Market abuse has made headlines in recent years with accusations of prices being rigged in markets ranging from Libor to oil. There has also been a substantial increase in reports of suspected insider dealing made to the Financial Conduct Authority (FCA). In late 2013 the FCA said it had received more than 1,000 suspicious transaction reports over its latest 12-month period, compared with 739 the year before.
The increase is not necessarily seen as evidence of more misdeeds but of a greater awareness of what constitutes insider trading, and of its consequences. Much of this is due to the efforts of the FCA and its predecessor, the Financial Services Authority (FSA). Although insider dealing has been a crime for some time, the first criminal conviction was brought in 2008, the year in which the FSA issued its Code of Market Conduct. By March 2013 the regulator had secured 23 convictions.
“With the regulator looking at insider trading more closely, and with the scale of fines ramping up, it is important for companies and financial institutions to take this seriously,” says Iain Coke, head of ICAEW’s Financial Services Faculty. “Insider trading is not a minor offence. It could inflict fatal damage to organisations, and people can go to jail.”
Those working and associated with financial institutions should be well aware of the illegality and consequences of insider trading. However, some in business might not realise that the law extends beyond the finance industry to reach anyone who participates in or whose conduct affects the UK’s financial markets.
Under the Criminal Justice Act 1993 the criminal offence of insider dealing covers the trading in any instrument traded on UK markets. And an inside trader does not have to be a company employee or contractor. “You don’t have to be an insider to be involved in insider dealing – you just have to know that what you know is inside knowledge,” says Ros Wright CB QC, chairman of the Fraud Advisory Panel.
So what can companies do to prevent insider trading? A good starting place, says Coke, is to control who has access to insider information. “The fewer people who know about price-sensitive information, particularly mergers and acquisitions, the less chance there is that they will be able to trade based on this information,” he says.
Compliance departments play a major role here. Normally senior management and directors need approval from compliance before trading in the company’s shares. Compliance should be told when price-sensitive information is around, and will keep a list of all those who they believe to have inside knowledge of corporate finance transactions.
The FCA keeps an eye on unusual share price movements after previously confidential information, such as a takeover bid, has been released. “If the price or trading volumes moved significantly before the event, especially shortly before, then they will look into the transactions with the help of the compliance department,” says Coke.
You don’t have to be an insider to be involved in insider dealing – you just have to know that what you know is inside knowledge
Organisations should educate their staff so they all know the rules governing trading in the company’s shares. While the FCA insists on these sorts of protocols in firms it regulates, non-regulated firms ought to have the same protocols in place. “You don’t have to be working in the financial services industry to be charged with insider dealing,” Wright emphasises. ICAEW contributed to the guidance for non-regulated firms, which is on the FCA’s website.
Company insiders have to be careful that they don’t let the inside information out to others, even accidentally. “The question is whether everyone recognises the importance of confidentiality,” Coke says. “You need a culture that reinforces this.”
Confidentiality is one of the five cornerstones of ICAEW’s Code of Ethics. The Code requires that members do not just keep information confidential but take all reasonable steps to preserve that confidentiality.
Members are also under a professional obligation not to use confidential information to their own advantage and not to disclose it to others. “All our members in practice or business must be aware of this at all times,” says head of business law, Felicity Banks.
ICAEW’s head of integrity and markets Tony Bromell points out that this can put members in business in an invidious position. “We are holding you to a standard while your organisation might not have the same standard,” he explains. He thinks members facing this dilemma should concentrate on selling the importance of ethics to the board as part of the business continuity strategy.
“Chartered accountants tend to be hard-nosed business types who can consider ethical behaviour, not just from the helps-you-sleep-better-at-night point of view, but also in the sense that it pays. Not being ethical can utterly destroy your reputation and the company’s business.”
A couple of years ago ICAEW commissioned researchers at Leeds University to look into what ethics really means in practice. The University’s professional ethics development officer Jim Baxter led the study, which included asking 92 business managers about their organisation’s approach to ethics at work.
Baxter found a major part of having a truly ethical organisational culture rests in making sure what is valued within the organisation accords with the messages from its leaders.
“If you constantly talk about how important ethics is but what gets people advanced is not abiding by the rules – so people can do well by not being ethical – then the organisation’s implicit values are not aligned with its explicit ones,” Baxter points out.
If employees have a sense that something is wrong but want to talk through the matter with someone independent before taking action, ICAEW has a free and confidential advisory helpline members can use to discuss their concerns. “It also provides strong moral support for people who find themselves in a difficult position,” adds Banks.
The Leeds University research highlighted the importance of having an open culture, a clear whistle-blowing policy and creating a net for catching issues before they become major problems. Training in ethics is vital – as long as it is the right kind of training.
“Initially some people said training was counter-productive,” says Bromell. “When we dug into this we found a box-ticking approach to ethics was putting people off as this suggests you are just going through the motions. Ethics is about a mindset, a way of thinking and of behaving. Training that uses case studies about practical situations always engages people.”
Members of professional bodies generally have an opportunity to act as champions in the organisations they work for, says Baxter.
“ICAEW members undergo more ethics training than many other professionals so they should be relatively comfortable in talking about this. Perhaps they could see it as their mission to spread this approach within the organisation.”
LLP partners will now be afforded protection under whistleblowing rules following a Supreme Court judgement made in May.
The landmark decision overturned a previous ruling that excluded partners from protection if they chose to expose wrongdoing at their own firm. The partners’ exclusion from the rule was based on a legal assumption that they are not “employees” in an LLP.
It followed a three-year case involving Krista Bates van Winkelhof, a law firm partner who sought to take complaints against the firm to an employment tribunal. It was decided that as a partner she would not be protected under any whistleblowing laws, and this decision was upheld at a court of appeal. The Supreme Court unanimously allowed an appeal, and ruled that van Winkelhof is “a worker”.
The legal and accountancy professions welcomed the ruling, describing it as a turning point. Some argued that it will result in an increase in disclosures of wrongdoing. Patrick Brodie, partner at City law firm RPC said regulators would be “pleased” with the ruling.
A recent report revealed that the Financial Conduct Authority (FCA) has seen whistleblowing reports rise 64% in the last year, increasing from an average of 338 to 556 a month.