Disclosing inside information

February 2023 | SPOTLIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2023 Issue

In the latter part of 2022, Tulip Siddiq, a Labour MP, publicly called for the Financial Conduct Authority (FCA) to launch an investigation into whether two Conservative MPs may have committed offences by unlawfully disclosing inside information: Kwasi Kwarteng in advance of his so-called ‘mini budget’ and Suella Braverman as a result of an email she shared containing information relating to immigration policies.

There has been no response from the FCA as to whether it has commenced any investigation, but the events serve as a timely reminder of the often overlooked ‘disclosure offences’.

What are the disclosure offences?

Disclosing inside information in circumstances other than in the proper performance of an employment, profession or office (improper disclosure) is a criminal offence in the UK by virtue of section 52 (2)(b) of the Criminal Justice Act 1993 (CJA). It is also a civil offence under the Market Abuse Regulation (MAR).

The maximum sentence for anyone found guilty of the crime of disclosing inside information is 10 years imprisonment. Although you cannot be imprisoned for committing the civil offence, anyone found to have breached the MAR can face an unlimited fine and prohibition from working in the regulated financial sector. In both cases the damage to an individual’s career prospects can be catastrophic, particularly in the regulated financial services sector.

Why is unlawful disclosure an offence?

Those who have access to inside information are in a position of power. They hold information that other financial market participants do not. In addition, they owe a fiduciary duty as a result of being entrusted with this information. Disclosing inside information could, in and of itself, damage investor confidence in the integrity of the UK financial markets. It is for this reason that disclosure offences exist – to punish the individual who discloses the inside information, not the person who deals upon it.

There are of course legitimate reasons for a disclosure of inside information to take place. Major shareholders in listed companies are often approached by investment banks to understand whether or not they are in support of a potential takeover bid or merger, disclosures have to be made to regulatory bodies for the purpose of fulfilling a legal or regulatory obligation, and lawyers working on a deal may well need to discuss inside information with fellow team members. It is for these reasons that disclosure offences only bite in circumstances when, for the criminal offence, the insider discloses information “otherwise than in the proper performance of the functions of his employment, office or profession”, or for the civil offence: “it is not made in the normal exercise of an employment, a profession or duties”.

Key takeaways

At the heart of both the civil and criminal offences lie three key elements that must be made out. These are: (i) the individual had inside information from an inside source; (ii) they disclosed the inside information to another person; and (iii) the disclosure was, for the purposes of the CJA, “otherwise than in the proper performance of the functions of his employment, office or profession” or for the purposes of MAR “not made in the normal exercise of an employment, a profession or duties”.

Inside information from an inside source

Both offences are designed to only capture the disclosure of inside information. If a person has disclosed information that is confidential in nature but does not contain any inside information – for example is unlikely to have a significant effect on the price of securities – then neither the civil nor criminal offences are committed.

If the disclosed information was inside information, then for the purposes of the criminal offence it must also be proved that the insider actually knew both that the information was inside information and that they had the information from an inside source. For example, if an individual did not realise that they held inside information and went on to disclose that information to an acquaintance, they would not commit the criminal offence. They may, however, have committed the civil offence.

Article 8 of MAR states that if a person possesses inside information as a result of: (i) being a member of the administrative, management or supervisory bodies of the issuer; (ii) having a holding in the capital of the issuer; (iii) having access to the information through the exercise of an employment, profession or duties; or (iv) by being involved in criminal activities, then they are automatically deemed to be an insider and, as a consequence, it is not necessary to prove that they knew the information they held was inside information.

The reasoning behind this is simple: such persons are expected to be well aware that they hold inside information.

