An examination of legal regulations for insider dealing in the UK and the lessons for China

• Author: ZHENG Weiwei
• Pages: 524-560

FRONTIERS OF LAW IN CHINA

VOL. 12 DECEMBER 2017 NO. 4

DOI 10.3868/s050-006-017-0029-2

FOCUS

NEW CHALLENGES AND UNDERTAKINGS FOR ADMINISTRATIVE AND

REGUL ATORY REFORM: A GLOBAL WATCH WITH CHINESE PERSPECTIVE

AN EXAMINATION OF LEGAL REGULATIONS FOR INSIDER DEALING IN THE UK

AND THE LESSONS FOR CHINA

ZHENG Weiwei*

Abstract The UK’s position as a leading international financial center depends not

only on the openness and competitiveness of its market, but also on its reputation as a

clean and fair place to do business. Market confidence will be undermined where

participants and users believe markets are susceptible to abuse. Thus, the main

convincing justification for controlling insider’s abuse of power is based on the harm

principle, which it causes to investor confidence and securities markets. An insider ought

not to be able to take advantage of his position either to breach a confidence or to

achieve an unfair advantage in the market place; particularly the market place should, as

far as possible, provide equality of opportunity to people entering it. Insider dealing has

been regulated by the criminal law involved under Part V of the Criminal Justice Act

1993 in the UK. It has become clear that the traditional criminal penalty was limited by

the criminal standard of proof required, while self-regulatory regimes are thought as

toothless tigers. Although various potential common law civil remedies for breach of

fiduciary duty and breach of confidence relating to insider dealing do exist, they are

ineffective remedies and beset by so many complexities. As a response, the Financial

Services and Markets Act 2000 came into force and marked an important development

in the regulation of market abuse in creating civil penalties, which also contained misuse

of confidential insider information. Later, the main substantive changes to existing civil

market abuse regime have been taken effect within the Financial Services and Markets

Act 2000 (Market Abuse) Regulations 2005, 2011 and 2014. Regarding to the regulatory

framework, the range of regulatory powers of the Financial Services Authority, which

has been replaced by the Financial Conduct Authority in April 1, 2013, available in

combating market abuse is one of the most fundamental innovations of the FSMA 2000

and plays a significant role in defining the law in practice through a Code of Market

Conduct. China has also exerted great efforts in regulating insider dealing. Under the

* (郑维炜) Ph.D., School of Law, Jilin University of China, Changchun, China; Associate Professor,

School of Law, Renmin University of China, Beijing 100872, China. Contact: smileweiwei1014@sina.com

This article is supported by Young Innovative Research Team in School of Law, Renmin University of

China. All mistakes and omissions are my responsibility.

2017] AN EXAMINATION OF LEGAL REGULATIONS FOR INSIDER DEALING 525

current Chinese legal framework, insider dealing is governed by the Criminal Law of the

People’s Republic of China, the Securities Law of the People’s Republic of China 2005

and some other regulations. The China Securities Regulatory Commission (CSRC) is the

regulatory body for supervising and penalizing insider dealing in China. Although China

has made progress in legislation in terms of the regulation of insider dealing, there are

still much room for improvement, such as the enforcement of the civil penalty and the

enforcement power of the CSRC. Due to the fact that the UK has rich experience in

regulating insider dealing, it is of great significance for China to learn from the UK’s

successful practices. Insider dealing could be well controlled with innovative and

effective legal regulations. This article focuses on an in-depth examination on the

regulations in the UK and a brief introduction of regulations in China in order to figure

out an answer to what has been achieved in the UK and what are the most important

aspects that China could learn from the UK’s experiences. The aim of increasing the

deterrent effect by reducing the obstacles to imposing suitable sanctions, whether

criminal, civil or regulatory, should enable regulators to police a more efficient manner

in the field of financial markets.

