The Guardian: £17m Shell shock was just an early broadside in FSA war on abuse: “Shell's action was made more serious because false or misleading announcements on reserves were made from 1998 to 2003. Even though Shell had indications and warnings from 2000 to 2003 that figures for proved reserves were incorrect, its actions continued.” (ShellNews.net)
Monday August 30, 2004
A succession of recent investigations and financial penalties levied by the Financial Services Authority has put the term "market abuse" on the lips of many commentators and, if the reaction to the £17m fine imposed on Shell this week is any indication, on the minds of company directors.
One could be forgiven for believing market abuse was rife in the City. Is this an overreaction? After all, the UK financial markets are world leaders. Surely this wouldn't be the case if market abuse was rife? Thankfully, market abuse is not widespread, partly because most practitioners are decent people but also because the FSA takes a tough stance with those who do play fast and loose with the rules, no matter how big or small.
While one team at the FSA was looking into Shell's misstatements of its proved reserves, another was completing action against one Michael Davies, financial controller of an Ofex company, who was fined £1,000 for share dealing using advance knowledge of his firm's results.
One driver for all the interest is that the offence of market abuse is relatively new. The concept, and the FSA's powers to tackle it, were created by the Financial Services and Markets Act 2000 and came into force less than three years ago.
There are three strands of market abuse. One is the misuse of information, which involves using information not generally available but normally disclosed to the market. Giving a false or misleading impression to the market is a second strand. The third is distorting the market through interference with the normal process of share prices moving up and down in accordance with supply and demand.
Although not all investigations lead to enforcement, to date the FSA has exercised its powers in two of these three strands. As well as Michael Davies, two others have been fined for misuse of information: Peter Bracken, who was group head of communications at a listed company, was fined £15,000, and Robert Middlemiss, a company secretary, was also fined £15,000.
Three lessons can be learned from these cases. First, the FSA can apply its powers to any of the UK's prescribed markets. Cases have involved trades on Ofex, Aim and the market in listed securities. Second, the FSA can and does take action regardless of the size of the profit made. Third, the number of people with access to inside information should be restricted to minimise the chances of misuse, but those who do have access must act responsibly.
The FSA's action against Shell is the first example of punishing a company for market abuse by creating a false and misleading impression. On January 9 2004, when Shell first publicly revealed that it had misstated its reserves, the company's market capitalisation fell by£2.9bn.
Shell's action was made more serious because false or misleading announcements on reserves were made from 1998 to 2003. Even though Shell had indications and warnings from 2000 to 2003 that figures for proved reserves were incorrect, its actions continued.
The £17m penalty, by far the biggest imposed by the FSA, is a reflection of the seriousness of Shell's misconduct and the impact the actions had on markets and shareholders. The penalty could have been larger had Shell not cooperated fully with the FSA investigation. Enforcement as a form of deterrent is far more effective when the FSA is able to work with market participants. The FSA will continue to give credit where it is due to those who recognise the benefit of the collective responsibility of the financial community.
Distortion is the only strand that the FSA has not taken public disciplinary action against. This is probably because this type of abuse is not as common and hard evidence of distortion is relatively rare. The FSA does, however, investigate potential distortion cases and it is likely to be only a matter of time before a penalty is imposed for interfering with the normal processes of share price movement.
What can be expected next?
Next year will see the introduction of the market abuse directive, EU legislation that attempts to harmonise market conduct rules. It will not change the FSA's policy on what is and what is not market abuse in the UK. However, greater international cooperation is anticipated, and investigations could span a number of jurisdictions. The Shell case is an example of this happening: the investigation was conducted in parallel with the securities and exchange commission in the US and the Dutch authorities. Cooperation between these authorities was excellent.
One thing that won't occur is a lowering of the FSA's guard. An FSA statutory objective is to maintain Britain's reputation for efficient, clean and fair markets, and there is a host of independent research confirming that this is being achieved. So there will continue to be investigations into suspicious activities and firm action taken. It may be that the recent run of cases has brought the issue to the fore but keeping the lid on market abuse is not a passing fashion. It is central to the success of our financial market place.
· Hector Sants is managing director of wholesale and institutional markets at the Financial Services Authority