Editors protest at FSA warning over media contact

In September, the UK's financial watchdog issues one of its quaint pieces of "non-guidance" to companies: don't talk to journalists about anything sensitive. The moves followed a persistent pattern over years, where the details of bids and other posturing of participants in mergers and acquisitions would show up in the newspapers without attribution. It's pretty easy to use journalists to sway market opinion. They're always on the lookout for scoops, and they play them prominently when they happen. That encourages those leaking information to leak more often. From the journalists' perspective, this is a good: free flow of information is just what the doctor ordered: Dr. Fama, that is, of the efficient market hypothesis. But from the perspective of the Financial Services Authority, it means an uneven and unequal flow of information, opening the market to abuse. The FSA warned companies and their advisers that it would investigate leaks through a circular that, while not official guidance of the regulator, served notice to all and sundry that it was on the prowl and ready to bite. Now the editors have bitten back.

Four prominent news organisations – The Financial Times, The Times, The Guardian and Reuters – issued a letter to the chairman of the FSA pointing out the danger of the non-guidance. "Properly functioning financial markets rely on the flow of accurate and timely information, available to all participants simultaneously. In the world of instant media, the pressure on journalists is to publish information ahead of anyone else," they wrote. "This information, in turn, is swiftly picked up by others. So the media, contrary to the assumptions underlying the recommendations, actually play a key role in protecting investors and other markets’ participant by inhibiting the creation of an unlevel and unfair market place due to the limited circulation of insider information." The media's on-line services help to create a level European playing field, too, they said. Why they didn't mention global markets is a bit of a mystery. What they really dislike is the FSA's Recommendation 2, under which all media enquiries to a regulated company would be directed to the company's media relations personnel. "The proposal that all contacts between journalists and regulated firms should become subject to a prior screening process is disproportionate and unacceptable, and should be corrected," the editors wrote.

This standoff, like many of the issues in and around financial markets, is a conflict of goods. There's nothing worse for the discovery of wrongdoing or unearthing the significant detail than having good quality journalism about a developing situation. Turn off the source of supply and the flow of information dries up. But market abuse is widespread, perhaps even rampant, and with journalists keen for scoops, manipulating them as a way of manipulating the market is not all that hard.

The biggest problem with the FSA's attack is its collateral damage. Companies that follow its advice will "err on the side of caution" in dealing with the media. That will stifle the discussion about a lot more than the bids and deals that represent the source of the problem. The FSA should try prosecuting insider trading more often rather than depriving the market of information.

Source documents: The editors' letter is available on FT.com. A story about it is on Reuters.