Insider Dealing (Securities and Regulated Markets) Order 2023

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Insider Dealing (Securities and Regulated Markets) Order 2023.

My Lords, this statutory instrument updates the UK’s criminal insider dealing regime to ensure that all market participants are held to high standards and that there are meaningful consequences for those who break the law. As noble Lords will be aware, insider dealing is a form of market abuse. In broad terms, it is where an individual trades in a financial instrument based on material, non-public information about a company. Insider dealing compromises the integrity and orderly functioning of financial markets. For this reason, it is both a criminal and civil offence in the UK.

The Financial Conduct Authority is responsible for identifying and taking enforcement action against cases of insider dealing. The FCA can impose a variety of criminal and regulatory sanctions under the criminal and civil market abuse regimes. The intention of this framework is to enable the FCA to take action against market abuse in a way that is commensurate to the seriousness and market impact of the abusive behaviour.

The legislation that defines the current criminal offence for insider dealing was first introduced in 1993. The Criminal Justice Act 1993 lists the securities and regulated markets to which the insider dealing offence applies. However, financial markets have evolved since the lists of instruments and regulated markets were last updated. As a result, these lists are narrower than the more recently updated civil market abuse regime.

The Government believe that this gap between the civil and criminal insider dealing offences needs addressing, and this SI does that by aligning the list of securities in scope of the criminal insider dealing offence with the civil insider dealing regime. The SI also replaces the named regulated markets in scope of the criminal insider dealing offence. The use of general definitions will future-proof the list going forward, avoiding relevant markets inadvertently falling out of scope. Closing this gap between the criminal and civil insider dealing regimes implements one of the recommendations from the Fair and Effective Markets Review, a joint review by the Treasury, the Bank of England and the FCA into the structural risks in the fixed income, commodities and currency markets.

This SI will reinforce the UK’s reputation as a fair and transparent place to invest, with robust regulatory standards and serious consequences for those who do not comply with our laws. I beg to move.

My Lords, this SI seems admirably straightforward and uncomplicated. We support it and I can be brief. I have only a couple of questions and one observation.

The first question relates to paragraph 7.7 in the EM. Why is it necessary to keep NASDAQ and the successor to the SWX Swiss Exchange explicitly in scope, and to add the New York Stock Exchange for that matter? Are they not already brought into scope by this SI’s adoption of the definitions in Article 4? I am sure that there is a good reason but I would be grateful if the Minister can explain what it is.

My observation concerns paragraph 7.8 of the EM. It points out that

“the set of securities to which the criminal offence of insider dealing applies to is narrower than the securities covered … in MAR”.

It goes on to give examples of the missing securities. It lists currency options, credit default swaps and units in collective investment undertakings, such as exchange traded funds—and says that the list is not exhaustive. It rather coyly says that this is “not optimal”. I agree entirely. I understand that this SI corrects that but, given the historical absence of these securities in the list of activities that may be pursued in the criminal courts for insider dealing, today’s SI rather looks like having just noticed that the stable door has been left open for 20 years and hastily closing it. It is good that no more horses will be able to bolt but that invites the question of how many have already bolted and how many, if any, were caught by the civil procedures in MAR. Does the Minister have an assessment of how many criminal cases would or could have been brought had the missing securities categories been within the purview of the Criminal Justice Act and how many were taken forward instead under the MAR provisions?

Finally, why does this instrument not come into force immediately? Does not the 21-day delay provide a further window for possibly unactionable criminal malfeasance? I look forward to the Minister’s reply.

We agree with the Minister’s assertion that there should be serious consequences for those who break the law. We also agree with the comments from the Liberal Democrat Benches and echo the comments about the seriousness of insider dealing. We share the curiosity shown in the other place when this instrument was considered about the length of time it has taken to bring in this measure, given we understand that it came about as a result of a review that took place in 2015. I am not asking this to be facetious, but what assessment have the Government made of the number of criminal offences that would have been caught had this measure been in place sooner, which were treated under the civil regime because this instrument had not yet been brought? We want to highlight the consequences of leaving things quite this late, because we are concerned. That underscores our support for this measure. The Government are right to address this gap between the two regimes and we support this instrument.

My Lords, I thank both noble Lords for their support for this statutory instrument.

On the time it has taken to deliver this measure and the potential impact in the meantime of not having the criminal regime and the civil regime aligned, it is important to note that since the Fair and Effective Markets Review was published, considerable work has been undertaken to modernise the UK’s market abuse legislation. For example, the civil regime for market abuse was updated in 2016 by the EU market abuse regulation and the Government and UK regulators have implemented the majority of the recommendations from the Fair and Effective Markets Review, including making changes in the Financial Services Act 2021 to increase the maximum sentence for criminal market abuse from seven to 10 years, bringing it into line with comparable economic crimes such as fraud and bribery. The Government have also recently completed a broader review of the criminal market abuse regime as part of the 2019 to 2022 economic crime plan. While this measure has taken longer to implement, there has been other action in this space in the meantime, including delivering on other recommendations from that review.

On the impact of the length of time in which the scope of the criminal offences has been different from that of the civil offences, it is important to note that the FCA has a number of tools available to tackle market abuse, of which the criminal insider dealing offence is only one. In addition to prosecutions under the criminal regime, between 2013 and 2022 the FCA has had 36 regulatory outcomes relating to market abuse, with regulatory fines totalling more than £70 million in that period.

The Government do not have data on the number of criminal prosecutions that have not been pursued due to the difference in the scope of the regimes. The FCA does not routinely record and track cases that it cannot take forward. This includes cases taken forward under the civil regime that could have resulted in a criminal prosecution with the changes made by this SI. Moreover, it is important to remember that there are a number of reasons why the FCA may choose to pursue a civil rather than a criminal prosecution other than the scope of the two regimes. For example, the FCA will consider the severity of the offence in question and whether the evidence meets the higher legal threshold needed to secure a criminal conviction.

Will the Minister address the point about the 21 days?

I can write to the noble Lord on that. It is probably the standard implementation period for a change of this nature. As I said in answering on the assessment of the FCA’s tools and track record on being able to tackle market abuse before this update was made, we do not think that will have a substantial impact on the ability to tackle these issues in that implementation period. I think that that addresses the point but, if there is anything further to add to that, I shall also write to the noble Lord.

Motion agreed.