Last week we outlined the changes being made to the UK’s market abuse regime when the EU Market Abuse Regulation takes effect next month. The Financial Conduct Authority (FCA) has recently issued a Final Notice which shows the dangers of engaging in one form of market abuse, namely insider dealing.
What is ‘insider dealing’?
Insider dealing occurs (amongst other things) when someone deals in shares in a listed company on the basis of ‘inside information’. ‘Inside information’ is precise information relating to a company or its shares which is not generally available and which, if it was made public, would have a significant effect on the company’s share price.
The recent case concerned a financial adviser, Mr Taylor, who worked for Towry Limited, a privately owned wealth management company.
Early in 2015 Towry had made an offer to acquire Ashcourt Rowan Plc, a wealth management company listed on AIM. On 12 March 2015 the CEO of Towry circulated an email to all its staff stating that Towry had increased its offer for Ashcourt Rowan. The email was sent in error, before any public announcement about the increased offer had been made. Realising his error, the CEO attempted to recall the email and sent a further email to staff informing them that the increased offer price was not public information and that staff should not act on it as doing so could be insider dealing.
Immediately after receiving the email, Mr Taylor bought 5,582 shares in Ashcourt Rowan for £15,012. Later the same day, the increased offer price was made public, the share price of Ashcourt Rowan increased by 26% and Mr Taylor sold his shares for £18,510 making a profit of £3,498.
Mr Taylor subsequently asked his broker if it was possible to reverse the buy-sell trade in the shares as he feared he may be ‘judged to be guilty of insider trading‘. The broker said this was not possible and reported the trading to the FCA as suspicious.
The FCA confirmed that Mr Taylor’s conduct was insider dealing. The information disclosed to him in error was inside information: it was precise, was not generally available and was likely to have a significant effect on the share price if it was made public – as demonstrated by the fact that the share price jumped 26% once it was made public. Mr Taylor’s decision to trade in the shares was based on that information.
The FCA considers a number of factors when deciding the appropriate level of fine for insider dealing, including the seriousness of the breach, any mitigating or aggravating factors and the need to ensure that the penalty is sufficient to deter further or similar acts of market abuse.
The FCA initially decided on a fine of £75,000. However, it was considered that a penalty of this size would cause Mr Taylor (who had been unemployed since Towry dismissed him for gross misconduct) serious financial hardship. A further discount was applied to reflect the fact that Mr Taylor had agreed to settle at an early stage of the FCA’s investigation.
The final penalty imposed by the FCA was therefore £36,285 – still over 10 times the actual profit made by Mr Taylor on the illegal share trade. In addition, the FCA has banned Mr Taylor from acting as a financial adviser on the basis that his lack of honesty and integrity meant he was not a ‘fit and proper person’ to perform regulated activities.
The case is a stark reminder that the penalties for insider dealing will always outweigh any perceived benefits.