested that the market information defence is the most important for ‘City’ activities being intended to cover a variety of common situations such as the sale of the rump of shares on a rights issue. [839] Rider, Abrams and Ashe in providing a practical example suggest that the market information defence would be available to an institutional shareholder who having decided to enter into a series of transactions which would affect the market commences its programme without making a public announcement [840] .

Alternative and Exchange based enforcement

Having considered the main criminal law affecting market abuse analysis of alternatives to the FSA’s regulatory actions would not be complete without a brief consideration of alternative market abuse actions that commonly arise. The European single market in financial services theoretically allow for enforcement actions to be taken in multiple EU member states where market abuse has occurred cross border. Concern persist however as to whether the ‘prosecution’ of the same case on the same facts amount to double jeopardy. [841] A case in point is that of Citigroup Global Markets considered in Chapter 7 [842] , where misconduct took place using Germany treasury bonds on an Italian trading platform impacting trading in Belgium, Italy and Portugal. Ultimately, although investigations were commenced in a number of EU member states, those States deferred to the FSA’s regulatory action. [843] 

Despite the debate regarding cross border enforcement, it is not uncommon in the United Kingdom for abuse of the markets to dealt with by enforcement of exchange activity by Exchange operators [844] rather than by FSA civil and criminal enforcement. For example in 2007 the Intercontinental Exchange Europe took enforcement action against Stuart Mann for the attempted manipulation of settlement prices in contravention of the exchange’s rules of conduct. [845] Considerable concern does however arise where the FSA investigates allegations of abuse and determines not to take enforcement action choosing to defer to exchange based enforcement. As an example, in the AIM disciplinary committee of the London Stock Exchange publically censured and fined Regal Petroleum plc [846] £600,000 (whose shares were traded on AIM) for breaches of the AIM rules in respect of a failing to take reasonable care to ensure information it released to the market was not misleading and failed to announce without delay the poor drilling test results. In particular Regal had released market notifications which used language that created a misleading impression as to the potential commercial viability, its releases were consistently over optimistic, and did not accurately reflect actual test results of the conclusions of independent experts. Although this case was not brought under the market abuse regime, its facts did relate to matters which were not dissimilar to those in the matter of FSA’s market abuse case against Royal Dutch Shell [847] in that following a series of announcements to the market about its drilling activities at its Kallirachi, Regal’s shares value rose by almost 500%. On 18 May 2005, however, Regal announced that following the completion of its testing on its Kallichari 2 well, “the flow rates from the well were deemed non-commercial" and this resulted in an immediate share price fall of 61% [848] . These price movements resulted in the London Stock Exchange investigating Regal’s compliance with the AIM rules and the FSA commencing an investigation into the same matters in relation to market abuse. It would certainly seem to be the case that on the facts described by the London Stock Exchange there was merit in the FSA commencing an investigation for market abuse, and those facts are an indicator that market manipulation in contravention of S118 might have occurred. Subsequently the FSA determined to discontinue the investigation, which however led to a criticism of the FSA efforts to toughen up its image as a regulator [849] .

CHAPTER 9: CONCLUDING REMARKS AND REFORM.

“It is the same each time with progress. First they ignore you, then they say you are mad, then dangerous, then there’s a pause, and then you can’t find anyone who disagrees." [850] 

Introduction

By drawing together the key observations made throughout this thesis, this Chapter consider areas of the Financial Service and Markets Tribunal constitution, jurisdiction and practice where improvements could be made to enhance market abuse enforcement decision in a manner that supports the United Kingdom’s Market Abuse regulation. In the eight years since the introduction of the United Kingdom’s civil Market Abuse regime, evidence shows us that the Financial Services Authority has altered it’s approach to Market Abuse enforcement. To begin, the Civil Markets abuse regime was seen by many as the panacea to discipline towards abuse in the UK financial markets and providing a solution in law to overcome the many years of difficulty in successfully concluding Insider dealing prosecutions. Although the FSA has experienced some notable Market Abuse successes before the Tribunal [851] , it was perhaps the embarrassment of its failure to secure a Market Abuse cases against Paul Davidson and Ashley Tatham [852] together with a cost award against the Authority that caused it to re set its enforcement strategy. Market Abuse relies on a complex web of solutions and that no single enforcement mechanism holds the key. The early indications that civil market abuse enforcement held the key has failed as a proposition. Since 2007 however we have seen the FSA publically promoting an increased desire to prosecute those involved in Insider Dealing and Market Abuse. Some commentators have suggested even that the Market Abuse regime has not been the success that had been hoped. Analysis of the data in Tables 1 and 4 however, reveals another story and since 2001 we have seen [49 ] Civil Market Abuse cases brought by the FSA, [ 3 ] Market Abuse cases dealt with by way of the FSA’s own rules and principles with only [ 6 ] Insider dealing prosecutions and only [2] Criminal Market Abuse prosecution (both derived from the same case) under S397 2000 Act. Even in 2009 a year that has seen a marked increase in new Insider Dealing prosecutions, there have been [10 ] civil Market Abuse cases, and [ 2 ] concluded Insider Dealing prosecution with [11] insider dealing and [4] Market Abuse prosecutions awaiting trial. The true picture, is that the FSA is now using a broader suite of enforcement tools to deal with abuse in the financial markets, combining its administrative Market Abuse powers with an ability to launch criminal prosecution. As explore din Chapter 8, even the Court have shown a willingness for the FSA to launch private prosecution thus enabling it to deal with the wide range of abusive conduct it might identify in the most appropriate manner.

