Another major change wrought by the Financial Services and Markets Act 2000 has been the introduction of a new offence of “market abuse”. Does this represent a clear and present threat to financial PR consultancies?
Topic: Financial Services
New Development: The introduction, as of 1 December 2001, of a new offence of "market abuse"
The record of the regulators in prosecuting alleged insider dealers and market manipulators is at best patchy. It is not surprising, therefore, that the wide-ranging changes to financial services regulation introduced by the Financial Services and Markets Act 2000 should include provisions seeking to beef up regulators' powers to police the circulation and potential abuse of market-sensitive information. The PR industry had particular cause for concern when news of the regulators' intentions leaked out. Well-tried and trusted practices such as feeding stories about listed companies to Sunday newspapers via the "Friday night drop" seemed very likely to be threatened by the regulatory cosh. This seemed particularly so when rumours abounded that PR professionals and financial journalists were to be specifically targeted. This threat has receded, but in its place, and probably just as worryingly for the world of public relations, has come a brand new offence, called "market abuse".
What has changed:
The new "market abuse" regime will augment rather than replace the existing criminal regime for insider dealing and market manipulation. The offence can be committed by anybody, regardless of whether they are "authorised" under the FSMA regime. Those who commit market abuse may be punished by an unlimited fine or public censure, ordered to make restitution and restrained from repetition of the offending publication by injunction. Similar sanctions await those who require or encourage another to engage in market abuse. Perhaps to allay fears of financial PR meltdown, a "Code of market conduct" was published back in April 2001 by the Financial Services Authority. The idea of the code is to help market users establish whether or not certain types of behaviour amount to market abuse. If the Code designates an activity as not being market abuse then this will be a complete defence to any attempted prosecution for such behaviour. In any other cases the code will have evidential effect.
To qualify as "market abuse", behaviour must occur in relation to "qualifying investments" traded on a "prescribed market". These do not currently extend to US markets such as the Nasdaq, but will extend to the London Stock Exchange, LIFFE, the London Metal Exchange, the International Petroleum Exchange and others. The conduct in question must be based on information which is not generally available to those using the market, but which, if it were available to a regular user of the market, would be regarded by him as relevant when entering into transactions in relation to relevant investments.
The conduct in question must also be likely to give a regular user a false or misleading impression as to the supply of, or demand for, or as to the price or value of, relevant investments. There is also a "regular user" test, a "regular user" being defined as a reasonable person who regularly deals in [the market in question]. The behaviour in question must be likely to be regarded by a regular user as a failure on the part of the person concerned to observe the standard of behaviour to be reasonably expected of a person in their position. It is also worth bearing in mind that behaviour may be caught by the offence whether or not it occurs in the UK, so long as it relates to qualifying investments traded on a prescribed market. Intention is effectively irrelevant and whether the behaviour is caught by the new offence will be based upon a semi-objective "reasonable user" test.
Clearly, public relations consultancies working in the financial sector will be paying particular regard to the requirements of this offence and the FSA Code of Market Conduct. In a way, any financial information being released to the press is almost by definition going to be market-sensitive if it is going to stand a chance of being published. Such concerns however, will not likely wash with the courts and before the regulators get fully into gear, prudent PR consultancies will be reviewing their internal checks and balances as well as their contractual arrangements with clients and their requirements for external pre-publication advice.