The statutory framework
In the UK, the Financial Services and Markets Act 2000 (FSMA 2000) (as amended by the Financial Services Act 2012 (FSA 2012)) provides the framework for the statutory regime of financial services regulation. On 1 April 2013 the Financial Services Authority was abolished and most of its functions were transferred to two new regulators, the Financial Conduct Authority (FCA) (which took over the majority of its functions) and the Prudential Regulation Authority (PRA). On the same date, the Bank of England took over the Financial Service Authority’s responsibilities for financial market infrastructures.
Section 1B FSMA 2000 sets out the strategic objective and three operational objectives of the FCA. It is useful to bear these objectives in mind because they inform the FCA’s actions in supervising the industry. They also provide the rationale for much of the legislation and regulation.
The strategic objective is to ensure that the relevant markets function well.
The three operational objectives are:
- to ensure an appropriate degree of protection for consumers;
- to protect and enhance the integrity of the UK financial system; and
- to promote effective competition in the interests of consumers.
The FCA has a role (i) as a conduct regulator, (ii) as a markets regulator, (iii) in countering financial crime and (iv) in promoting competition.
The FCA’s aim as a conduct regulator is to address actual or potential risks, for instance by requiring firms to withdraw or amend misleading financial promotions.
The FCA has responsibility for the conduct of business regulation of all firms authorised under FSMA 2000 and the prudential regulation of all firms not regulated by the PRA.
The PRA is responsible for the prudential regulation of systemically important firms, including banks, insurers and certain investment firms. The conduct of business regulation of these firms is still the responsibility of the FCA, so these firms are often referred to as ‘dual-regulated firms’.
The FCA as a markets regulator
In its capacity as markets regulator the FCA has a number of functions, the following being the most important for our purposes:
- acting as the UK competent authority for the LPDT Rules; and
- acting as the conduct supervisor and regulator of the financial services sector generally (including authorising firms to carry out certain types of financial services business, supervising those firms and writing the rules which those firms must follow).
The FCA’s financial crime role
The FCA has responsibility for taking regulatory action to counter financial crime by:
- imposing penalties for market abuse;
- undertaking criminal prosecutions for insider dealing and market manipulation; and
- acting as competent authority for the purposes of the Money Laundering Regulations 2017.
The FCA’s role in promoting competition
Amongst other things the FCA has the power to request that the Competition and Markets Authority considers whether features in the UK financial services market may prevent, restrict or distort competition.
Important secitions of FSMA 2000 and FSA 2012
The general prohibition (s.19 FSMA 2000)
It is a criminal offence for anyone who is not authorised by the FCA (or exempt) to carry out any regulated activity. For example, it would be unlawful for anyone to operate a business offering financial advice or arranging investments without obtaining authorisation.
This is known as the general prohibition and the maximum penalty for breaching this prohibition is two years in prison and/or an unlimited fine (s.23 FSMA 2000). For the purposes of the BLP module it will be important for you to be able to correctly determine when you may, and when you may not, give advice on a particular issue.
Restriction on financial promotions (s.21 FSMA 2000)
Financial promotions can only be made if allowed by s.21 FSMA 2000, otherwise the person making the promotion will commit a criminal offence for which the maximum sentence is two years in prison and/or an unlimited fine.
This provision aims to ensure that investors, particularly vulnerable and inexperienced investors, are not exposed to misleading sales pitches. An example of this would be the so-called ‘boiler rooms’, where unauthorised stock promoters cold call, or send spam e-mail to, potential investors with high pressure sales pitches for investments that are often worthless. Such calls and e-mails would generally contravene s.21 FSMA 2000.
The criminal offence under s.21 FSMA 2000 is to ‘communicate an invitation or inducement to engage in investment activity’ in the course of business unless the requirements of s.21 FSMA 2000 are satisfied. There are two ways of satisfying those requirements:
- To have the promotion made or approved by an authorised person, for example an investment bank which is authorised and regulated by the FCA. In such circumstances, the authorised person is expected to ensure that the promotion is clear, fair and not misleading.
- To rely on an exemption established by statutory instrument under s.21 FSMA 2000. Detailed exemptions are available, one of which, for example, covers promotions which are made only to investment professionals, who are less likely to be deceived by a clever but misleading promotion.
Misleading statements and impressions (ss.89 & 90 FSA 2012)
Sections 89 and 90 FSA 2012 provide various further criminal offences in relation to misleading statements and impressions. These include:
- making a statement, promise or forecast which you know to be false or misleading in a material respect;
- recklessly making a misleading statement;
- dishonestly concealing a material fact; and
- engaging in a course of conduct which creates a false or misleading impression.
In very simple terms, the conduct involved must, in each case, be carried out for the purpose of inducing another person to take action, or to refrain from taking some action, in relation to an investment. The maximum penalty for infringing s.89 or s.90 FSA 2012 is seven years in prison and/or an unlimited fine.
Insider dealing (s.52 Criminal Justice Act 1993 (CJA 1993))
Insider dealing is a further example of a type of behaviour which the FCA aims to reduce. Section 52 Criminal Justice Act 1993 (CJA 1993) makes it a criminal offence for an individual to deal in price-affected securities on the basis of inside information.
This would cover a situation where an insider (such as a director of a listed company) purchased shares at an advantageous price, before a public announcement of a profitable contract by that listed company. The director’s knowledge of price sensitive information, as yet undisclosed to the market, about the existence of the contract, would be inside information. He could be prosecuted for buying shares on the basis of that information.
Market abuse (‘MAR’)
This is a separate civil offence and from 3 July 2016 it has become wider in scope. The legislation to put this into effect was adopted by the Council of the EU on 14 April 2014 and consists of a regulation on market abuse (known as ‘MAR’) and a directive on criminal sanctions for market abuse (‘CSMAD’). This package of legislation is known as MAD II.
The changes introduced by MAR included:
- new market abuse offences of attempted market manipulation and attempted insider dealing; and
- an expanded definition of ‘inside information’ for the market abuse behaviours of insider dealing and improper disclosure.
CSMAD makes insider dealing and market manipulation criminal offences if carried out intentionally. The UK has opted out of CSMAD and so is not bound by it. The UK government’s view is that UK law already covers all market abuse offences covered by the CSMAD and it currently extends further than the CSMAD (by covering market abuse activities that are committed recklessly or intentionally).
Market abuse is described in MAR as ‘a concept that encompasses unlawful behaviour on the financial markets’ (recital 7 to MAR). This includes behaviour such as:
- insider dealing;
- unlawful disclosure of inside information; and
- market manipulation.
Market abuse is a civil offence and is therefore easier to prosecute than insider dealing under the CJA 1993. This is because the civil standard of proof applies to market abuse (balance of probabilities), rather than the criminal standard for insider dealing (beyond reasonable doubt). It should therefore be a more useful tool to the FCA in tackling market misconduct.
In addition, the offence of market abuse can be committed by companies (for example, the listed company itself) as well as by individuals (for example, the listed company’s directors). Only individuals can be found guilty of the criminal offence of insider dealing.
The penalties for market abuse are set out in s.123 FSMA 2000 (financial penalty or publication of a statement that a person has engaged in market abuse) and are, of course, less onerous than criminal penalties for insider dealing.