Perhaps the impact of the Human Rights Act 1998 on the civil Market Abuse regime was not as widely anticipated during the drafting of the Financial Services and Markets Bill. Although the Human Rights challenge in relation to the right to a fair trial under Article 6 European Convention on Human Rights as explored in Fleurose v Securities and Futures Authority [853] provided some insight into future challenges, arguably the Court of Appeal’s dismissal of such challenges in relation to disciplinary arrangements for Self Regulatory Organisations, disguised the future Article 6 arguments that would affect the enforcement of the Market Abuse regime. As explored in Chapter 6, the likely single distinguishing feature is the regime’s applicability to members of the public generally as well as authorised and approved persons that has prompted the Tribunal to confirm that the evidential proof required in market abuse cases is at the higher end of a sliding scale within the balance of probabilities. Arguably where serious allegations such as market abuse are made there is little discernable difference between the civil and criminal law standards. In ensuring that Article 6 requirements are satisfied the impact of the Tribunal’s decisions on evidential standards has undoubtedly increased the protections required in Market Abuse cases before it. Equally, however it is submitted that there has been a re-evaluation by the FSA of the prior perceived benefits of having a flexible civil law based enforcement regime for handling market abuse. It is evident that the FSA now accept that all contentious market abuse cases, whether before the Tribunal or the Criminal Courts are challenging and difficult to prove. Whereas the banking crisis lead to tough talk from politicians about the need for financial criminals to be prosecuted and has led to the FSA being granted powers to offer immunity from prosecution in exchange for evidential assistance, any perception that in the current economic climate the FSA is likely to find it easier to secure a prosecution from a jury was shattered by the acquittal of King, McFall and Rimmington [854] from charges of Insider Dealing. Nonetheless there remain considerable positive benefits in the FSA having available a suite of enforcement tools including the power to prosecute or impose administrative penalties.

Maintaining the benefits of a single structure

As highlighted at the end of Chapter 1, at the time or writing the United Kingdom Government is proposing a radical overhaul of the structural aspects of the regulatory regime. The FSA is to be abolished with its prudential supervisory responsibilities to be transferred to the Bank of England and its conduct of business supervision to be transferred to a new Consumer Protection and Markets Authority. It is unclear from the current proposals where the enforcement of Market Abuse will go. Undoubtedly a new Consumer Protection and Markets Authority will be granted powers of enforcement in order to discipline those that breach its conduct rules. Concern must arise, however if the new agencies emphasis on the consumer side of regulation, which has certainly been the thrust of the Government’s proposal. The Market Abuse regime’s application to all market users (whether the general public or market professionals) and to a wide variety of investments and markets, [855] has necessitated the development of specialist market regulation expertise. Indeed as is seen in enforcement cases such as Deutsche Bank and Citigroup Global Markets, the FSA has deployed high level principles based enforcement in order to deal with cases of abuse that fall outside the strict requirements of the regime, but nonetheless threaten market integrity. Furthermore as seen in cases such as Bertie Hatcher and Malcolm Calvert [856] the FSA developing experience has seen creative approaches to enforcement to the extent that ‘deals’ can be offered in exchange for cooperation.

In light of the foregoing any proposal to allocate to a dedicated consumer protection agency responsibility for civil market abuse enforcement seems flawed. Given that the Government motivation for the proposed regulatory restructure has been a perception that the FSA was not sufficiently focused on its responsibilities the same argument could in time be aimed at a consumer protection agency with the added responsibility for market abuse.

