Insider Dealing (Securities and Regulated Markets) Order 2023

Lord Sharkey Excerpts

Tuesday 16th May 2023 Grand Committee

This SI will reinforce the UK’s reputation as a fair and transparent place to invest, with robust regulatory standards and serious consequences for those who do not comply with our laws. I beg to move.

[Lord Sharkey (LD)]

My Lords, this SI seems admirably straightforward and uncomplicated. We support it and I can be brief. I have only a couple of questions and one observation.

The first question relates to paragraph 7.7 in the EM. Why is it necessary to keep NASDAQ and the successor to the SWX Swiss Exchange explicitly in scope, and to add the New York Stock Exchange for that matter? Are they not already brought into scope by this SI’s adoption of the definitions in Article 4? I am sure that there is a good reason but I would be grateful if the Minister can explain what it is.

My observation concerns paragraph 7.8 of the EM. It points out that

“the set of securities to which the criminal offence of insider dealing applies to is narrower than the securities covered … in MAR”.

It goes on to give examples of the missing securities. It lists currency options, credit default swaps and units in collective investment undertakings, such as exchange traded funds—and says that the list is not exhaustive. It rather coyly says that this is “not optimal”. I agree entirely. I understand that this SI corrects that but, given the historical absence of these securities in the list of activities that may be pursued in the criminal courts for insider dealing, today’s SI rather looks like having just noticed that the stable door has been left open for 20 years and hastily closing it. It is good that no more horses will be able to bolt but that invites the question of how many have already bolted and how many, if any, were caught by the civil procedures in MAR. Does the Minister have an assessment of how many criminal cases would or could have been brought had the missing securities categories been within the purview of the Criminal Justice Act and how many were taken forward instead under the MAR provisions?

Finally, why does this instrument not come into force immediately? Does not the 21-day delay provide a further window for possibly unactionable criminal malfeasance? I look forward to the Minister’s reply.

[Baroness Chapman of Darlington (Lab)]

We agree with the Minister’s assertion that there should be serious consequences for those who break the law. We also agree with the comments from the Liberal Democrat Benches and echo the comments about the seriousness of insider dealing. We share the curiosity shown in the other place when this instrument was considered about the length of time it has taken to bring in this measure, given we understand that it came about as a result of a review that took place in 2015. I am not asking this to be facetious, but what assessment have the Government made of the number of criminal offences that would have been caught had this measure been in place sooner, which were treated under the civil regime because this instrument had not yet been brought? We want to highlight the consequences of leaving things quite this late, because we are concerned. That underscores our support for this measure. The Government are right to address this gap between the two regimes and we support this instrument.

[Baroness Penn (Con)]

My Lords, I thank both noble Lords for their support for this statutory instrument.

On the time it has taken to deliver this measure and the potential impact in the meantime of not having the criminal regime and the civil regime aligned, it is important to note that since the Fair and Effective Markets Review was published, considerable work has been undertaken to modernise the UK’s market abuse legislation. For example, the civil regime for market abuse was updated in 2016 by the EU market abuse regulation and the Government and UK regulators have implemented the majority of the recommendations from the Fair and Effective Markets Review, including making changes in the Financial Services Act 2021 to increase the maximum sentence for criminal market abuse from seven to 10 years, bringing it into line with comparable economic crimes such as fraud and bribery. The Government have also recently completed a broader review of the criminal market abuse regime as part of the 2019 to 2022 economic crime plan. While this measure has taken longer to implement, there has been other action in this space in the meantime, including delivering on other recommendations from that review.

On the impact of the length of time in which the scope of the criminal offences has been different from that of the civil offences, it is important to note that the FCA has a number of tools available to tackle market abuse, of which the criminal insider dealing offence is only one. In addition to prosecutions under the criminal regime, between 2013 and 2022 the FCA has had 36 regulatory outcomes relating to market abuse, with regulatory fines totalling more than £70 million in that period.

The Government do not have data on the number of criminal prosecutions that have not been pursued due to the difference in the scope of the regimes. The FCA does not routinely record and track cases that it cannot take forward. This includes cases taken forward under the civil regime that could have resulted in a criminal prosecution with the changes made by this SI. Moreover, it is important to remember that there are a number of reasons why the FCA may choose to pursue a civil rather than a criminal prosecution other than the scope of the two regimes. For example, the FCA will consider the severity of the offence in question and whether the evidence meets the higher legal threshold needed to secure a criminal conviction.

It is not possible to say with certainty whether the FCA’s decision not to pursue criminal proceedings in a particular case was due to the issues that this statutory instrument addresses or to other factors, and we do not believe that attempting to determine that retrospectively would be a good use of government legal resources. It is a perfectly legitimate question to ask but, given that other mechanisms were available to the FCA to tackle market abuse under the civil regime—and it has also continued to bring prosecutions under the criminal regime—we can be reassured that it has been able to take action in this period. The Government are confident that the FCA has a strong track record of identifying, investigating and prosecuting insider dealing.

The noble Lord, Lord Sharkey, asked why we include specific US and Swiss exchanges and why they are not covered under the more general definitions that have been used in this SI to avoid the need to update this list again as specific named instruments change. My understanding is that for the more general definitions there are commonly understood definitions used in the UK and EU markets that this can work for, but that when you are looking at other exchanges further afield outside that scope, there remains a need to name those trading venues. That is the difference between continuing to need to name some trading venues versus going for the more general definition-based approach that this SI has done.

As to why we have chosen to include specific US and Swiss exchanges in addition to the UK and EU exchanges that will be covered by this measure, the FCA has seen a persistent trend of organised crime groups recruiting UK insiders to disclose inside information relating to securities traded on those markets. While of course this abusive behaviour is also possible for other third-country venues, this SI includes the third-country markets where the FCA has observed the greatest risk of harm. With regard to other third-country trading venues, and indeed in respect of these ones too, you would expect the home regulator to take action to tackle market abuse in those cases.

I hope that with those remarks I have answered the questions put forward today.

[Lord Sharkey (LD)]

Will the Minister address the point about the 21 days?

[Baroness Penn (Con)]

I can write to the noble Lord on that. It is probably the standard implementation period for a change of this nature. As I said in answering on the assessment of the FCA’s tools and track record on being able to tackle market abuse before this update was made, we do not think that will have a substantial impact on the ability to tackle these issues in that implementation period. I think that that addresses the point but, if there is anything further to add to that, I shall also write to the noble Lord.