Winterflood Securities Ltd & Ors v The Financial Services Authority

Market abuse under the Financial Services and Markets Act 2000 is assessed objectively. The statutory test does not generally require an actuating purpose to mislead, distort, or position the market. Under section 122, only conduct expressly identified as not amounting to market abuse has conclusive safe-harbour protection. Other Code provisions are evidential and persuasive. MAR 1.5.8E–1.5.9E and MAR 1.6.9E identify particular forms of abusive conduct but do not exhaustively exclude other conduct. The regulatory regime remains legally certain because non-safe-harbour provisions have evidential effect.

Winterflood Securities Ltd & Ors v The Financial Services Authority concerned appeals from a preliminary ruling of the Financial Services and Markets Tribunal in consolidated references arising from the appellants’ involvement in trading FEI shares on AIM. The Financial Services Authority alleged market abuse and imposed financial penalties. The FSA accepted that it could not establish an actuating purpose to mislead or distort the market. The appellants accepted that the references would not proceed if such a purpose was unnecessary. The Tribunal held that no actuating purpose was required and dismissed the references. The central issue before the Court of Appeal was the interaction between the objective statutory test and the Code provisions concerning artificial transactions and price positioning.

The appeal was dismissed. The Court of Appeal upheld the Tribunal’s conclusion that an actuating purpose was not required.

1. Objective statutory test. The starting point was section 118 of the Financial Services and Markets Act 2000. Market abuse consists of behaviour relating to qualifying investments which satisfies at least one statutory condition and is likely to be regarded by a regular user as a failure to observe the standard reasonably expected of a person in that position. The test is wholly objective and does not require a particular state of mind.
2. Meaning of regular user. The regular user is a reasonable person who regularly deals on the relevant market in investments of the kind concerned. That person’s assessment of the expected standard provides the essential yardstick.
3. Effect of the Code. Sections 119 and 122 form part of an integral regulatory regime. Under section 122(1), conduct expressly described in the Code as not amounting to market abuse is conclusively protected. Under section 122(2), other Code provisions may be relied on for their evidential and persuasive value. They do not create additional safe harbours merely by implication, unless a true dichotomy makes that conclusion necessary and inevitable.
4. Artificial transactions and price positioning. MAR 1.5.8E and MAR 1.5.9E do not make an actuating purpose the exclusive route to market abuse involving a false or misleading impression. MAR 1.6.9E similarly identifies a specific type of price-positioning conduct without implying that other objectively abusive conduct is excluded. The absence of an actuating purpose therefore did not prevent the alleged behaviour from constituting market abuse.
5. Legal certainty. The regime did not offend legal certainty because Code provisions outside section 122(1) were intended to have evidential, rather than conclusive, effect. Richards and Lloyd LJJ agreed with Moore-Bick LJ.

• Court of Appeal (Civil Division): In [2010] EWCA Civ 423, the appeal was dismissed.
• Financial Services and Markets Tribunal: Determined preliminary issues in consolidated references, held that no actuating purpose to mislead or distort the market was required, and dismissed the references.