In Chapters 2, 3, 7 and 8 it has become evident that the FSA has developed a realisation that a suite of enforcement outcomes (including both administrative enforcement and criminal prosecution) is more appropriate for regulatory enforcement than one single solution and it is submitted that provided that such tools are selected and deployed in a coherent and transparent manner the greatest prospect of cleaning up the financial markets is if those tools are managed from within one single regulatory agency. There has been speculation that the Government is to propose a unified economic crime agency to replace the Serious Fraud Office which infers that criminal investigations and prosecutions for Insider Dealing and Market Abuse would be transferred to it. Such a move it is submitted would threaten the benefits of a single market abuse enforcement regime with a likely increase in inter-agency parallel proceedings.

Improvement to jurisprudence in FSA settled cases

Save in exceptional circumstances, such as where a privacy order has been granted each of the Financial Services and Markets Tribunal decisions are published. As explored in Chapter 5, Paragraph [ ] of the Tribunal procedures require it to publish written reasons for its decision, an obligation likely to be derived from Article 6 ECHR. The Tribunal’s decisions appear in the traditional format as Court decisions being well reasoned and written, setting out the background to the matter in question, the key arguments before the Tribunal, the Tribunal’s analysis of the law on the matter and the reason for the Tribunal’s decision. Such decisions build up and contribute to a fuller understanding of the law relating to Market Abuse and are likely as a matter of law to have some binding authority on the FSA’s subsequent decision making. In reality, however few market abuse cases have been referred to the Tribunal and on analysis of those that have, only the matters of Phillip Jabre v FSA [857] and Winterflood Securities v FSA [858] have raised importance issues of law concerning the Market Abuse regime. Although many of the remaining case decisions have clarified important aspect of Tribunal procedure the absence of Market Abuse jurisprudence is of concern

The overwhelming majority of Market Abuse cases are settled between the Financial Services Authority and the respondent. The outcome of the settlement is represented in the FSA’s Final Notice regarding the matter. As highlighted in Chapter 2, S126 of the 2000 relating to Decision Notices and S390 of the 2000 Act relating to Final Notices Act requires only that the notice sets out technical information concerning the amount of any penalty and terms of any statement of misconduct. The 2000 Act imposes no obligation on the FSA to set out in those notices the reasons for it decisions On a reading of such Final Notices relating to cases that have not been referred to the Tribunal, what becomes clear is that they almost without exception read as terms of settlement. Although each notice sets out the facts of the matter, there is little if any analysis provided to show the FSA’s reasoning for concluding the matter. Although in practice most Final Notice will recite the regulatory provisions that have been breached there is little if any analysis of why the FSA’s rules have been interpreted as they have. Analysis of recent enforcement cases illustrate this point. For example the FSA’s enforcement action against Morton and Perry, bond traders at Dresdner Bank, the Final Notice outline in some detail the factual background to the case together with the provisions of the S118 Financial Services and Markets Act 2000, the FSA rules and the Code of Market Conduct that had been breached. It also sets out in some detail the arguments put forward by the respondents, but on the important questions of why the actual price sensitivity need not be demonstrated to establish Market Abuse and why the FSA did not consider that actual market practice was an acceptable defence, little analysis is provided. Such absence of well reasoned provide little assistance in the creation of jurisprudence and creates the perception that FSA enforcement decision making is at times arbitrary. Indeed the current structure does not lend itself to the creation of effective jurisprudence to aid certainty to the prohibited Market Abuse behaviours. It is certain that authorised and approved persons and their legal advisors rely on the content of Final Notices as guidance of acceptable and unacceptable behaviour. Indeed in this thesis there has been considerable reference to FSA Final Notices contribute to an understanding of the Market Abuse regime. In law however the value of the Final Notices is questionable and at best they can merely be relied on as providing persuasive authority for the interpretation of S118 and S119 of the 2000 Act. The natural consequence of so few formal Tribunal Market Abuse decisions has lead to creation of poor and limited precedence through regulatory soft guidance (Final Notices). For example see FSA Final Notices concerning Filip Boyan and Erik Boyan which create a doubtful decision the question of whether circumstantial interpretation can amount to inside information.

To counteract such challenge but without compromising the benefits to the regulatory system derived from the FSA ability to settle enforcement cases, the obligation relating to the content of notices in S126 and S320 should be modified to include an obligation on the FSA ( of its successor agency) to include in notices written reasosn for its enforcement decision in individual cases.

