Treasury changes tack on insider dealing: Guidance notes to be replaced by clearer legislation

THE Treasury is on the point of dropping controversial guidance notes on insider dealing, which were promised to allay fears that the broker's lunch and other traditional City exchanges of information would be outlawed.

A Bill before Parliament includes a much wider definition of inside information than at present.

Officials started to draw up the guidance notes because company directors, analysts and investment managers were alarmed at the prospect that current market practices could be classed as insider trading.

But a strong lobby from the Stock Exchange and the rest of the City appears to have persuaded the Treasury that the notes would be worse than useless. A Stock Exchange source said: 'Guidance notes are the last refuge of the bad draftsman. They are no defence if a judge decides you breached the law.'

City practitioners could be given a false sense of security if they relied on guidance notes to decide what is legal. Treasury promises that the broker's lunch will not be stopped could prove useless if judges opt for a tougher interpretation.

Treasury lawyers are now trying to counter City fears by rewording the Bill itself to clarify what is meant by making information public, one of the key ambiguities in the Bill.

A Treasury spokesman confirmed this was now the Government's 'preferred approach', as long as it proved possible to draft the clauses effectively. The clauses would also be 'non-exhaustive', giving the courts the job of setting more precise limits on what is meant by inside information.

Any changes will be introduced at the committee stage of the Bill, which begins later this month. The legislation, part of the Criminal Justice Bill, was prompted by a Brussels directive harmonising insider legislation in Europe. The directive has been widely criticised as badly drafted but the Government has been forced to accept it.

Previously, insiders had to be connected with the company whose securities are traded. The new law removes this restriction and also widens the definition of how inside information can be acquired. It could seriously affect trading practices in the City, for example by classifying companies that are stake-building with a view to a takeover bid as insiders.

There are also fears in the gilts market that if executives of a firm have plans for big deals that could move the market, that could be classed as inside information so the firm's other dealings could be ruled illegal. Gilts are to be included in insider dealing legislation for the first time.

The underlying fear is that the wide scope of the new law will halt growing contacts between company executives and their institutional shareholders.