On the effectiveness of insider dealing regulations

Mirrakhimov, Rustam and Milman, David (2023) On the effectiveness of insider dealing regulations. PhD thesis, Lancaster University.

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Abstract

Insider dealing can undermine the integrity of the financial system by vitiating the normal efficiency of financial markets and corroding investors' confidence. Insider dealing is a threat and should be minimised to keep UK capital markets clean and attractive for sustainable growth. This thesis will aim to examine the effectiveness of insider dealing regulations in the UK by investigating into the challenges to enforcement and will present a novel form of evaluation of the deterrent effect of civil financial sanctions. This inter-disciplinary thesis will approach this task by regarding some challenges to enforcement of insider dealing regulations as ineradicable, i.e., those challenges being associated with the nature of insider dealing, and some challenges will be deemed to be rectifiable, such as a properly devised deterrence-based enforcement strategy. The two sets of challenges will be reduced to a quantification issue, that is, the Financial Conduct Authority cannot, at least constantly, precisely quantify the illegal gains from insider dealing and the ambiguous nature of disgorgement, as a financial penalty component. On the basis of these considerations, the thesis will put forward a theoretical two-step metric for evaluating a deterrent effect in civil financial sanctions. This metric is original in a number of ways, (1) it will subsume the discussed challenges and treat them as the underlying assumptions and (2) it will infer a deterrent effect from the observed enforced civil cases. The results obtained from the two-step metric indicate that in around half of the selected civil cases the financial sanctions were lower than the quantified illegal gains. Therefore, insider dealing regulations in the UK are not effective. The thesis will also examine whether the level of quantified ill-gotten gains from insider dealing standing alone has influenced the magnitude of a civil financial sanction. By applying a one-way ANOVA test, it will be observed no statistically significant relationship between the aforementioned impact factor and the three penalty groups.