When the going gets tough... get tough on insider dealing and market manipulation

A few days ago the European Commission released a new proposal for a Regulation on insider dealing and market manipulation (together these practices constitute market abuse) (Getting tough on insider dealing and market manipulation). It has been mentioned a few times on this blog that the European Commission tries to contribute to the process of sanation of financial markets by recognizing and dealing with some of its issues (e.g. Shortcoming of a financial market to be healed by shortselling regulation, Cross-border debt recovery to be made easier for consumers and SMEs). One of them is an increase in the possibilities of market manipulation due to globalization of financial markets, their complexity and new technologies. Insider dealing means that a person is trading in financial instruments after having obtained possession of price-sensitive inside information in relation to those instruments. Market manipulation is understood as artificial manipulation of prices of financial instruments through practices such as spreading of false information or rumours and conducting trades in related instruments. These practices concern consumers only indirectly by influencing the stability and transparency of the financial market. However, this indirect influence can have quite a strong effect on consumers, which means this new development in European law is worth mentioning here (see also previous post on Inside Job).

The new proposal intends to strengthen investor protection already offered by the Market Abuse Directive (2003/6/EC). It extends the scope of protection to financial instruments that are only traded on new platforms (e.g. multilateral trading facilities) and over the counter as well as adapts the existing rules to new technologies (e.g. high frequency trading within which certain practices, like "quote stuffing" - i.e. submitting orders without an intention to trade but to disrupt a trading system - will be recognized as prohibited market manipulation).

"The proposal clarifies that market abuse occurring across both commodity and related derivative markets is prohibited, and reinforces cooperation between financial and commodity regulators. The proposal includes a number of measures to ensure regulators have access to the information they need to detect and sanction market abuse. Since the sanctions currently available to regulators often lack a deterrent effect, the proposal introduces tougher and greater harmonisation of sanctions, including possible criminal sanctions which are the subject of a separate but complementary proposal."

This means that regulators will also gain the power to access phone and data traffic records from telecoms operators or to access private documents and premises (upon prior judicial warrant) where a reasonable suspicion exists of insider dealing or market manipulation. Whistleblowers will be granted protection and incentives for reporting market abuse. Also suspicious unexecuted orders and suspicious OTC transactions are to be reported. Additionally, an offence of 'attempted market manipulation' is introduced to protect the parties in the financial market from attempts to manipulated the market, where that manipulator does not succeed in actual trading practices. As far as sanctions are concerned: fines are not to be less than the profit made from market abuse, and not more than two times any such profit.

A proposal for a Directive on criminal sanctions was introduced as well, according to which, criminal sanctions will be applied for intentional offence of insider dealing and market manipulation (European Commission seeks criminal sanctions for insider dealing and market manipulation to improve deterrence and market integrity). Currently, the Member States differ in regulation of such offences which means that investors might avoid sanctions by 'forum shopping'.

For more information see FAQ about these two proposals. See also the website of The EU Single Market on Market Abuse.

Shortcomings of a financial market to be healed by a short selling regulation

In May this year we reported that a draft Regulation on short selling and credit default swaps (Short selling regulation?) is being prepared by the European institutions. Last week an agreement has been reached between the Council and the Parliament on this matter and only a formal endorsement lacks before this Regulation enters into force. The new rules are supposed to increase transparency, responsibility and stability in short selling transactions that are so often difficult to understand by consumers. After the regulation is enacted the short positions will need to be disclosed to regulators and they will have the power to limit short selling on a temporary basis in exceptional situations. This regulation is one of the measures that is seen as necessary to restore a healthy financial market and prevent future financial crisis (since short selling was seen as an aggravating factor in price declines in distressed markets).

"In a welcome improvement to our original proposal, so-called "naked" sovereign CDS positions will be prohibited where sovereign CDS are not acquired to hedge an exposure which is correlated to the value of the sovereign debt. The restriction will not apply to primary dealers and market makers. A competent authority will be able to temporarily suspend these restrictions where it believes, based on objective elements, that its sovereign debt market is not functioning properly and that such restrictions might have a negative impact on the sovereign credit default swap market. These balanced measures will ensure that sovereign CDS are used for the purpose for which they were designed, hedging against the risk of sovereign default, without putting at risk the proper functioning of sovereign debt markets." (Commissioner Michel Barnier welcomes trilogue agreement by Council and Parliament on new rules for short selling and Credit Default Swaps).

See FAQ for more details on this new regulation.

Any thoughts on the internal market?

If you are interested in sharing them, finding out what others think and getting some answers from the European Commission as to any doubts that you might have about the internal market... tune in to Facebook!

On Wednesday, the 26th of October, 15.00-16.00, on the European Commission's Facebook page a chat is organized on this subject. Main findings from a market research about opinions on the internal market may be found in the video below.

What's the score? - Consumer Markets Scoreboard Autumn 2011

The 6th Consumer Markets Scoreboard is now available on the website of the European Commission, DG Health and Consumers. The Scoreboard is meant to help the Commission 'identify potentially underperforming sectors in the single market from the consumers' perspective' and ranks '51 consumer markets, covering more than 60% of household budgets, in terms of consumer trust, satisfaction, the ease of switching and comparing offers, problems and complaints, choice and prices' (see the Q&A press release for more details on the Scoreboard's functions and this year's main results).