Keywords insider dealing, criminal prosecution, civil penalty, regulatory sanction, market

abuse

INTRODUCTION .................................................................................................................... 526

I. PART V OF THE CRIMINAL JUSTICE ACT 1993 FOR THE CONTROL OF INSIDER

DEALING................................................................................................................. 531

A. General Overview of Part V of the Criminal Justice Act 1993 ......................... 531

B. Extensions of the Scope of Part V of the Criminal Justice Act 1993 .................533

C. Problems Associated with Part V of the Criminal Justice Act 1993.................. 534

1. Uncertainties of the Provisions .....................................................................534

2. Difficulties of the Criminal Prosecution .......................................................536

D. Criticisms on Part V of the Criminal Justice Act 1993..................................... 538

E. Concluding Remarks .........................................................................................539

II. PART VIII OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 AND ITS RECENT

AMENDMENTS FOR THE REFORM OF INSIDER DEALING......................................... 540

A. A Civil Penalty System and Its Effectiveness: Filling the Gaps in the Insider

Dealing Regulations .........................................................................................541

B. UK’s Major Amendments to Civil Market Abuse Regime.................................. 543

C. The Role of the Code of Market Conduct.......................................................... 544

D. Concluding Remarks......................................................................................... 545

III. REGULATORY POWERS OF THE FINANCIAL CONDUCT AUTHORITY UNDER THE

FINANCIAL SERVICES AND MARKETS ACT 2000 AND APPLICATION OF THE CRIMINAL

JUSTICE ACT 1993................................................................................................. 546

A. Detection ...........................................................................................................546

B. Investigations ....................................................................................................547

C. Regulatory Sanctions ........................................................................................549

526 FRONTIERS OF LAW IN CHINA [Vol. 12: 524

D. Criminal Enforcement....................................................................................... 550

E. Concluding Remarks .........................................................................................552

IV. REGULATING INSIDER DEALING IN CHINA: LEARNING LESSONS FROM THE UK

REGULATORY EXPERIENCES .................................................................................. 552

A. China’s Regulation on Insider Dealing .............................................................553

B. The China Securities Regulatory Commission.................................................. 554

C. Lessons That Can Be Learned from the UK’s Experiences............................... 555

CONCLUSION........................................................................................................................ 558

INTRODUCTION

For several years the subject of insider dealing has attracted a lot of attention in the

world’s press. It is perceived as a problematic issue facing the securities markets in most

countries and the general trend has been to make it illegal. As developed, legal

regulations for insider dealing became an important issue in the field of financial markets.

Historically, the insider dealing regulation dates from the 1930’s in the US.1 Under

the federal law, the Securities Act 1933 and the Securities Exchange Act 1934 were

passed in response to insider dealing, fundamentally they are civil statutes, but they

impose criminal liability where they have been willfully violated.2 In the European

Community, rapid developing investments markets, the desired harmonization of the

relevant laws and a number of scandals in the investment sector resulted in call for an

insider dealing law on investor protection within each member state; therefore, following

a number of unsuccessful attempts, insider dealing became a criminal offence in the UK

for the first time in 1980 under Part V of the Companies Act 1980.3

Regulation contains an assortment of criminal, civil and regulatory law. Each set of

proceedings possesses its own characteristics and purposes. Generally, the criminal law

has always been concerned to distribute blame, the civil proceeding may permit to

compensation for private wrongs and the regulatory sanction may protect the integrity of

public markets.4 A person who engages in conducting insider dealing may find that it is

in breach of the provisions of several rules. Under such circumstances, there is a choice as

to whether to commence a criminal proceeding or to take a civil action against this

person.

Reference to the UK context, when trying to find the starting point of an examination

of legal regulations for insider dealing in the field of financial markets, it is necessary to

consider how insider dealing should be regulated and how effective insider dealing laws

1 Jacqueline A. C. Suter, The Regulation of Insider Dealing in Britain, Butterworths (London), at 1

(1989).

2 Alistair Alcock, Order Restored to US Insider Dealing Law, 18 Company Lawyer, 301 (1997); Alistair

Alcock, Five Years of Market Abuse, 28(6) Company Lawyer, 163 (2007).

3 Gil Brazier, Insider Dealing: Law & Regulation, Cavendish Publishing Limited (London), at 34 (1996).

4 Michael Chan, Regulation in the City: Sharing Information, 21 Company Lawyer, 135 (2000).