Stricter rules and tougher sanctions for market manipulation and financial fraud

Arlene McCarthy, Vice-Chair ECON Committee on Economic and Monetary Affairs and Commissioner Michel Barnier in charge of Internal Market and Services holding a joint Press conference on 'Publish what you pay'. (European Parliament Audiovisual Services 12/06/2013).

Arlene McCarthy, Vice-Chair ECON Committee on Economic and Monetary Affairs and Commissioner Michel Barnier in charge of Internal Market and Services holding a joint Press conference on ‘Publish what you pay’. (European Parliament Audiovisual Services 12/06/2013).

The plenary session of the European Parliament followed yesterday a motion of the Economic and monetary affairs Committee and adopted in ‘the first reading’ the text of a draft Regulation providing for tougher sanctions for financial markets manipulation. This is an ordinary legislative procedure repealing Directive 2003/6/EC. According to a Parliament Press release issued afterwards the new “rules imposing tougher sanctions for manipulating financial markets, insider dealing or abuse of inside information were voted last Tuesday”.
These provisions will cover a wider range of trading venues and financial instruments than today’s rules and they will apply directly in all member states, which should ensure a high level of investor protection in the EU. The new legislation was adopted in the Plenary by 659 votes to 20, with 28 abstentions.

Tougher regulation

In its final form this legal text will be a Parliament and Council Regulation. The Parliament will start negotiations with member states (the European Council) in October on the criminal sanctions chapter of market abuse. It was high time the European Union adopted such a legal text. It’s now almost two years since the fraudulent setting practices scandal of Libor and Euribor broke out. Soon after that came the scandal of the Baltic Indices rigging.

Libor, the London market interest rate benchmark, is used as a base for interest rates contracts all over the world with an estimated value of $250 trillion in derivatives. Euribor has a similar role in euro denominated financial settlements while the Baltic Indices are sea freight price benchmarks used globally for sea transport and ship chartering contracts.

“There is still much to do in restoring the trust and confidence in banks and the financial services industry. We must get the real economy moving again and make sure consumers are protected in the financial services sector. We are sending a clear signal that the EU is not a soft option or safe haven for perpetrators of market abuse,” said Arlene McCarthy, Vice-Chair ECON Committee on Economic and Monetary Affairs, the leading MEP on this legislation.

The new legislation foresees that Companies convicted of market abuse could be fined up to 15% of their annual turnover or €15 million. Individual perpetrators would face fines of up to €5 million and a temporary or some cases permanent ban on doing certain jobs within investment firms. The new rules will now be extended to cover a variety of financial instruments including commodity derivatives affecting food and energy prices, traded inside and outside exchanges.

Application hurdles

The problem is though that this legislation can be applied only on official trading platforms within EU. Unfortunately there is a variety of trading venues all over the world including digital platforms on the Internet. All those activities cannot be easily, if at all, monitored or investigated for fraudulent activities by individuals or companies. In most cases trading takes place under strict anonymity and the counterparties are just bank accounts or offshore companies incorporated in a vast variety of tax havens.

In any case this new legislation against financial crime and fraudulent behaviour in the European Union is a step towards the good direction. Even if the EU authorities and the law enforcement and regulators’ services of member states are unable to control all the offshore activities of the financial players, the fact that the EU enacts strong legislation against financial fraud, is a good deterrent.

Offshore jurisdictions do not always offer a political, economic and legal solid environment. In this respect the European Union’s financial environment guaranteeing full reliability is a must for trustworthy financial activities. Consequently those individuals and companies who want to offer reliable investment services have to accept the new stricter EU rules punishing financial fraud. That’s why the new legislation is a giant step towards more investor confidence in financial services and, God help us, banks.

 

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