The UK's Implementation of the new Market Abuse Directive (MAD 2) and Market Abuse Regulation (MAR)

The new Market Abuse Regulation (MAR) (Regulation (EU) No 596/2014) is due to take direct effect in the European Union (EU) this 3rd July 2016. It will certainly bring in many new operational requirements for banks and financial services firms operating in the EU. At the same time the new Market Abuse Directive (Directive 2014/57/EU) (MAD 2) is required to be transposed and implemented by EU Member States by 3 July 2016. The United Kingdom (UK) has opted out of MAD 2 and is instead intending to update the existing Market Abuse operational framework via the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016 (2016 No. 0000) (MARS 2016). These are currently in draft form and have not yet been finalised but are available to view below. I will provide a very brief overview of some of the most pertinent provisions.

Regulation 5 (Delayed public disclosure of inside information)

This provides that where an issuer or emission allowance market participant (EAMP) has delayed the disclosure of information further to Article 17(4) of the MAR, it is only required to provide a record of its written explanation of how the conditions in that Article were met, upon request by the Financial Conduct Authority (FCA). In reality it would clearly be best practice for issuers and EAMPs to develop pro forma templates that document in detail how each of the three conditions in Article 17(4) MAR were met:
(1) immediate disclosure is likely to prejudice the legitimate interests of the issuer or emission allowance market participant;
(2) delay of disclosure is not likely to mislead the public;
(3) the issuer or emission allowance market participant is able to ensure the confidentiality of that information.

Regulation 6 (Applications under the market abuse regulation)

This provides that any applications to the FCA under MAR must be made in such manner that the FCA may direct and with all information that the FCA may reasonably require. TheFCA may also require an applicant to provide such further information as the FCA reasonably considers necessary to enable it to determine an application.

The MARS 2016 will also amend parts of the Financial Services Act 2000 (FSMA 2000).

[NEW] Section 122A. (Power to require information from issuers etc.)

This empowers the FCA to require:
(1) an issuer;
(2) an emission allowance market participant;
(3) a person discharging managerial responsibilities (PDMR);
(4) a person closely associated (PCA) with a PDMR to provide any information that the FCA reasonably requires in order to protect:
(1) the interests of investors;
(2) the orderly operation of the financial markets;
(3) the orderly operation of auctions of emission allowances and products based on emission allowances on auction platforms authorised as regulated markets.

It also empowers the FCA to require such persons to provide any information or explanation the FCA reasonably requires to verify whether Article 17 (public disclosure of inside information) or Article 19 (manager's transactions) MAR is being or has been complied with.
The FCA has discretion to require this information to be delivered in respect of:
(1) TIMING (before such reasonable period specified by FCA);
(2) LOCATION (such place specified by FCA);
(3) FORMAT (such form reasonably required by FCA);
(4) VERIFICATION (such manner as required by FCA).

  • PDMR means members of the administrative, management or supervisory body of an issuer, EAMP, or entity referred to in Article 19(10) MAR, or a senior executive (not a member of these bodies) but who has regular access to inside information relating directly/indirectly to that entity and power to take managerial decisions affecting the future developments and business prospects of that entity.
  • PCA means a spouse; civil partner; dependent child (18 years, unmarried, no civil partner, including stepchild); relative (sharing house for at least one year on date of transaction); and legal person, trust or partnership (managerial responsibilities discharged by PDMR or by spouse, civil partner, dependent child, relative, which is directly/indirectly controlled by them, which is set up for the benefit of such person, or the economic interests of which are substantially equivalent to those of such a person.

[NEW] Section 122B. (General power to require information)

This empowers the FCA to require a person to provide:
(1) specified information;
(2) information of a specified description;
(3) specified documents;
(4) documents of a specified description.
The FCA must reasonably require the information and/or documents for the purpose of exercising its functions under the MAR.
The FCA has the power to require this in respect of TIMING, LOCATION, FORMAT, and VERIFICATION requirements.

[NEW] Section 122C. (Power to require information: supplementary)

The FCA is empowered to require persons producing documents, or any relevant person (ARP), to provide an explanation of the document. If that person fails to do so, the FCA may require the person to state, to the best of the person's knowledge and belief, where the document is.

  • ARP means (1) a person who is, is proposed to be, or has been, a director or controller of that person; (2) is, or has been, an auditor of that person; (3) is, or has been, an actuary, accountant, or lawyer appointed or instructed by that person; (4) is, or has been, an employee of that person.