Market sectors that, according to the new Scoreboard, remain problematic from the consumers' point of view are (not surprisingly..) those concerning financial services: 'Consumers are most satisfied with "books, magazines and newspapers", "personal care services" and "glasses and lenses". The lowest satisfaction scores are assigned to "investments, pensions, securities", "mortgages" and "real estate services". "Train services" obtain the highest percentage of consumers giving a very poor score (16 %)' (p. 15 of the report).

Further action that will be taken on the basis of these results includes the launch of two in-depth market studies, one on consumer credit, the other on fuels. For those interested in the facts and figures presented on the Scoreboard, detailed breakdowns on different aspects of the data can be found on the related Consumer Market Monitoring Dashboard.

World Food Day

Today is a World Food Day which was proclaimed in 1979 by the Conference of the Food and Agriculture Organization (FAO). It basically reminds us the founding date of the FAO in 1945 (and is not associated with any particular world food crisis etc.). The idea behind establishing this Day was to remind consumers of the world food problem and to strengthen solidarity in struggle against hunger, malnutrition and poverty. The UN endorsed observance of the Day by resolution 35/70 of 5 December 1980 stating that: 

"food is a requisite for human survival and well-being and a fundamental human necessity".

World Food Day of 2011 has a following theme: "Food prices - from crisis to stability", and intends to highlight a major threat to food security in developing countries due to price swings. According to the World Bank in 2010-2011 rising food costs pushed nearly 70 million people into extreme poverty.

I would also like to point out that a month ago we celebrated the EU Food Safety Day during which lots of attention was given to food waste (see also earlier post on this blog about this: Love food. Hate waste.). In the framework of the EU 2020 Resource Efficiency Flagship programme the Commission is looking at how to minimise food waste and improve food packaging without compromising food safety (EU Food Safety Day: Commissioner Dalli on food waste). What scared me about this news was the statistics quoted.

Annual food waste in the EU is currently estimated at 89 million tonnes and is expected to rise to 126 million tonnes by 2020! Consumers waste on average 565 euros due to food waste per household per year, 60% of which could be avoided.

Scary, ain't it? Let's do something about it!

More compensation to air passengers - CJEU in case Sousa Rodríguez and Others

13 October 2011: CJEU case C-83/10 Sousa Rodríguez and Others

The CJEU decided today a case concerning interpretation of the Regulation (EC) No. 261/2004 establishing common rules on compensation and assistance to passengers in the event of denied boardng and of cancellation or long delay of flights (see the comments on the opinion of the AG in: Compensation for cancelled flight). Article 2(1) of this Regulation defines cancellation as:

"the non-operation of a flight which was previously planned and on which at least one place was reserved"

Article 5 of the Regulation gives passengers rights to claim: assistance by the operating air carrier (in accordance with Article 9) and compensation (in accordance with Article 7). Article 12 states that passengers have a right to claim further compensation than the one provided for in the Regulation.

The dispute concerned a flight of Air France from Paris to Vigo (Spain). A few minutes after the flight took off as planned, the pilot decided to return to the departure point, Charles de Gaulle airport in Paris, due to a technical failure of the plane. Three passengers were offered a flight the next day from Paris Orly to Porto (Portugal), from where they travelled to Vigo by taxi. Another traveller got a seat on a flight the same day, from Paris to Vigo via Bilbao. All other passengers were offered a flight the following day from Paris to Vigo, scheduled at the same time as the one that had broken down. Only one passenger was provided with accommodation at Air France's cost or received any assistance from that airline. Seven passengers brought an action against Air France for damages for breach of contracts of carriage by air. They demand damages in the amount as prescribed by Article 7 (250 euro each), one of the passengers claims also costs he incurred for his transfer by taxi from Porto to Vigo. Another applicant claims repayment of his meal costs at the Paris airport, as well as those in respect of his dog's being kept in boarding kennels for a day longer than initally expected. All other passengers also claim an additional compensation for non-material damage they consider they have suffered.

Was the flight cancelled?

Firstly, Air France tried to defend itself by claiming that there was no 'cancellation' in this case, as defined by the Regulation, which would mean that they would not have to provide any compensation as per the Regulation. They had claimed, therefore, that the flight took off according to the schedule, so it may not be perceived as cancelled nor as delayed. 

The CJEU had no problem stating that this factual situation could be seen as 'cancellation', as well. The court reminded that:

"a flight consists, in essence, of an air transport operation, being as it were a ‘unit’ of such transport, performed by an air carrier which fixes its itinerary" (Par. 27)

An itinerary is an essential element of the flight, as the flight is operate with the carrier's pre-arranged planning in mind.

