Howard Davies, Chairman of the Financial Services Authority used a conference in March this year to set out the FSA's approach in practice to the policing of the market abuse regime, which came into force in December 2001, and its view as to what impact, if any, the regime should have for the handling of price-sensitive information under the longstanding Listing Rules. Both of these areas have been causing concern for companies and the market generally. Has Mr Davies alleviated these concerns?

Policing the market abuse regime

Disquiet has been expressed about the powers available to the FSA to impose penalties for market abuse, particularly given uncertainties as to what activities will or will not constitute market abuse (leading some companies to adopt an extremely cautious approach to their activities until there is established precedent and practice).

Mr Davies has tried to assuage any fears that the full powers of the FSA will be brought into use for every suspected case of market abuse. He said that the FSA will aim to "prioritise rigorously, investigating only those cases which are material and significant". The response of the FSA will also be "proportionate". The FSA is saying that it will not chase every small, insignificant case but instead look to channel its resources into investigating cases of market abuse that pose a threat to confidence in the UK's financial markets. Mr Davies expanded on this approach further by saying that the FSA is "not interested in pursuing technical or inadvertent infringements" of the rules.

In determining whether or not to pursue a case the FSA will ask itself three main questions:

• has there been an impact on market confidence or have consumers actually or potentially lost money?
• will prompt action by the FSA prevent further damage?
• will action by the FSA deter the behaviour in question in the future?

Whilst the words of Mr Davies should be of some comfort, without something more specific on which companies can rely, and which binds the FSA, it is difficult to see in the short term at least companies and advisers relaxing their cautious stance. The market needs to see how the FSA operates over a reasonable period of time before any view can be taken as to where in fact the FSA will draw the line. Of course what happens in practice may ultimately afford companies little comfort for the future as there will always be the possibility that the FSA's approach could change, for example in response to a major scandal.

Handling of price-sensitive information

Whilst the FSMA did not change the general obligations (contained in Chapter 9 of the Listing Rules) on listed companies regarding the disclosure of price-sensitive information, there is some overlap between these obligations and the market abuse regime. This overlap, when combined with the more rigorous sanctions now available to the FSA (in its capacity as the UK Listing Authority) for a breach of the Listing Rules (for example the power to impose fines), has caused some companies to change their disclosure practices to try and stay within what they believe to be the rules. Mr Davies commented that some companies are now being advised to say as little as possible about future prospects whilst, at the other extreme, others are being told that they should consider making public statements about prospective plans and confidential discussions (despite the specific carve out in the Listing Rules regarding the disclosure of impending developments or matters in the course of negotiation). Clearly Mr Davies thought that there has been some over reaction by companies and their advisers, referring in particular to some "high octane nonsense" emanating from lawyers.

Whilst noting that a number of companies had overhauled their practices regarding the disclosure of information as a result of the new powers available to the FSA, Mr Davies said that the FSA had identified a number of "very sloppy practices" in the market regarding compliance with the listing and continuing obligations regime. A number of cases are being investigated which should act as a warning to all companies.

Trying to allay any fears, Mr Davies referred to the fact that there had been no changes to the Listing Rules in this area and pointed out that behaviour conforming to various disclosure obligations under the Listing Rules was the subject of a specific safe harbour under the market abuse regime. In Mr Davies' view the general principle is clear. A company in considering how to deal with price-sensitive information "needs to pay prime attention to the principle of equal access for all investors" to such information and it if does so it is "unlikely to go far wrong".

But does this really get companies and their advisers much further? Mr Davies himself said that no one can, or should want to, construct a rule book dealing with every possible scenario regarding the disclosure of price-sensitive information and absolute clarity is not available. For companies in doubt the FSA are suggesting they either consult their advisers or seek informal advice from the FSA (which will be non binding).

It is suggested that very little, if anything, in Mr Davies' comments will cause companies and their advisers to change their approach. Until some clear practices develop and the market has seen over time how the FSA deals with the issue of disclosure and the exercise of its new powers, it should come as no surprise to the FSA if companies and their advisers, in an effort to keep within the rules (which by definition are not clear), remain cautious, even if this has the effect of, to use Mr Davies' words, "dampening the legitimate flow of information, which is the lifeblood of open and competitive financial markets".

For further information please contact:

Nick Callister Radcliffe
Corporate Partner
Phone: +44 (0)20 7367 2394
Email: nick.callisterradcliffe@cms-cmck.com

Simon Howley
Phone: +44 (0)20 7367 3566
Email: simon.howley@cms-cmck.com

Peter Bateman
Phone: +44 (0)20 7367 3145
Email: peter.bateman@cms-cmck.com