The civil offence can therefore be committed inadvertently, on a reckless or negligent basis in circumstances where the discloser should have known that the disclosed information was inside information. A recent example of this is the Sir Christopher Gent Final Notice, which reveals that Sir Christopher, in his capacity as non-executive chairman of ConvaTec, disclosed inside information relating to the revision of ConvaTec’s financial guidance and the retirement of its chief executive. The disclosure was made to a senior individual at one of ConvaTec’s major shareholders. The FCA found that Sir Christopher acted “negligently in disclosing the information. Having received relevant training on EU MA, and based on his own considerable experience and position, Sir Christopher should have realised that the information he disclosed constituted, or may have constituted, inside information…”

Disclosed to another

As technology capabilities have increased, so have the methods of communication. Any form of disclosure to another person or persons – whether by telephone call, email, WhatsApp, Twitter, text message or in person – will be sufficient to fall within the definition of disclosure.

Not in the proper performance or normal exercise

Whether a disclosure is within the “proper performance of” or “normal exercise of” is a question of fact. Neither the CJA nor MAR define what is meant by the phrases, although examples are given of conduct that would be considered acceptable in the FCA Handbook. It is possible to think of a number of examples where disclosing inside information needs to be able to take place legitimately.

MAR does contain exemptions from the civil disclosure offence in article 6 (for monetary and public debt management activities and climate policy activities) and article 11 (market soundings). If a person is acting in accordance with either of these articles then they will not be committing the disclosing offence. It is important to note that in respect of market soundings the person must have complied with the process for conducting the sounding (as set out in paragraphs 3 and 5 of article 11) for the disclosure to be considered in the normal exercise of a person’s employment, profession or duties.

The need to comply with any relevant processes is not just limited to article 6 activities. There is a real risk that even if a disclosure is in some-way related to the exercise of a person’s employment it will be deemed to be outside of “normal exercise” or “proper performance” if it has not been carried out in accordance with internal rules. If, for example, an individual were to improperly access inside information from a computer system they had access to in their employment and pass this on to another (as indeed occurred in the case of R v Fabina Abdel-Malek and Walid Choucair), it would be difficult to maintain that the disclosure was in the proper performance of their employment or duties.

No need for trading to have occurred

There is nothing in either offence that requires any actual dealing to have occurred as a result of the disclosure, or for the person disclosing the information to have any knowledge of whether trading in fact occurred, or a profit ever made.

In respect of the civil offence under MAR the prohibition on disclosing information is strict. If an individual discloses inside information to another and the disclosure is not in the normal exercise of employment, profession or duties, then an offence is committed. It matters not that it was believed the information would not be traded upon, nor whether in fact the person did.

The circumstances regarding the criminal offence are slightly more nuanced. This is due to the statutory defence, specific to the disclosing offence which can be found in section 53 (3) of the CJA: “an individual is not guilty of insider dealing by virtue of a disclosure of information if he shows that: (i) he did not at that time, expect any person because of the disclosure, to deal in securities; or (ii) although he had such an expectation at the time, he did not expect the dealing to result in a profit attributable to the fact that the information was price sensitive information”.

In respect of example one, this could cover pillow talk, between a husband and wife, an individual who made a throwaway comment to a friend, never expecting that friend to deal upon it, or a company director making a disclosure which, although not in the course of his employment, he did not expect the recipient (given his position) to take advantage of the information. It is harder to imagine circumstances in which example two could pertain, although it might apply to an individual making a disclosure who believed the recipient of the information intended to buy shares, but intended to hold them for the long term rather than to profit from the inside information.

Scope

A final point is that it is a common misconception that disclosure offences are only enforced against senior individuals, such as chief executives. This is not true. The FCA can, and does, pursue cases against normal everyday people as well as those who are in positions of senior responsibility. In R v Mustafa and others, the FCA successfully prosecuted two brothers who worked in the photocopy rooms of major banks for disclosing inside information.

As criminal and civil offences can be committed by anyone, not just regulated professionals, there is no special exemption that would preclude the FCA from taking action against cabinet ministers. Whether those MPs have committed either of the disclosing offences is a very different matter.

Claire Cross is a partner at Corker Binning. She can be contacted on +44 (0)20 7353 6000 or by email: cc@corkerbinning.com.

Claire Cross

Corker Binning