"As the term ‘itinerary’ means the journey to be made by aeroplane from the airport of departure to the airport of arrival according to a fixed schedule, it follows that, for a flight to be considered to have been operated, it is not enough that the aeroplane left in accordance with the scheduled itinerary, but it must also have reached its destination as appearing in the said itinerary. The fact that take-off occurred but that the aeroplane then returned to the airport of departure without having reached the destination appearing in the itinerary means that the flight, as initially scheduled, cannot be considered as having been operated." (Par. 28)

The above means that also when cancellation happened due to practical circumstances (returning the plane from its way towards destination to its port of origin due to mechanical failure) and not due to an express decision cancelling it, it should still be perceived as cancellation. (Par. 29) As a result:

 

"the answer to the first question is that ‘cancellation’, as defined in Article 2(1) of Regulation No 261/2004, must be interpreted as meaning that, in a situation such as that at issue in the main proceedings, it does not refer only to the situation in which the aeroplane in question fails to take off at all, but also covers the case in which that aeroplane took off but, for whatever reason, was subsequently forced to return to the airport of departure where the passengers of that aeroplane were transferred onto other flights." (Par. 35)

What kind of compensation could the passengers claim?

 

The CJEU makes clear that passengers rights to compensation provided for in the Regulation is of a minimum nature. (Par. 37) Article 12 on 'further compensation' intends to make sure that passengers are compensated:

 

"for the entirety of the damage that they have suffered due to the failure of the air carrier to fulfil its contractual obligations" (Par. 38)

 

National courts are therefore allowed to order the air carrier to compensate damage arising, for passengers, from breach of contract of carriage by air on a legal basis other than the Regulation, e.g. on the basis of the Montreal Convention and national law provisions. (Par. 38) The Montreal Convention refers to damages (Chapter III) as including both material and non-material damage (see: case C-63/09 Walz). This means that passengers are free to claim non-material damage within 'further compensation' as described by Article 12 of the Regulation. (Par. 41)

 

It's interesting to note what the CJEU did with compensation of the expenses that the passengers incurred due to the failure of the carrier to fulfill its obligations to assist on the basis of Article 8 and 9 of the Regulation (reimbursement of ticket or re-routing to final destination, cost of transfer between the airport of arrival and originally scheduled airport, meal, accommodation, communication costs etc.). These expenses may not be seen as part of 'further compensation' regulated by Article 12 of the Regulation. (Par. 42-43) That does not mean, however, that consumers may not claim compensation for these expenses, if the air carrier fails to fulfil these obligations voluntarily. (Par. 44)

 

What if the consumers based their claims on the breach of Article 12 of the Regulation and did not mention breach of Article 8 and 9 thereof?

 

"there is nothing in Regulation No 261/2004 that precludes the award of compensation in respect of a failure to fulfil the obligations provided for by Article 8 and Article 9 therein, if those provisions are not invoked by the air passengers." (Par. 45)

This means that the national court may adjudicate of its own motion that there was a breach of these provisions of the Regulation and award damages to the passengers.

 

This is a very interesting case that once again makes it clear that air carriers need to fulfil all the legal obligations that are placed on them in respect of cancelled and delayed flights and not try to look for loopholes in these regulations.

Common European Sales Law

Just published: the Commission's proposal for a Common European Sales Law.
More information can be found in the press release and on the website of DG Justice.
The press conference can be watched here.

Tune in on the European Commission today - press conference at 12.30

Commissioner Reding has called a press conference for 12.30 today on which she will announce a proposal to bring more coherence to European contract law. It is expected that this will entail a proposal for an 'optional instrument' that contracting parties may choose to apply to their agreements.

It should be possible to follow the press conference 'live' through the Commission's website.

To be continued...

Are we there yet?... Adoption of Consumer Rights Directive. Finally!

The new EU Consumer Rights Directive has been formally adopted today by Member States in the EU's Council of Ministers. The works on this Directive were stormy and its scope has changed tremendously from the first draft that we had seen in October 2008. The agreement between the institutions of the EU was difficult to reach, but after many compromises had been made, the Directive became a reality. The final text is not published yet, but from the news (New EU rules on consumer rights to enter into force; Council approves new directive) it seems that the text had not changed since June 2011, i.e. the last amendments adopted by the European Parliament. Spain was the only country who voted against adoption of this Directive in the Council. The Directive will enter into force 20 days after its publication in the Official Journal. The Member States will have 2 years to implement it.

For top 10 benefits for consumers in the new Directive see here. More detailed analysis will follow on this blog as soon as we get the official text.

Protecting minors' privacy in social networking

As part of the Digital Agenda, the European Commission aims at enhancing consumers' trust in the Internet. One way to do this is, would be by reviewing protection of minors online from such risks as grooming (some child abusers will pose as children online and make arrangement to meet with them in person) or cyber-bullying (using the Internet to harm other people in a deliberate, repeated and hostile manner) (more in: Digital Agenda: social networks can do much more to protect minors' privacy). A report on the Safer Social Networking Principles for the EU focused partially on the protection granted to minors by social networking sites. 

The worrying finds included the following: 

• only 2/9 social networking sites have default settings which make minors' personal profiles accessible only to their approved list of contacts;
• all sites tested allow for anyone to send friend request to minors;
• 6/9 sites allow friends of friends to access directly minors' profiles.

The good finds were, e.g.:

• majority of sites gives youngsters age-appropriate safety information, guidance, etc.;
• all sites provide shorter and more child-friendy version of their Terms of Use or Service.