you're reading...
Economic and Social Policies, PUBLICATIONS

Toughening EU rules on market abuse

Responding to the economic crisis and recent scandals in financial institutions, the European Commission (EC) has proposed to strengthen the financial-market abuse framework.

Undermining market integrity

Zipper on mouth

© AR Images / Fotolia

Banks have been struggling to recover from the 2008 financial crisis and trying to lose their negative image, but recent market abuse scandals (e.g. Libor manipulation and investment bankers’ behaviour) slowed the pace of this recovery. Market abuse occurs when the integrity of financial markets is intentionally harmed, leading to a loss of investor confidence, and generally consists of insider dealing or market manipulation.

With insider dealing, investors benefit from trading based on information not yet available to other investors, and therefore not integrated in market prices. Manipulation concerns either influencing price-setting mechanisms (e.g. “wash trades”, in which trading volumes are artificially driven up by the same person), or providing the market with misleading information (e.g. “bear raids” with rumours spread to drive down prices).

Tackling financial market abuse

Whilst regulators review financial legislation, the EC identified several issues in regard to the current EU anti-market-abuse framework (the Market Abuse Directive, MAD). They include the insufficiency of the legislation in addressing new markets and certain types of trading, its scope excluding commodities or their derivatives, the lack of clarity of the regime and its effective enforcement, and heavy administrative burdens.

In response to the challenges, the EC on 20 October 2011 presented proposals to review the legislation. A first pillar would be the replacement of the MAD with a regulation on insider dealing and market manipulation (MAR). This regulation would broaden the scope, review definitions of insider dealing and market manipulation, clarify procedures for handling inside information, and widen national authorities’ responsibilities. MAD was accompanied by a proposed directive on criminal sanctions for insider dealing and market manipulation (CSMAD), seeking to establish a criminal-law regime for market abuse. CSMAD proposes to treat certain forms of insider dealing as criminal offences and Member States (MS) would be required to sanction them accordingly, with minimum sanctions fixed at EU level. With criminal law central to MS’ sovereignty, this would be only the second set of criminal penalties in EU law.

Challenges

Although most analysts agree criminalisation of market abuse is justified, some doubt its efficiency. It would enable MS to impose tougher punishments, but with heavy burdens of proof required. This adds to financial markets’ technical complexity with which regulators will have to deal, as well as the potential reach of market abuse beyond EU borders. As a result, it is possible that financial transactions will have to be documented more extensively, driving up costs and conflicting with the drive for efficiency. Finally, some observers doubt legislation can keep pace with rapid innovation in financial instruments. As for alternative solutions to market abuse, some critics propose a clear-cut separation on entity level, to avoid contamination of commercial banks with investment banks’ culture.

European Parliament

On 9 October 2012, the EP’s Economic Affairs Committee (ECON) adopted reports on the MAR and the CSMAD. MEPs decided maximum prison sentences should not be below five years for the most serious infringements, whilst less serious cases would be subject to a two-year minimum. The Committee also called for intention (reckless, attempted or committed) to be disregarded when it comes to punishments and for public naming of fraudsters. Trilogue negotiations concluded in June 2013, and on 26 June, the Council confirmed its provisional agreement on the compromise text.

Discussion

No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Download the EPRS App

EPRS App on Google Play
EPRS App on App Store
What Europe Does For You
EU Legislation in Progress
Topical Digests
EPRS Podcasts

Enter your email address to follow this blog and receive notifications of new posts by email.

Join 3,319 other followers

Disclaimer and Copyright statement

The content of all documents (and articles) contained in this blog is the sole responsibility of the author and any opinions expressed therein do not necessarily represent the official position of the European Parliament. It is addressed to the Members and staff of the EP for their parliamentary work. Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the European Parliament is given prior notice and sent a copy.

For a comprehensive description of our cookie and data protection policies, please visit Terms and Conditions page.

Copyright © European Union, 2014-2019. All rights reserved.

%d bloggers like this: