UK: Market abuse and insider dealing

The UK's Financial Services Authority's Market Watch Newsletter 26 was published yesterday. It provides an update on the FSA's work in deterring and prosecuting market abuse. The Newsletter explains the FSA's approach to the detection of insider dealing and provides further information about the FSA's market cleanliness research (about which click here).

Perhaps the most important statement in the Newsletter concerns the manner in which the FSA seeks to deter market abuse. The FSA has, thus far, relied upon administrative sanctions (see here) but the Newsletter makes clear that a greater role is now seen for criminal prosecutions in recognition of what the FSA describes as "the significant deterrent effect of custodial sentences".

One of the perceived advantages of administrative sanctions is said to be the lower standard of proof: the "balance of probability" rather than, as in criminal prosecutions, "beyond reasonable doubt". It can, however, be difficult to draw a distinction where the alleged misconduct is serious. Thus, as the Financial Services and Market Tribunal stated in the important market abuse decision Davidson & Tatham v FSA (2006) (paras. [198]-[200]):

"...we conclude that there is a single civil standard of proof on the balance of probabilities but that it is flexible in its application. The more serious the allegation, or the more serious the consequences if the allegation is proved, the stronger must be the evidence before we should find the allegation proved on the balance of probabilities. 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. A penalty of £750,000 imposed on Mr Davidson, an unregulated individual, is very serious. A penalty of £100,000 imposed on Mr Tatham, together with the professional consequences, is also very serious. Accordingly, 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 they are likely, in the context of these references, to produce the same or similar results".