From July 3rd EU member state governments have been obliged to have in force effective mechanisms to comply with Regulation 596/2014 on a framework to prevent market abuse in the financial services sector. Such abuse largely consists of unlawful insider dealing and disclosure of inside information, together with the manipulation of financial markets.
In fact, the regulations actually go beyond the financial sector as they apply to anyone who, or corporate body that, carries out activities that are regulated by financial services rules, such as the issuing and dealing in shares. Employers must put in place “internal procedures for their employees to report infringements” and provide “appropriate protection for persons working under a contract of employment, who report infringements or are accused of infringements, against retaliation, discrimination or other types of unfair treatment” including the protection of their personal data. Moreover, If individuals do not have a contractual duty to report infringements of the regulations then governments may introduce a system of financial incentives to encourage whistleblowing.
It would appear that not every EU country has met the required deadline or implemented the regulation correctly. For instance, although an amendment has been made to the German Act on Financial Services Supervision it falls short on potential application by excluding accountants, tax consultants and attorneys who may – at least in part – be in a position to be involved in “insider trading” or the passing on of insider information. This is an especially important omission as attempted breaches and cancelling a share purchase order (Art 16.1) are now within the scope of the regulations. In fact, Directors and senior managers of public companies will be generally bound by the new regulations – even to the point of informing family members and close associates of their duties under the regulations (in spite of the fact that the timing of such a declaration might be, in itself, a tip off).
One peculiarity of the regulations is that it actually encourages insider trading by introducing rules under which it can take place (Article 11). Therefore the practice of informing investors about new issues into capital markets – called “market sounding” – must be subject to a procedure that first asks the investor if they would like to receive insider information, then obliges the informant to tell them about the regulations and then obtains from the recipient an agreement to treat the data as confidential. It is also necessary to for managers purchasing such instruments as equities (Article 19) to notify the issuer and competent authorities of their purchase and for the purchase to be made public within three days – thus opening up insider trading to anyone who interprets such purchases as an indication of the future improvement in the value of a company’s shares. This is over and above any scope that exists for insiders to hint to others what they should do without actually directly informing them.
These glaring loopholes simply avoid market abuse by setting out a mechanism by which it may take place. Greater transparency is not, in itself, any guarantee of greater market integrity as it may simply open up abuse to a wider community. Thus the actions of any whistleblower are likely just to unearth the incompetence of market players who are not astute enough to use the regulations to achieve their unethical ends.