As confiscation orders in insider dealing cases expand beyond illicit profit to encompass invested capital, a critical legal question emerges. Rachel Cook, Of Counsel, at law firm Peters & Peters, examines whether the FCA’s evolving approach risks undermining proportionality, predictability and fairness, principles that underpin both effective enforcement and long-term market confidence.
Market stability relies on fairness, both in terms of investment but also enforcement. Whilst misconduct must be punished, regulatory action must be proportionate, predictable, and fair. Insider dealing sits at the heart of that balance. Few areas of financial misconduct attract stronger rhetoric or sanctions. The Financial Conduct Authority (FCA) has long taken a robust stance, and rightly so. Trading on inside information corrodes confidence and distorts the level playing field on which markets rely.
Yet a developing issue in the criminal courts raises an important question. In its determination to strip offenders of illicit gains, is the FCA stretching confiscation law beyond its proper limits? The issue is how financial benefit is understood within the enforcement framework.
What counts as benefit?
When someone is convicted of insider dealing in the UK, the criminal process does not usually end with a sentence. The court is essentially required to move on to confiscation proceedings under the Proceeds of Crime Act 2002. In practical terms, this means a financial order requiring the defendant to pay a sum to the state, assessed by reference to the “benefit” of their criminal conduct. The aim is to strip away the financial gain derived from the offending.
Common sense suggests that in insider dealing cases, the benefit is the profit from the trade, namely the difference between the purchase price and the post announcement market value. Take a simple example. An individual buys £1,000 of shares after receiving confidential information that a takeover is imminent. The deal is announced, the share price rises, and the shares are sold for £1,100. The unlawful gain from trading on inside information appears to be £100.
That is how most market participants would see it. In several recent cases, the FCA has advanced a different interpretation.
The full value approach
The regulator has argued that the benefit is not merely the £100 gain, but the entire £1,100 received on sale. The reasoning rests on the wording of the confiscation regime, which provides that a person benefits if they obtain property as a result of or in connection with criminal conduct. The FCA’s position is that the shares themselves were obtained through insider dealing, and therefore their full value represents the benefit.
On that logic, the purchase price becomes part of the confiscation figure. While this may appear to strengthen deterrence, it creates conceptual and practical difficulties and leads to inconsistent outcomes for what is essentially the same misconduct.
Confusing tools with proceeds
The difficulty lies in conflating the mechanism of offending with the proceeds of offending. The shares are not the fruits of the crime. They are the vehicle through which the gain is realised. If robbers buy a car for £1,000 to use in a bank robbery and steal £10,000, no one would argue that their criminal benefit is £11,000. The car is a tool, not the loot.
Similarly, in insider dealing, the capital deployed to purchase shares is not the illicit gain. The gain is the uplift in value attributable to the unlawful reliance on inside information. By treating the entire sale value as criminal benefit, the confiscation calculation includes capital alongside unlawful profit.
Perverse outcomes
The implications of the full value approach are not merely theoretical. If the inside information proves inaccurate and the share price falls, the investor may have made no profit at all. Yet on this analysis, they have still obtained the shares and therefore benefited to the extent of the capital deployed.
Timing also becomes decisive. An investor who already owns shares and sells after receiving negative inside information would be assessed on the loss avoided. But a buyer who acts before positive news would face confiscation of the entire sale value. There is no conceptual difference in their misconduct. Each unlawfully relies on inside information.
The approach also creates inconsistency between long and short strategies. In a short sale, shares are borrowed rather than obtained, so the benefit would be limited to profit. In a long position, the entire value is treated as unlawful benefit. The same inconsistency of outcome is found where other derivatives are used.
Each example highlights the inherent tension and inconsistency in the FCA’s approach.
Why this matters beyond the criminal courts
Most wealth professionals will never encounter insider dealing from the inside of a criminal case. Nor should they. However, the debate over how benefit is defined is still important. At its core, this is about how far the regulator is prepared to stretch statutory language in pursuit of deterrence. Should it wish to do so, the regulator can impose fines in addition to confiscation to reinforce its message. But pursuing confiscation based on capital deployed plus gain is inherently inconsistent and unfair.
For advisers and compliance teams, predictability and proportionality are essential features of a stable regulatory environment. Markets function best when rules are clear and enforcement aligns with economic reality. Where interpretation departs from commercial and common-sense logic, it raises questions about coherence. Strong enforcement and consistency underpin confidence.
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