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The flaw at the heart of Europe’s insider dealing laws

The EU’s insider dealing directive will be too soft on offenders, its critics argue.

A weak law is an opportunity missed. A study by academics at Indiana University in the US shows that the cost of capital in markets with a strong insider-dealing regime can be 5% lower than in those without.

Conviction rates for insider dealing in Europe are dismal. In the UK, for example, only 12 convictions have been secured against insider dealers during the past five years. Across the entire EU, there were only 19 convictions in the years 1995 to 2000.

The EU directive on insider dealing, which is due to take effect this month, is unlikely to improve this. The root of the problem is the directive's requirement that companies disclose all inside information. The thinking goes: no inside information, no insider dealing. This seems a good idea in principle. But regulators have been forced to narrow the definition of what is and what isn't inside information to ease the disclosure burden on issuers.

It has fallen to the Committee of European Securities Regulators (CESR) to set the details of the single test on which the directive is based. Under the Lamfalussy plan for financial lawmaking in Europe, the European Commission will pass CESR's advice into law.

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