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Misleading statements and practices under the Financial Services Act 2012

21 May 2013

by Simon Burke, Chartered Legal Executive with Richard Nelson LLP

On 1 April 2013 the Financial Services Act 2012 (the Act) changed the landscape of financial regulation in the UK. The Act abolished the Financial Services Authority (FSA) and transferred the majority of its functions to two new regulators:

  • the Prudential Regulation Authority (PRA) – which ensures the stability of financial services firms, as part of the Bank of England, and
  • a conduct of business regulator, the Financial Conduct Authority (FCA).

This article sets out the changes made by, sections 89-95 of the Act to section 397 of FSMA 2000 which dealt with misleading statements and practices.

Section 397 of FSMA

It is worth reminding ourselves about the wording of the section 397 provision which created two distinct offences. The first was making misleading statements in the context of market activity. The second was creating a misleading impression as to the value of investments.

In relation to misleading statements, the offence could be committed by a person a) making a statement, promise or forecast which he knew to be materially misleading, false or deceptive b) by dishonestly concealing material facts; or c) recklessly making (dishonestly or otherwise) a statement, promise or forecast which is materially misleading, false or deceptive.

The offence was committed if a person made the statement or concealed the facts for the purposes of inducing (or being reckless as to whether it might induce) a 3rd party to enter into a transaction, or to refrain from dealing with investments in a certain way.

As to the separate offence of creating a misleading impression as to the value of an investment, this was committed when that impression was given for the purposes of inducing another either to buy/sell or to refrain from buying/selling any qualifying investments.

It was a defence to a charge of making misleading statements to show that the statements were made in conformity with either:

  1. The price stabilising rules,
  2. The control of information rules, or
  3. The provisions of EU Directive 2003/6/EC re exemptions for buyback programmes and the stabilisation of financial instruments (similar in effect to the above).

These statutory defences also applied in general terms to the offence of creating a misleading impression. In addition, a person facing allegations of creating a misleading impression could seek to establish that he reasonably believed that his conduct would not create the misleading impression suggested.

The new section 89-95 offences

Under the new Act misleading statements and impressions have been divided into two separate offences – sections 89 & 90.The new section 89 makes it an offence if a person:-

    1. makes a statement which he knows to be false or misleading in a material respect,
    2. makes a statement which is false or misleading in a material respect, being reckless as to whether it is, or
    3. dishonestly conceals any material facts whether in connection with a statement made by P or otherwise.
  1. He commits an offence if he makes the statement or conceals the facts with the intention of inducing, or is reckless as to whether making it or concealing them may induce, another person (whether or not the person to whom the statement is made)—
    1. to enter into or offer to enter into, or to refrain from entering or offering to enter into, a relevant agreement, or
    2. to exercise, or refrain from exercising, any rights conferred by a relevant investment

The statutory defences are carried over from s397.

There is no reference in the new section 89 offence to misleading promises or forecasts which were both explicitly referred to in section 397. This is a curious omission given that many presumed that there was an intention to extend the net of criminal liability. It may be that the Prosecution will, in future, suggest that promises and forecasts are caught within the definition of “statements”.

Section 397 of FSMA provided for reckless statements to be caught by the provisions whether “dishonestly made or otherwise”. This wording has been removed from the new slim line section 89 offence and this is likely to provide defendants with an argument that only dishonest (e.g. deliberate and artificial) forms of recklessness should now be vulnerable to prosecution.

Turning to the new impressions offence under section 90 one may have expected a similarly pared down treatment. Interestingly, the new s90 offence has been made far more complex than section 397.

Under section 90:-

    1. A person who does any act or engages in any course of conduct which creates a false or misleading impression as to the market in or the price or value of any relevant investments commits an offence if—
      1. he intends to create the impression, and
      2. the case falls within subsection (2) or (3) (or both).
    2. The case falls within this subsection if he intends, by creating the impression, to induce another person to acquire, dispose of, subscribe for or underwrite the investments or to refrain from doing so or to exercise or refrain from exercising any rights conferred by the investments.

 

    1. The case falls within this subsection if –
      1. he knows that the impression is false or misleading or is reckless as to whether it is, and
      2. he intends by creating the impression to produce any of the results in subsection (4) or is aware that creating the impression is likely to produce any of the results in that subsection.
    2. Those results are –
      1. the making of a gain for himself or another, or
      2. the causing of loss to another person or the exposing of another person to the risk of loss.
    3. References in subsection (4) to gain or loss are to be read in accordance with subsections (6) to (8).

 

    1. “Gain” and “loss” –
      1. extend only to gain or loss in money or other property of any kind;
      2. include such gain or loss whether temporary or permanent.
    2. “Gain” includes a gain by keeping what one has, as well as a gain by getting what one does not have.

 

  1. “Loss” includes a loss by not getting what one might get, as well as a loss by parting with what one has.

Again the s397 defences are carried over.

In addition to the original form of the offence (i.e. creating the impression in order to induce another to buy/sell shares, or to refrain from doing so), it is now an offence to create such an impression intending to profit for oneself or cause loss to another. Section 90 goes much further than the old section 397 by making it an offence for a person to create an impression in circumstances in which he is reckless as to whether that impression is false or not, and is merely aware that it is likely to result in personal gain or loss to another.

The new offence is likely to capture a very wide range of behaviour. Given the amount of opinion, analysis, guesswork, rumour, chance and risk in the operation of any of the traded exchanges, not to mention how high the stakes can be, there seems to be an open-ended exposure to certain types of trouble.

New section 91 offence

Finally, in response to the LIBOR scandal section 91 creates a new offence which deals with the manipulation of benchmark rates. In summary, offences are committed if misrepresentations are made in the course of setting the benchmark, or if false impressions as to the value of an investment may in due course have an impact upon the benchmark rate. The same statutory defences arise as for sections 89 & 90.

For an interesting view which explores challenges that courts (and juries) might face from Chris Coltart, a barrister specialising in the area see www.2harecourt.com/news-events/libor-3-584/

Conclusion

The section 397 offences have proved difficult to prosecute and the new offences within sections 89 and 90 are likely to ensure that these types of cases will remain complicated and difficult as far as juries are concerned. It is highly likely that the wording and ambit of the offences will be the subject of future challenges.

The Libor offence is all very well in hindsight but one anticipates that as market participants continue to strive for financial reward and to stay ahead of the game these new offences may well fail to capture the new types of infringing behavior which develops over the next few years.

If you would like to speak to us about any specific concerns that you may have, or you want to seek legal advice more generally, contact us today to see how we can help.

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