CISI Financial Products Markets Services Topic Financial Services

CISI – Financial Products, Markets & Services Topic – Financial Services Regulation and Professional Integrity Lesson: 8. 3 Insider Dealing and Market Abuse cisi. org

What do you know? Attempt the 10 multiple-choice questions about financial crime covered previously cisi. org

Re-cap – Financial Crime Answers: 1. D –There is not a fourth stage 2. B – FATF (Financial Action Task Force) 3. D – Reporting knowledge or suspicions of possible money laundering which are inaccurate 4. D – Up to 14 -years in prison 5. B – MLRO (Money Laundering reporting Officer) 6. A - Impersonation fraud 7. C – Using forged identity documents 8. B – A bribe has to involve cash or an actual payment exchanging hands 9. C – JMLSG (Joint Money Laundering Steering Group) 10. C – Layering cisi. org

Learning Objectives 1. Know the offences that constitute insider dealing and the instruments covered 2. Know the offences that constitute market abuse and the instruments covered cisi. org

Transparency International Corruption Perception Index 2017 The index ranks 180 countries and territories by their perceived levels of public sector corruption according to experts and businesspeople. It uses a scale of 0 to 100, where 0 is highly corrupt and 100 is very clean. cisi. org

Transparency International Corruption Perception Index 2017 On the map, the darker the country/territory, the more perceived corruption exists Which countries do you think were perceived to be the most and least corrupt in 2017? cisi. org

Financial services is one of the least trusted industries globally Trust in Industries, 2013 vs 2014 Source: 2018 Edelman Trust Barometer Survey cisi. org

Insider Dealing Watch the short CNN clip about insider dealing and jot down a few notes on what insider dealing is. What is insider trading? CNN Money http: //money. cnn. com/video/investing/2014/06/03/what-is-insider-trading. cnnmoney/ cisi. org

What is insider dealing? “When confidential, price-sensitive knowledge and data is used to provide an unfair advantage when buying and selling securities” FT. com, 2016 cisi. org

Insider Dealing Timeline Up to the end of World War II the buying and selling of stocks and shares in a company By the late 1950 s it began to be on the basis of considered information known only to the company or unethical to make private profits at its directors, officers the expense of and advisers was the main body of considered legitimate shareholders. and was widespread. 1945 Late 1950’s The practice became widespread once more, often using inside knowledge of a take over. 1960’s and early 1970’s 23 June 1980, The Companies The Stock Act 1980 came Exchange and into force and the Takeover made insider Panel issued a dealing a criminal joint statement offence in certain calling for specified criminal circumstances. sanctions for The relevant act insider dealing. is now The Criminal Justice Act 1993 1973 1980 -1993 cisi. org

The Criminal Justice Act 1993 The Act made insider dealing a criminal offence (punishable by a fine and/or jail term). It defines. . . What is deemed to be inside information Information relating to particular securities or a particular issuer of securities and which: § Is specific or precise § Has not been made public § If it were made public, would be likely to have a significant effect on the price of the securities Information is public when it is: § Published e. g. Co. Results § Derived from accessible information e. g. Analysis of accounts or press releases Who is deemed to be an insider The situations that give rise to the offence of insider dealing A person in possession of price sensitive information § An insider acquires or and knows it that it is inside disposes of price-affected information from an inside securities while in source. They may have: possession of unpublished, price-sensitive information. § Gained it through being a § Encouraging another person director, employee or to deal in price-affected shareholder of the security securities. issuer § Disclosure of the information § Gained it by virtue of his to another person (other than employment, office or those permitted to know it). profession e. g. company auditors §Acquisition of disposal must § Sourced it from either of occur on a regulated market or the above, either directly through a professional cisi. org or indirectly intermediary.

The Criminal Justice Act 1993 The instruments covered by the law are described as securities. This includes: q Shares q Bonds (Including Gilts or those issued by a company or public sector body) q Warrants (Similar to an option, normally based on equities) q Depositary receipts q Options (To acquire or dispose of securities) q Futures (To acquire or dispose of securities) q Contracts for differences (Based on securities, interest rates or indices) Not included: o Commodities or derivatives based on commodities o Units/Shares in Unit Trusts, OEICs and SICAVs cisi. org

Activity – articles on market offences Read the two articles below on market offences and answer the questions on your worksheets. Article 1 “Ex Moore Capital trader Julian Rifat jailed for insider trading”, taken from The Telegraph, March 2016 http: //www. telegraph. co. uk/finance/financialcrime/11483297/Ex-Moore-Capital-trader-Julian-Rifatjailed-for-insider-trading. html Julian Rifat Article 2 “‘Mad Punter’ claims no knowledge of market offence”, taken from FT. com, April 2016 http: //www. ft. com/fastft/2016/04/08/mad-punter-claimsno-knowledge-of-market-offence/ Iraj Parvizi dubbed the ‘Mad Punter’ cisi. org

Market Abuse The offence of market abuse was introduced by the Financial Services and Markets Act 2000. The EU introduced Market Abuse Regulations (MAR) in 2016 applying to all EU countries Market abuse may arise in circumstances where financial investors have been unreasonably disadvantaged, directly or indirectly, by others who behave unlawfully. It is a civil offence, subject to fines and sanctions by the regulator. There are three market abuse behaviours stipulated by MAR: Insider dealing Unlawful disclosure of inside information Market manipulation cisi. org

Market Abuse - Behaviours Insider dealing Arises when a person in possession of inside information uses it to deal, or to attempt to deal or to recommend or induce another to do so. Dealing includes acquiring or disposing of financial instruments to which the inside information relates, as well as to cancelling or amending an order that was made before having inside information in relation to that instrument. A person using the recommendation or inducement will also be insider-dealing where they know or ought to know that the recommendation or inducement is based on inside information. In the UK, the FCA judges what a reasonable person knows, or ought to know, in such circumstances. cisi. org

Market Abuse - Behaviours Unlawful Disclosure of Inside Information This requires issuers to inform the public as soon as possible about inside information which directly concerns them. Where their securities are admitted to trading on a regulated market, disclosure must also be made to the officially appointed central storage mechanism. Market Abuse Regulations 2016 prohibits a person from unlawfully: • Disclosing inside information, except • ‘In the normal course of employment, profession or duties’. cisi. org

Market Abuse - Behaviours Market manipulation Committed if a person carries out any of the specified activities or behaviours in Article 12 of MAR. These include: Using fictitious devices or other deception or contrivance that is likely to affect the price of financial instruments Giving false or misleading signals about the supply of, demand for or price of a financial instrument. Disseminating information which gives, or is likely to give, false or misleading signals as to supply, demand or price of financial instruments; or secures, or is likely to secure, their price at an abnormal or artificial level, including circulating rumours knowing the information was false or misleading Certain other behaviours including collaborating to secure a dominant position over the supply or demand for a financial instrument or creating other unfair trading conditions including by algorithmic and highfrequency trading. cisi. org