The Laws of the UK


In financial market, investors try to gain benefit from their investment. Some investors lose and some investors gain. The market is likely a committee for control fair trading. Profits are cause of violated rule of investment, so the markets have many problems which lead to the market abuse. This essay is about the significant problem that is insider dealing, lead to unfair trading. This problem spreads to the worldwide. Moreover, this essay focus in why insider dealing is wrong, history of insider dealing, CFA standard, process and development for solving the insider dealing in UK, mosaic theory and defense of legitimate research.

To begin with definition of insider dealing, following from FSA Handbook 2006, is behaviors of someone who attempts to trade in related investment base on inside information or nonpublic information.

The reasons of why insider dealing is wrong, firstly, insider dealing can prejudice the efficiency of the markets, for example it reduces liquidity of the markets and Raise cost of capital. The stock prices should reflect from all available information and hence provide trustworthy signals on based of investment decisions, if a stock market is efficiency. Moreover, the insider dealing endangers the fair market development and organized markets, so it demoralize confidence of investors. It can menace to damage confidence by decline investors’ beliefs for the fairing market, affect them to take out their money from investment. Furthermore, the insider dealing is immoral because unfair dealing base on unequal in information access. Lastly, it is conflict to business ethics, for example, it destroys companies and their shareholders and recently, many cases in US have significantly broken the fiduciary duty by employees using inside information which belongs to a company.

Move to the historical of insider dealing, at the end of World War II, stocks buying and selling in a firm base on information only known in the firm or its directors. This behavior is widespread and legitimate. It was considered wrong for individual benefits for the expense of the main shareholders in a firm between the end of World War II and late decade1950. Although, between the decade 1960 and early decade 1979, the exercise became widespread and often using knowledge for take over. In 1973, the Sunday Times was describing the insider dealing as the “crime of being something in the City”. A joint statement for criminal sanctions was released by the Takeover Panel and the Stock Exchange in 1973. After that, a number of legislation was passed through Parliament, but it was aborted. The sections 69-73, Part V of the Companies Act 1980 was released for force insider dealing as a criminal offence on 23 June 1980.So the historical of insider dealing shown the insider dealing was concerned long time ago but it quit difficult and take a long time to release the regulations or laws for force and punishment, because the insider dealing is difficult to define. This behavior should concern by ethic of investor (Cole, 2007).

The most important institute of investment which is Chartered Financial Analyst Institute (CFA) also concern about the insider dealing. CFA was issuing Standards of Professional Conduct. The insider dealing was mention in term of material nonpublic information in Standard II (Integrity of Capital Market). In the standard II A. said “Members and candidate who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information”. CFA present reason of acting on nonpublic information wrong because capital markets, institutions and investment professionals was eroded confident because the idea from special access and inside information able to get unfair advantage from investors or organizations who use public information for investment.

In UK, the financial regulatory system is self regulation. The self-regulatory arrangements have not been adequate. It was pressured from global factors more than domestic factors. The global factors are significantly changing company law and financial regulations (Gilligan, 1999).

The problem of punishable lead to poor market, because the regulations was issued by only authorized persons and key employees in some cases. Hence, the Finance Services and Market Act 2000 (FSMA) presented the chance to create a single regulator, renovate and consolidate the law of UK financial services and right of enhanced regulatory powers for the regulator. So, FSMA provide the FSA to make rule with wide range. Moreover, the FSA also has ability for investigatory and enforcement powers, including the capability to act for avoid market abuse and accuse offenders who are dealing with insider materials. In July 2005, the Market Abuse Directive (MAD) came into largely force. The MAD provisions and the market abuse regime were similar. Nearly five years ago, the Market Conduct in Code of FSA was published in original. In detail, the standards should be examined by everyone who involves in the significant part of UK’s financial markets such as someone who are trading in The UK, including from overseas. The standards are clear in particular, so it is expected to see through descriptions for defining and definition for example, what is and what is not market abuse. The Code gives obviousness for users who involve in financial markets. Furthermore, it brings everyone know about between trading on UK markets, what standards able to be expected. The FSA is not a regulator for enforcement. Otherwise, its purposes to retain clean the markets and discourage abuse through combine enforcement action and prevent measurements. Therefore, improvement of the FSA’s securities transactions checking system lead to heavy investment. The FSA will improve their ability to detect track market abuse (Cole, 2007).

The major difficult for enforcing insider dealing regulation in UK are detection, jurisdiction, difficulty of proof, limited enforcement resources such as high cost of prosecution, and ambivalence about censure and general issues of legitimacy. Sometime, insider dealing can be comparatively easy to identify in financial market in some cases. Especially, if there are radical an abnormal fluctuations in the stock value, which are pursued shortly later by publication of take-over or similar scheme. On the other hand, the identification for defining someone who use inside information, is the most difficult for practical enforcement. These problems are aggravated in the market which functions due to increasingly unidentified, global and complicated markets and so precise measurement of the situation of insider dealing is almost impossible. The distorted nature of information from inside and widespread use of useful possession of securities compound these finding problems. The finding problems in UK are perhaps greater than in other countries as a result of the greater amount of secondary trading that mirrors UK market. In all possibility there is a potentially massive dirty amount of insider dealing since new technologies and global markets enlarge the insider dealing abuse scope (Gilligan, 1999).

