Financial Crimes Law

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nCritically analyse the enforcement response towards market manipulation in the United Kingdom since the 2008 financial crisis.

nIntroduction

nIn response of global financial crisis in 2007-08, the United Kingdom government developed shift change in the economic policy to control market manipulation. The country had suffered huge financial losses from 2007 that led to risk of British banking systems meltdown after 12 months. Prior to the financial crisis, the house price in the UK had remained constant for a decade. However, the house price bubble caused huge suffering to the economic growth of the economy. The UK also suffered from economic recession of 4 per cent, which was the first one of its kind in 17 years. The retail prices reduced with 1.7 per cent, posing a risk to 3 million people because of lack of employment in the country. In this regard, the government enacted ad hoc policies that would facilitate international cooperation after the financial crisis in order to reduce it effects. Moreover, the financial laws were enacted aiming to combine efforts to boost financial supervision in the EU. Prior to this recession, the UK government relied on the Financial Services and Markets Act 2000 (FSMA 2000) to implement financial issues. After recession, the legislature introduced legislations such as the Financial Services Act, 2013 (banking reforms), the Financial Services Act 2012, and Banking Act 2009 (Special Provisions). Through the Financial Services Act, the government has established measures to address market manipulation that would prevent another financial crisis. The financial Conduct Authority is used to enforce laws and initiate prosecution strategies for persons involved in market manipulation. The paper will critically analyse the enforcement response after financial crisis in order to prevent cases of market manipulation in the UK.

nFinancial Market Manipulation and Insider Dealing

nAccording to Financial Services Act, a market manipulation refers to financial practices of forging securities either downwards or upwards in order to look like as if securities have a higher or less value as compared to their actual value. For instance, a security issuer allocates money to a group of individuals whom it regulates in order for those individuals to obtain those securities hence appearing as if there is market for them. Consequently, these securities increase in value due to high demand. Market manipulation is considered criminal in the UK.. In addition, in accordance with Financial Services Act it is a criminal offence to engage in market manipulation because it does not encourage fair competition and it can cause another recession. Prior to financial crisis in 2008, the government enforced the Financial Services and Management Act 2000 but this legislation was not effective in controlling market manipulation. The law was amended and the legislature introduced the Financial Services Act, which is implemented by Financial Conduct Authority. The law is effective in dealing with market manipulation because it gives FCA adequate powers to deal with traders who engage in it.

nIn particular, this law stipulates that an individual who participate in such act can be imprisoned, lead to public censure, and/or get unlimited fines. Market manipulation is normally addressed pursuant to the regime of market abuse.

nMarket abuse refers circumstances where mechanisms for setting prices are distorted by certain individuals in order to disadvantage financial investors. It includes both market manipulation and insider dealing. On the other hand, insider dealing refers to illegal trading of shares of a certain firm by particular individuals who have access to special information (which is not known to public) in that firm. In addition, these financial market abuses can occur in the UK or any other country in Europe. In market manipulation there is seven types of characters that either lead to a sanction or civil offence. Most notably, market manipulation is considered as criminal offences.

nThe Financial Conduct Authority

nThe Financial Conduct Authority enforce the Financial Services Acts and deals with any persons who attempts to manipulate security markets regardless of the type of company or whether it was intentionally or was unintentionally committed. The Financial Services Act covers financial instruments such as contracts, warrants, debt and options instruments and contracts for differences that are traded in European regulated markets. In particular, in the United Kingdom, they include the London Stock Exchange as well as commodity derivative markets. The law also applies to all transactions conducted in off-market environment associated with financial instruments.

nWhen making decisions on enforcement action over market abuse, the Financial Conduct Authority determines the seriousness and nature of accused behaviour and the conduct of the specific individual following identification of the behavior. Moreover, it considers the extent of complexity of the users of a particular market as well as the liquidity and size of the market. Similarly, in the process of enforcement, it considers the vulnerability of market to manipulation and whether appropriate authorities have undertaken adequate actions. Furthermore, the enforcement of these laws depends on the previous actions in similar cases. Besides, it considers the effects in specific behaviours since a financial penalty can lead to adverse impacts on the consumer. The enforcement agencies in the UK consider the compliance history and disciplinary record of an individual involved in market manipulation.

nThe financial Conduct Authority is mandated to promote and protect the integrity of the financial systems in the United Kingdom. In order to achieve this object the financial conduct authority is concerned with resilience stability and soundness of the financial markets, transparency during the process of price formation and dealing with market abuses. Moreover, it enforces organised business operations in the financial market, which ultimately helps to reduce financial crime that threatens customers in the United Kingdom. In addition, the Financial Conduct Authority focuses on regulatory activities as it deals with supervision of security. In this respect, it acts the UK Listing Authority and conducts oversight of markets and detecting market abuses.