Now, this is where the new MARS 2016 begins to get interesting. For starters, the FCA's new power to require a person or ARP to provide an explanation of the document might, in some circumstances, involve legally breaching confidentiality clauses contained within those documents or pertaining to those documents. Furthermore, it also opens up the question of what will happen in circumstances where such documents are subject to legal professional privilege, whether that is advice privilege or litigation privilege. There is an exception whereby legal professional privilege will not be extended to documents forming part of a criminal or fraudulent act (R v Cox & Railton (1884) 14 QBD 153). However, the displacement of legal professional privilege requires prima facie evidence (O'Rourke v Darbishire [1920] AC 581).

Also, if under FSMA 2000, s.122c(3) the FCA requires a person to state, to the best of the person's knowledge and belief, where the document is, and that person fails to comply with that requirement, the FCA may certify that fact in writing to the court ([NEW] Section 122F. (Offences) FSMA 2000). If the court is satisfied that the person failed without reasonable excuse to comply with the requirement, the court has the power to deal with that person as if they were in contempt of court (this includes directors or other officers where the person is a company). So under the Contempt of Court Act 1981, s.14(1), the courts have the power to imprison someone for up to 2 years (committal by superior court) or one month (committal by inferior court), or to a fine of up to £2,500 (committal by inferior court). If a person provides information which the person knows to be false/misleading in a material particular, or recklessly provides information which is false/misleading in a material particular, they will also commit an offence. The penalty is up to 3 months imprisonment, a fine, or both (summary conviction), or up to 2 years imprisonment, a fine, or both (conviction on indictment).

Under the new section 122c.(5) FSMA 2000, a person ("P") may not be required to disclose information or produce a document in respect of which P owes an obligation of confidence by virtue of carrying on the business of banking. In effect this refers to the duty of confidentiality that banks owe to their customers at common law (Tournier v National Provincial and Union Bank of England [1924] 1 KB 461). Yet in Tournier this duty of confidentiality was held not to be absolute, but subject to four qualifications:
(1) where disclosure is under compulsion of law;
(2) where there is a duty to the public to disclose;
(3) where the interests of the bank require disclosure;
(4) where the disclosure is made by the express or implied consent of the customer".
Compulsion of law generally refers to where the court orders disclosure or where legislation mandates disclosure. However, new section 122c.(5) FSMA 2000, also provides that information may be disclosed or documents produced, where:
(1) the FCA suspects that P (or a member of P's group) has contravened any provision of MAR;
(2) the FCA suspects that the person to whom the obligation of confidence is owed (or a member of that person's group) has contravened any provision of MAR.
So, technically under Tournier disclosure under section 122c.(5) FSMA 2000 will be under compulsion of law. But in reality this can be seen as a complete dilution of the force of law. Disclosure ordered by the courts reflects public and open democratic rights of accountability, but disclosure where the FCA simply suspects something, may in actuality be thwarting principles of democratic accountability. There is no built in accountability for the FCA to objectively justify its suspicions to the public, to the courts, or in fact to anyone.

The FCA's powers are further extended by new section 122D. (Entry of premises under warrant) FSMA 2000. Under this section the FCA may apply to the court to enter premises under warrant. The warrant may be executed by any constable and any persons authorised to accompany the constable, i.e. FCA officers. The warrant authorises the FCA officers (supervised by a constable):
(1) To enter the premises;
(2) To use such force as may be reasonably necessary;
(3) To search the premises and take possession of any documents/information appearing to be documents/information of a kind in respect of which the warrant was issued (Relevant Kind);
(4) To take any other steps which may appear necessary for preserving them or preventing interference with them;
(5) To take copies/extracts from documents/information appearing to be of the Relevant Kind;
(6) To require any person on the premises to provide an explanation of any document or information appearing to be of the Relevant Kind or to state where it may be found.
Under [NEW] 122F(5) FSMA 2000 if someone intentionally obstructs any rights under the warrant, they will be guilty of an offence and subject to imprisonment for up to 3 years, a fine, or both (summary conviction). So for example, an employee who unwittingly but intentionally refuses to cooperate or explain documents or information, will be guilty of an offence.
One of the difficulties with this section is that the breadth of power contained within this type of warrant is constrained only by the stipulation of the Relevant Kind of documents stated in the warrant. But in reality it is difficult to see how this section is not tantamount to providing the FCA with carte blanche discretion over the purview of the documents/information sought.

[NEW] S.131B (Reporting of infringements) FSMA 2000

This section provides that employers must have in place appropriate internal procedures for their employees to report contraventions of MAR or any directly applicable EU regulation made under MAR. In order for employees to be able to report contraventions of MAR, it is likely that employers will be obliged to train their employees on the new and quite extensive MAR obligations.

RZ