The brighter lights of regulation

Standing in the dock at Blackfriars Crown Court this summer, Christopher Williams learnt that this was a miscalculation.

But the case of Mr Williams - who netted more than £25,000 buying shares in a company his friend had told him was about to be taken over - is highly unusual. Only seven people have been successfully prosecuted for insider dealing since 1993, when it was made a criminal offence.

The difficulty of convincing a jury of this apparently victimless crime - of proving, beyond reasonable doubt, that someone intentionally dealt using un-disclosed, price-sensitive information - has deterred prosecutors from pursuing all but the most obvious cases.

The regulators are understandably frustrated by the impunity with which people are perceived to be breaking insider dealing laws. They are also concerned at the authorities' lack of territorial reach, which was thrown into stark relief by their inability to pursue an unregulated, overseas company used in the 1996 $2.6bn ( £1.8bn) Sumitomo copper-trading scandal.

But will the regulatory pendulum swing too far when the new offence of market abuse takes effect on 1 December? Its sweeping nature, and the powers given to the Financial Services Authority regulator to enforce it, have triggered concern.

The market abuse regime in effect replicates the offences of insider dealing and of giving false and misleading impressions to the market, as well as introducing the offence of "distorting the market".

The sanctions for market abuse - including unlimited fines, naming and shaming, restitution orders (forcing any profits to be repaid) and injunctions - can be handed out by the FSA to almost anyone, including firms and individuals it does not authorise.

"If there is sufficient disturbance in a UK market and the FSA can trace it back to someone sitting on a mountain in Switzerland, they will seek to impose a penalty," says Simon Gleeson, a partner at Allen & Overy, the law firm.

This hypothetical Swiss climber will have far less protection than in a criminal prosecution for insider dealing (a sanction that will be retained). Market abuse is a civil offence - the burden of proof is much lower than for a criminal one - and can be committed unintentionally.

This legislative approach explains much of the uncertainty and nervousness marking the run-up to the new regime. "It is difficult to give advice to people to not do things they don't intend to do," says Mr Gleeson. "It is a bit like saying 'don't have a car crash.'"

The broad definition of the offence also means that a lot rests on the way the FSA chooses to police the markets. "It leaves a question mark over vast numbers of transactions in the market," says Alistair Alcock, professor of corporate law at the University of Buckingham. "It is in effect giving the FSA - which is the only power - a very, very wide discretion."

The watchdog stresses that there are important checks on this discretion. Anyone convicted of market abuse will have the right to appeal to an independent tribunal. There are also significant safeguards in relation to the offence itself, set out in a code of market conduct.*

The question of whether someone has breached this code will be largely decided by the "regular user test": would a hypothetical, reasonable person, familiar with the market in question, regard the behaviour as acceptable in the light of specific circumstances?

This test is not a simple endorsement of existing practices. "The test is designed to inject an objective standard - it's not what your expectation of an actual market participant is," says Martyn Hopper of the FSA.

Lawyers warn that there may be instances of previously accepted practices that fall foul of this new test. "There are areas - particularly in markets that only involve powerful players and where the playing fields are relatively ill-lit - where there may be practices that have potential to cause discomfort," says Annabel Sykes, a partner at Freshfields Bruckhaus Deringer, the law firm. "This regime has potential to light up those ill-lit corners."

Such illumination may prove uncomfortable. "One difficult issue is where to draw the line between something abusive and something aggressive but acceptable," says Michael Raffan, another Freshfields partner.

Behaviour such as buying up baskets of expiring futures contracts to force your rivals into more expensive deals could tread a narrow line between clever use of the market and its distortion.

Despite such concerns, lawyers stress that normal market behaviour, particularly on the main exchanges, is unlikely to cause problems, particularly for firms and individuals already under the regulatory thumb. "While it is a new regime, our message to clients is that's not a reason to panic," says Ms Sykes.