nThe Financial Conduct Authority play a crucial role in ensuring that Listed firms have appropriate disclosures, which helps investors to make sound decisions on their investments. Its supervisory role ensures that all sponsor firms follow rules and regulations regarding their operations and approval process as well as their performances. One of its functions in the UK markets is to ensure integrity of London Interbank Offered Rate (LIBOR) and FOREX scandal. The latter refers to manipulation of exchange rates for banks in the UK, the UK and Asia in order to gain financially.

nPursuant to the Financial Services Act 2012, a person commits criminal offence if he or she makes misleading impressions or statements about a particular standard. In order to improve its enforcement strategies and reduce market manipulation, the FCA regularly updates the Code of Market Conduct. The latter provides guidance for assessing whether a certain behavior leads to market abuse. It also describes the types of behaviours that do or do not lead to market manipulation. It also defines the acceptable and unacceptable market practices to control financial market abuses.

nThe Financial Conduct Authority is the UK agency that deals with EU Short Selling Regulations. Therefore, it tasked with the responsibility of guaranteeing that the needs of this law are adhered to. In the United Kingdom, market manipulation is regulated via Market Abuse Directive (MAD). The severity and depth of the financial crisis in 2008 that led to recession forced European legislators to review the legislative framework where financial markets functions. Consequently, MAD was overhauled and the EU established Market Abuse Regulation (MAR) and established criminal sanctions.

nSerious Fraud Office

nSerious Fraud Office (SFO) is a government agency that deals with cases of complex or serious corruption, bribery and fraud. In addition, the agency prosecutes those involved in financial crimes such as market manipulation. SFO functions under the superintendence of office of Attorney General in the UK. The agency is established pursuant to the Criminal Justice Act 1987. The legislation empowers the SFO to identify, prosecute and investigated cases of serious financial crimes in the country. During the financial crisis in 2008, Serious Fraud Office was involved in investigations concerning liquidity auctions of the Bank of England. The SFO was also involved in prosecuting financial criminals that were involved in FOREX and LIBOR scandals.

nThe bank was accused of committing fraud and market manipulation on its money-markets auctions during this period. In accordance with Criminal Justice Act the SFO have adequate powers to request any kind of data or document from any person or bank. In this respect, an individual or entity suspected to be involved in crime is required to provide confidential data and answer relevant questions.

nFurthermore, the Serious Fraud Office implements the Bribery Act 2010 aiming to control all types of crimes in corporate market. In this respect, the SFO deals with cases on publishing false information, share manipulation and fraudulent trading. The latter refers to instance when a firm engages in business aiming to defraud its creditors. Besides, share ramping occurs when financial criminals manipulate the prices of shares for a certain company. Consequently, the company suffers from false prospects of its profits. The SFO deals with false information because it leads to market manipulation. In most cases, financial criminals establish, falsify, conceal or destroy an account aiming to mislead people of the financial position of a company. Eventually, creditors or investors are misled on the financial potential of a firm.

nThe Securities and Exchange Commission

nThe SEC is an agency in the US that deals with enforcement of laws concerning market manipulation. In addition, it regulates security laws in the country and stock exchanges. It was established under the Securities Exchange Act. It played a crucial role in investigations of foreign exchange manipulation especially between the UK and the US banks. In particular, it listed some banks such as JP Morgan in the FOREX scandal in the UK.

nThe Commodity Futures Trading Commission

nThe CFTC is an agency in the US that enforces futures and options markets. It is also involved in maintaining fair trade between financial markets. Furthermore, it ensures that market players do not engage in manipulation, fraud and abusive financial practices. The agencies are involved in investigations of foreign scandals between the US and other global partners. For instance, it currently involved in investigations in the UK concerning a FOREX scandal that include banks in the US and the UK.

nMarket manipulation as a criminal offence

nThe Financial Services and Markets Act 2000 provided both civil and criminal provisions regarding participating in market manipulation. However, the UK legislation Part VII repealed the Financial Services and Market Act in April 2013 and established sections 89-91 of the financial services act, 2013 that set new criminal offences. Individuals or legal entities can commit the new offences. In accordance with section 89 of the Financial Services Act, a prosecutor must proof that a person or a firm has made misleading or false statements. In such as case, a prosecutor need to show that a particular person intended to make misleading or false or was reckless or he or she dishonestly hide an important material fact. It is also crucial to proof that the individual or company deliberately misled in order to sell invest or avoid investing or refrain or exercise some rights in investment sector.

nThe offence of establishing misleading or false statements or impression pursuant to section 90 of the Financial Services Act need a proof that a firm deliberately misled for specific reasons. Some of these reasons may include causing a losing or gaining from profits, understands that the statements are misleading or false or being careless as to whether the above aspects exist or not. The law also requires that the defendant purposely established the statement or impression in the financial market. However, the act allows the defendant to show he or she did not make misleading or false statements or impressions.

