Criminal sanctions for market abuse on the way as European member states' representatives approve Commission proposals

Out-Law News | 16 Apr 2014 | 8:03 am | 2 min. read

Market abuse rules in Europe will be broadened to include abuse on electronic trading platforms and offences related to the manipulation of benchmarks, such as LIBOR or EURIBOR following the approval of new rules by EU member states' representatives.

The new regime will also introduce a common set of criminal sanctions for market abuse offences across the EU, including fines and prison sentences of at least four years for insider dealing, unlawful disclosure or market manipulation. Member States will have two years to implement the new directive and regulation following their publication in the Official Journal of the European Union (OJEU), which is expected to happen in June.

"Today's adoption sends a strong zero tolerance warning to those engaging in insider dealing and market manipulation," said Justice Commissioner Viviane Reding and Internal Market Commissioner Michel Barnier in a statement. "It demonstrates Europe's commitment to protect the integrity of its financial markets and deter criminals who want to make money by deliberately manipulating information."

"Administrative authorities will now have greater powers to investigate market abuse and to impose fines of up to millions of euro, while those found guilty of market abuse will be deterred by the prospect of facing jail across the Union. We now need to pass from laws to action: member states should swiftly implement these new rules so criminals have no place to hide in Europe," they said.

The package takes the form of a directly-applicable regulation on market abuse, along with a directive on criminal sanctions which member states will have to implement into their own national legal systems. Together, the new measures will introduce harmonised EU definitions of market abuse offences and harmonised criminal sanctions, preventing those who commit such offences from taking advantage of the differences in laws between Member States to avoid stronger penalties or being caught by the law altogether.

The new regime is also notable as it is the first time that the European Commission has used its powers under the Lisbon Treaty to compel member states to introduce criminal sanctions in order to enforce an EU policy. Member states will be required to ensure criminal sanctions apply to the criminal offences of insider dealing and market manipulation, but also to inciting, aiding and abetting market abuse and any attempts to commit such offences.

Once in force, the regulation will extend the existing market abuse rules to include abuse on electronic trading platforms, and to clearly prohibit abuse strategies enacted through high frequency trading (HFT). The rules will also cover insider dealing or market manipulation involving financial instruments that are only traded on multilateral trading facilities (MTFs), those traded on other organised trading facilities (OTFs) and those traded over-the-counter (OTC). The regulation sets out an indicative list of HFT strategies that will be considered as market manipulation, including placing orders that disrupt or delay the functioning of a trading system. Those who manipulate benchmarks such as LIBOR or EURIBOR will also be guilty of market abuse, and will face tough sanctions.

The directive will establish common EU definitions for insider dealing, which occurs when a person who has price-sensitive inside information trades in related financial instruments; and market manipulation, which takes place when a person artificially manipulates the price of financial instruments. This can be done by spreading false or misleading information, and conducting trades in related instruments in order to profit.

Member States will be expected to implement a common set of criminal sanctions including fines and imprisonment. Insider dealing and market manipulation will be subject to a minimum sentence of at least four years in prison, while unlawful disclosure of inside information will be subject to a minimum sentence of at least two years. Legal 'persons', such as companies, will also be liable for market abuses, punishable by "effective proportionate and dissuasive criminal or non-criminal fines" and other appropriate sanctions.