The CFA institute promotes the method for solving of using non-public materials in legitimate way, which is mosaic theory. Definition of the mosaic theory, which was mention in the standard II A., is an analyst method to assemble and interpret information about a corporation from many sources. Mosaic theory may was regarded for analytical significant conclusions from public material and non-public material information. For example, a firm so as to determine the underlying firm’s securities value and provides recommendations to customers or investors on the basis of that information.

In CFA magazine March-April 2011, Kurt Schacht, CFA, who is managing director of Standards and Financial Market Integrity Division of CFA Institute, was mention about Defense of Legitimate Research, which is about research method, using expert networks and respected in mosaic theory were attacked by insider dealing. In US, federal agents have started charging players in financial market, who are firm insiders, investment fund managers and executive directors, for research firms, which were called “expert networks”. The expert networks available investors to enter in inside information in exchange for a charge. Some case of research firms were charged for obtain benefit and other non-public materials straight from publicly traded firm employees. Allegation of the cases was approached by federal government, the firm employees, who create the specialists network, were more ways for sample of insider information. From all indications, the wave of insider dealing cases is the starting of more expanding round of insider dealing probes. Media reporting has watched to overstate the circumstance to the detection of casting doubt on the model of expert network and anyone who exercise the service. Furthermore, many still have question, if the U.S. Securities and Exchange Commission (SEC) or other regulators define insider trading again, possibly to comprise a number of legitimate and research methods employed by firm analysts. The allegation has argued that someone who was basically employing standard primary research methods and approaching the mosaic theory in at least one of the cases. The effect has been analysis of this well-established exercise. The reporting has confused the businesses, prompting many lawful analysts and investors to query the exercise of research networks and other completely exercises for horror of reaching caught up in the detection.

Regarded from CFA’s analysis, some cases did not about legitimate the mosaic approach using and occur to be clear insider dealing examples. CFA has supported the techniques of thorough, hard working, and honest research. The most great analysts can show their distinction in many ways, including the talent to transcend the significant point and search for disappear fact and situation the boost the investment. Ethical analysts have adequate opportunities to discriminate themselves exclude intentionally getting nonpublic information from someone who should not share this information. For analysts, hedge fund managers and network experts who violate the rule, will attempt to defend their behavior. They might try to justify their violation of using inside materials by regarding the mosaic theory, however illegitimate effort should not reduce appropriateness of the mosaic theory when practical correctly. Significantly, as an institute committed to supporting the greatest ethical conduct standards, CFA strongly sustain the attempts of federal investors and SEC to control insider dealing. Since the investigation continues to improve, CFA will be closely detecting any activities attack on legitimate research. Moreover, CFA have extended to SEC for further explanation and guarantee that the process of legitimate research is not threaten. Furthermore, CFA has developed a task force, including other business experts and CFA charter holders to evaluate any activities resulting from regulatory probe.

Overall, the insider dealing seem to the serious problem which was concerned and attempt to solve long time ago, but this problem still appear now, because the problem is difficult to detect the behavior. Both in UK and CFA have considered the problem and try to develop their regulations and standards, including forcing someone who is violate the regulations and standards. The major factors of difficulty enforcement are detection, jurisdiction, difficulty of proof, limited enforcement resources and ambivalence about censure and general issues of legitimacy. The method for solving of using non-public materials in legitimate way, which is mosaic theory, was promoted by CFA Institute. This theory also has threat from someone, who use insider information, try to justify their behavior. However, Illegitimate effort should not reduce appropriateness of the mosaic theory when practical correctly. In addition, CFA has developed a task force, including other business.


CFA Institute. (2010) Material Nonpublic Information. In: Standard II Integrity of Capital Markets. Ethical and Professional Standards and Quantitative Methods, Person, pp.36-45

Cole, M. (2007) Insider Dealing in the City. Available:

[Accessed 9 April 2011]

Ferguson, R. B. and Page, A. C. (1992) Enforcement. Investor Protection London, Weidenfeld and Nicolson, pp. 106-120

FSA (2011) Market Abuse. In: The Code of Market Conduct. FSA Hand Book. Available: [Accessed 5 April 2011]

Gilligan, G. P. (1999) The Enforcement of UK Insider Dealing Regulation. In: Regulating Insider Dealing. Regulating the Financial Services Sector, pp.183-191

Gilligan, G. P. (1999) The Need for Continuing Review of Financial Services Regulation. In: White Collar Crime and Financial Services Regulation. Regulating the Financial Services Sector, pp.21-36

Schacht, K. (2011) In Defense of Legitimate Research. CFA Magazine, March-April, pp.21

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