nAs established in the Misleading Statement Order, the criminal offence of providing misleading or false impression or statement is only applicable to specified benchmark. In this regard, under section 91 of the Financial Services Act it can only apply in the benchmark of the London Interbank Offered Rate (LIBOR).

nRegulatory regimes

nThe Financial Services Act of 2013 established the Code of Market Conduct, which creates Market Conduct Handbook. Moreover, the Code of Market Conduct provides some special examples of behaviours and guidance that lead to market manipulations and related penalties.

n Market Abuse Regulation (MAR)

nIn the UK, the FCA is tasked with the responsibility of enforcing the Market Abuse Regulation on behave of the European Union. MAR deals with laws on market manipulation among the EU member states. In addition, the new law is enforced in order to protect the European nations including the UK from occurrence of another global financial crisis. According to MAR market manipulation refers to any behavior that is provide or is likely to provide misleading or false signal relating to price of, demand of or supply of a financial instrument such as contract, shares or securities. Secondly, market manipulation refers to behaviours that ascertain prices of different financial instruments at artificial or abnormal level.

nPursuant to MAR, such behaviours in financial markets are illegal except in cases they are conducted to conform with acceptable practices or for legal reasons. It also gives details of manipulative behavior by giving examples. For instance, pricing fixing is considered illegal because participants in the market collaborate at the expense of the consumer. Trading through algorithmic and high frequency represent a new instance of market manipulation. Moreover, MAR identifies new examples marketing manipulation via development of an abusive effect. Some of these examples include delaying or disrupting operations of trading system in a particular venue. In addition, article 15 of Market Abuse Regulation, makes it illegal for any person trying to participate in market manipulation.

nEnforcement of Market Abuse Regulation in the UK

nSince the United Kingdom is a member of EU, it enforces the regulations. The Financial Conduct Authority, therefore, is responsible of protecting the customers from market manipulation. In addition, participants in the market are required to help in inhibiting market manipulation. In accordance to article 16 of Market Abuse Regulation, market participants and investment companies should create and safeguard sound procedure, systems and arrangements aimed at detecting and preventing market manipulation.

nFurthermore, professionals designing or implementing transactions are required to develop procedures and systems for identifying suspicious transactions and orders. Besides, they should design effective reporting mechanisms that deliver information immediately. In case there is reasonable suspicion, individuals or firms must notify suitable authorities. The primary reason for establishment of MAR is to reduce instances of market abuse among the EU member states.

nWith this in mind, the EU requires member states to have adequate powers to deal with market manipulation. In such cases, the government should have powers to impose ban to firms or individuals engaging in manipulative behaviours, compel those guilty to remit profits acquired through such means and/or suspend the license of a firm. Furthermore, member states are required to impose strict sanctions to financial companies or individuals involved in market manipulation. In this respect, MAR has set, for instance, 5 million Euros for parties engaged in market manipulation or three times the total value of loss avoided or profit gained.

nThe regulatory authority is provided with huge powers in accordance with article 23 of MAR when conducting investigations over potential market manipulation. In particular, these powers include the right to acquire any material, data or document in any format, to demand access of information from any individual and to demand the asset freezing and trading suspension of instruments such as contracts, shares and securities.

nRegulatory authorities such as the FCA are provided with authorization conduct inspections on different places aiming to seize document and data. However, the right of entry of such premises can only take place in case of reasonable suspicion that data concerning issue under investigation is relevant in market manipulation. Furthermore, under article 32, sub-articles 3 of MAR, all member states must initiate appropriate mechanism to ensure that employers have necessary internal procedures for their workers to notify to authorities in case of MAR violations.

nFailures of Enforcement Authority

nFollowing the financial crisis in 2008, the UK Financial Services Authority faced many criticisms from different sources for failing to initiate timely investigations, poor regulatory approach and failure to enforce efficient protection of investors. Prior to the crisis, the authority had only produced nine actions related to enforcement for market manipulation. After establishment of the FSA, it has been criticized of failing to initiate high profile cases against powerful individuals involved in financial crisis. In addition, it did not put appropriate mechanisms to prevent with London Interbank Offered Rate (LIBOR) scandal. However, reports have emerged that it failed to pursue financial criminals in the United Kingdom. In addition, there is some criticism on the Serious Fraud Office and the Financial Conduct Authority on how they handle cases related to prosecution charges for persons accused for LIBOR manipulation.

nFurthermore, powerful individuals in the banking sector in the UK, who actively participated in the financial crisis of 2007-08 have not been prosecuted or convicted. Moreover, these two agencies have not disqualified any persons pursuant to the Company Directors Disqualification Act of 1986. Under this Act, any director who engages in financial misconduct in cases such as during the financial crisis is disqualified. Furthermore, the coalition government in the UK has failed to provide adequate resources to deal with financial misconducts.

