Inside out!
Inside out!
Writing in 1978, I expressed doubts as to whether it would ever be practical to establish and administer, in a manner that would be acceptable, a system of controls that would do more than catch the minnows who engage in insider dealing(Rider and Ffrench, The Regulation of Insider Trading (1979) Macmillan). Therefore, I was not surprised to read the leader article in The Timesfor Saturday 18 March 2006 – boldly headed “Shares soar but cheats prosper – Financial Watchdog’s new laws fail to halt insider dealers… ” Indeed, it was only the “small fry” that were identified, let alone pursued, by the Special Commissioners appointed by the House of Commons in 1698 to pursue those who had “disrupted the trade of England” by, among other things, insider abuse. In fighting financial misconduct we rarely learn from history!
The editorial pages of this journal have not, over the years, been silent on these issues – and have in particular focused on the problems of addressing insider dealing. While there is little convincing empirical evidence– particularly pertaining to the developed markets, establishing beyond doubt that insider dealing is actually detrimental to the efficient operation of the markets, we have progressed the moral argument against insiders benefiting through the use of inside information to one based on the need to protect and vindicate public confidence in the integrity of the markets and those who play upon them. Of course, even the “moral” issues are not entirely free from debate. Although it is not vogue today to raise such a debate, indeed we have buried the issue in numerous levels of legislation – with the assistance of Europe, it is nonetheless relevant in control and interdiction. There are those who have argued, and I have been one of them, that the most convincing reason why various societies at different times have expressed their outrage about insiders’ taking advantage of their position is rather more to do with jealousy than any fundamental notion of equity and fairness. Indeed,this rather jaundiced view of humanity is given some credibility by the fact that still a significant proportion of insiders that are caught in circumstances where there is sufficient evidence for action – even in the USA –with all its intelligent stock watch programmes, involve “whistleblowers”and informants. Many of these appear to fall within the category of jealous colleagues, jilted lovers and ex-wives!
The Financial Services Authority, which has authority to prosecute for the crime of insider dealing under the Criminal Justice Act 1993 as well as the potentially more useful powers to pursue insider abuse (which would include almost all circumstances of insider dealing) under the civil enforcement powers in the Financial Services and Markets Act 2000, has not to date achieved any greater success in bringing errant insiders to book, than the Department of Trade and Industry (or for that matter for a few years the Treasury). Given the fact that the “buck” now stops – politically – with the FSA, there has been concern within the Board about what to do – for the most “unacceptable wart” on the face of capitalism (to quote or rather misquote Prime Minister Edward Heath). The FSA has now unveiled its apparatus for testing the cleanliness of the markets (Measuring Market Cleanliness, FSA Occasional Paper Series 23, March 2006). This amounts to little more than, albeit in a somewhat more sophisticated manner, examining price/volume movements, within predetermined spreads, prior to material events. Of course, the stockwatch programme that was developed by the Toronto Stock Exchange in 1972, which became the model for all others, did much the same. Mr Hector Sants, one of the FSA’s Managing Directors, nonetheless considers this “methodology … an important step forward in establishing the starting point against which the FSA’s future work in tackling market abuse should be judged” (FSA Press Release, 17 March 2006). He does admit that“the analysis shows that there was no improvement in market cleanliness in the period after the FSA’s new powers”. In fact the “new tool”indicated that insider abuse occurred in 29 per cent of cases prior to take-overs and 22 per cent of cases preceding announcement of trading statements. Figures which would be in line with some of the roughest markets in the developing world!
Mr Sants considers “that visible enforcement action may be the key tool in our work to reduce market abuse”. While not a radical observation, it is pleasing to see enforcement being given the recognition that it deserves within the overall mandate of the FSA. Rather too much happened and drifted away in the past. Of course, there is no panacea and no agency – in the world,including the USA – has achieved great results in prosecuting –under the criminal or civil law – insider abuse. As the IMF Study in 2000 emphasised, a much more strategic use of all the weapons and procedures at the disposal of those concerned with market integrity is required. What the FSA should be commended for is its willingness to test the integrity of our markets as this itself will emphasise the need – politically and otherwise –to address these issues with the sophistication, dedication and resources that are needed.
Barry Rider