The elimination of procedural duplication

In reality overall few market abuse cases have been dealt with before the Tribunal. This is likely as many of the FSA enforcement cases are factually straight forward and for many the opportunity to settle early allows them to put the matter behind them. After a shaky start in cases such as Davidson and Tatham there are now indications from cases such as Winterflood Securities, that Tribunal’s decision making has moved closer to the FSA’s thinking.

We have seen that the FSA’s response to the Statutory requirement to separate the operation of its monitoring and enforcement activities was the establishment of its Regulatory Decisions Committee (RDC). In Chapter 3 the RDC’s role as a decision maker in Market Abuse enforcement matters is discussed together with the impact that the FSA’s early settlement programme has had on the conclusion of enforcement cases. Indeed in practice the enforcement system now operated, places the FSA enforcement function in the centre ground of the regime, expressing views on the most appropriate disciplinary outcome in any given factual scenarios. Table 1, however reveals that few enforcement cases are now even reach the RDC, with the majority of cases being settled by an Executive Decision maker of the FSA. In consequence, albeit anecdotally, respondents to civil enforcement actions now likely to treat the RDC as a mechanism for appeal from the decision making of the FSA enforcement division. The RDC’s de facto appeal function creates a duplicated juridical structure for enforcement cases, having the impact of delaying any contentious enforcement cases and as evident from the case in Morton and Parry (discussed above and in Chapter 2) raises the prospect of inconsistency in the decision making between the enforcement team, the RDC and finally the Tribunal.

The removal of the RDC’s role in enforcement decision making would contribute to an improvement in efficiency and an increase in the potential for consistency in enforcement cases.

Tribunal independence and selection of tribunal members

Chapter 6 considered the constitution of the Tribunal and in particular the composition of and appointment of Tribunal members. The argument in favour of specialist Tribunals is driven by the advantages of having expertise relating to the specialist areas under review. Concerns about the role of Jury trials in complex financial matters has in some part contributed to the desire to utilise financial professionals as panel members on the Tribunal. The Tribunal reference in Paul Davidson [859] highlighted, however, the inherent risk of bias that is a consequence drawing expert panel members from the relatively small financial community. Although changes to Tribunal governance introduced by the Tribunal Courts and Enforcement Act 2007 has further embedded the Tribunals independence from the FSA, their remains concern about the extent to which the Tribunals members and particularly its non judicial members can ever be sufficiently distanced from the Financial Services industry to ensure there is never bias. As confirmed in P v The General Council of the Bar [2005] [860] as discussed in Chapter 5, bias exists where it is apparent. The reported factual events leading to the Tribunal’s decision in Davidson suggest the extent which the non-judicial members of the Tribunal are able to influence the Tribunals overall decision making. In part this problem can be limited by the appointment of a large panel of non-judicial members. In reality however the limited pool of available and willing expertise together with the myriad of expertise needed to deal with potential references means that the few non-judicial members appointed are likely to have some connection with the financial industry subject to an individual reference. Nonetheless the benefit from having financial industry expertise eon a Tribunal panel remains. It is a problem that must be overcome to maintain the legitimacy of the Tribunal decision making and given the practical difficulties described, consideration should be given to both widening the panel of non-judicial members and reducing the extent to which non-judicial members can influence decisions by increasing the ratio of judicial members to non judicial members on individual Tribunals.

The continuing challenge for justiciability of principles and high level rules

The enforcement of tribunal recommendations

The non-binding nature of Tribunal recommendations, made under S133A (5) appears anomalous and it is submitted adversely affects the extent to which the Tribunal can hold to account the impact that the FSA’s enforcement activities might have on the wider financial industry. In Chapter 4 we considered the dual nature of accountability measures that affect both individual decision making and the wider impact of regulatory decisions. The limitations imposed on the Tribunal powers in S133A (5) and analysis of its decisions suggest that its Statutory focus is on the review of individual enforcement decisions. Although the Tribunal may no w also receive applications from judicial review under the Tribunals Courts and Enforcement Act 2007 , it will not have the opportunity to review and grants binding orders in respect of the FSA’s wider policies and procedures in individual case references. Although there is some indication, as shown in the Tribunal reference in the matter of Legal and General, that the FSA as a responsible regulator responds to fundamental criticism, the non-binding nature of any Tribunal recommendations must severely restrict the extent to which the Tribunal can compel change where an adverse Tribunal decision has wider ramifications to the financial community, investors of the standards of regulation.