nEnforcing the Financial Services Act in LIBOR Scandal

nThe London Interbank Offered Rate (LIBOR) scandal arose when it was identified that the UK banks were falsely increasing or decreasing their rates in order to acquire huge profits or provide the impression that they were profitable than they were. LIBOR is very useful as its derivatives are used in many other countries including the United States. Therefore, its manipulation was likely to affect other derivatives markets.

nThe LIBOR scandal prompted the government to set the FSA 2012 where it is regulated by the government. In addition, the law established criminal offences for LIBOR manipulation. The government of the United Kingdom and the United States fined most of the banks in these countries that were involved in LIBOR scandal. Some of these banks include Barclays Bank –fined approximately £ 300 million, RBS bank, £ 400, UBS bank £ 950 million in 2012. By the end of 2013, other banks such as Rabobank were fined nearly £ 670 million for their engagement in manipulation of this benchmark.

nMartin Broker Ltd was also fined because of its submissions demonstrating the determination of the Financial Conduct Authority. Other firms such as FX are fined after investigations showed that they were involved in the LIBOR scandal. Serious Fraud Offences was also involved in prosecuting people who participated in defraud and conspiracy. Since the FCA has dealt with major brokers and banks, it continues to conduct investigations on individuals. Most importantly, it conducts regular discussions concerning Libor currency aiming to prevent occurrence of another manipulation scandal.

nFOREX Scandal

nThe regulatory agencies in the UK such as the FCA and SFO have taken shift measure to identify, investigate and prosecute banks that engaged in FOREX scandal. The key allegation of the scandal involved five banks that participated in manipulation of exchange rates. In particular, these banks included UBS, RBS, JPMorgan, HSBC and Citibank in both the UK and the US. In addition, agencies are conducting investigations in order to determine the financial malpractices in foreign exchange rates. Similarly, the Commodity Future Trading Commission in the US is collaborating with the FCA to investigate the market manipulation of these banks.

nChallenges facing the Financial Conduct Authority

nIn its enforcement of financial laws in the UK, the FCA has faced many challenges. Some of these challenges include advanced technology, and meeting higher growth. Financial fields have experienced faster growth in technology leading to High Frequency Traders (HFTs). In this regard, it has enhanced payments technology, money transfer, portfolio analysis and peer-to-peer finance. In addition, these technologies are applied at a faster rate across the world due to emergence of global mobile banking. High rate of global innovation and technology is a concern in financial services because it is exposed to cybercrime, hash-crashes and flash crashes; runaway algos and data losses. In such cases, it is difficult to protect the customers from the crime.

nOver the recent period, the UK economy has recorded significant growth in insurance sector. Consequently, it is the largest in Europe and third biggest in the world. On the contrary, the FCA has faced the challenge of meeting the needs of both the client and business. For instance, it have no adequate capacity to ensure that businesses make profits through appropriate methods and offering their customer value-added services. The FCA does not only require conducting more regulatory activities but also become smarter in their jobs.

nConclusion

nThe United Kingdom government has introduced strict financial crime laws in response to financial crisis in 2008. Initially, the Financial Services Management Act 2000 handled market manipulation and was enforced by Financial Services Authority. However, many government reports including Treasury Committee in parliament accused the FSA for being lenient and failed to prevent the financial crisis in 2008. Furthermore, it was unable to detect the LIBOR scandal, which involved manipulation of interests by major banks in the UK. Consequently, the UK legislature amended the FSMA 2000 and enacted the Financial Services Act 2012, and the Financial Services Act 2013 that provided strict penalties to any individual of persons that were involved in market manipulation. In addition, the law formed the Financial Conduct Authority to enforce the provisions of the law. Persons or individuals involved in market manipulation are prosecuted in the UK financial system. Pursuant to this law, it is a criminal offence to engage in market manipulation, which can lead to sanctions, ban, imprisonment or freezing of assets. The Financial Conduct Authority maintains the transparency, stability and soundness of the financial market and fixing prices in the market. It also ensures that listed firms carry out disclosures as needed by investors in order to make informed choices when investing. Most importantly, it supervises the market integrity of LIBOR benchmark in order to avoid market manipulation. Through the Code of Market Conduct, the FCA issues guidelines that help market players to determine the kind of practices that lead to market manipulation. The EU also conducted an overhaul of its financial legislations in order to prevent new cases of financial crisis. It amended the Market Abuse Directive (MAD) to Market Abuse Regulation. Most importantly, the FCA is mandated to enforce the EU laws such as Market Abuse Regulation (MAR). The law empowers the FCA to conduct thorough investigations and obtain any form of document from suspected person or individual. Persons or firms that violate these laws are prosecuted in order to maintain fairness and effectiveness of financial market.

nWord Count: 3450

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