On November 23, 2018 the Financial Conduct Authority (FCA) published Consultation Paper 18/36 - Brexit: Proposed changes to the Handbook and Binding Technical Standards (Consultation Paper). The Consultation Paper follows on from the FCA’s October 2018 first consultation paper on the amendments it needs to make should the UK leave the EU without an implementation period.
The Consultation Paper proposes further changes that may need to be made to the FCA Handbook and Binding Technical Standards (BTS). In addition to clarifying how it plans to resolve cross-cutting issues, the Consultation Paper addresses matters in a number of areas including in relation to the Listing Rules and the Disclosure Guidance and Transparency Rules (DTRs).
The FCA notes that HM Treasury has proposed, in its policy note on the Official Listing of Securities, Prospectus and Transparency (Amendment) (EU Exit) Regulations 2018, that the UK’s primary markets regime after Brexit should apply to all issuers that have securities admitted to trading on a regulated market in the UK or are admitted to listing in the UK, or are making a public offer in the UK. This will apply irrespective of the country in which the issuer ias incorporated and so most of the changes the FCA is proposing to make to the Listing Rules, Prospectus Rules and Disclosure Guidance and Transparency Rules (DTRs) are to ensure consistency with HM Treasury’s proposed approach. It notes that in practice this means that certain issuers will need to have a prospectus approved by the FCA, where they now rely on a passported document. Similarly, some issuers will have to make disclosures according to the FRC’s rules where they now do so following the rules of their home competent authority.
The FCA notes that currently, when an issuer applies for admission of shares or depository receipts over shares to the Official List, it must demonstrate that enough securities of that class are distributed to the public in one or more EEA states and the continuing “free float” obligation is that the level of shares in public hands within the EEA must be maintained at 25 per cent or above (or at a lower level if the FCA has agreed to this). The FCA is now proposing to remove the reference to EEA holders in the rules so that holders from any jurisdiction can be counted towards the free float.
DTR 1A and 4-6 currently only apply to issuers with securities admitted to trading on a regulated market in the EU and for which the FCA is the home competent authority. The FCA proposes amendments to reflect that the home/host state distinction will fall away and after exit the transparency rules will only apply to issuers with securities admitted to trading on a UK regulated market. As a result, the provisions setting out which public-sector issues can benefit from an exemption from publishing annual and half-yearly financial reports will be amended to remove references to the EEA so that a wider group of issuers will benefit from the exemption, notably public international bodies and central banks.
DTR 4.1.6R will be amended to require issuers to use IFRS as adopted by the UK although the FCA notes that in a no-deal scenario, HM Treasury has stated it intends to issue an equivalence decision, in time for exit day, determining that EU-adopted IFRS can continue to be used to prepare financial statements for Transparency Directive requirements and for the purposes of preparing a prospectus under the Prospectus Directive. It notes that this will allow issuers registered in EEA states with securities admitted to trading on a UK regulated market or making an offer of securities in the UK to continue to use EU-adopted IFRS when preparing consolidated accounts and all issuers will be able to continue to prepare financial accounts using EU-adopted IFRS for financial years beginning before exit date.
DTR 4.1.7R will be amended to reflect the fact that after Brexit, auditors based in the EEA will become subject to the requirements currently applicable to third country auditors.
The exemption in DTR 5, which means that notification requirements do not apply in respect of voting rights provided to or by members of the European System of Central Banks in the context of carrying out their functions as monetary authorities will be amended, so the notification exemption is available to the Bank of England only.
DTR 6 will be amended so that after exit, issuers will only be able to use a Primary Information Provider to disseminate regulated information and not an incoming information society service as they can now.
In relation to DTR 7.1, currently an issuer which is a subsidiary undertaking of a parent undertaking, where the parent undertaking is subject to DTR 7.1 or to requirements implementing article 39 of the Audit Directive in any other EEA State, is exempt from having to establish an audit committee. That exemption is to be amended so that an issuer will only be exempt from DTR 7.1 where the parent undertaking is subject to DTR 7.1. However, the existing exemption will continue to apply in respect of a financial year beginning before exit day.
How non-Handbook guidance should be interpreted after exit day
Non-Handbook guidance relating to EU law or EU-derived law will continue to be relevant to matters arising after Brexit where the European Union (Withdrawal) Act 2018 preserves the provisions to which the guidance relates. As a result, the FCA have clarified how existing non-Handbook guidance should be interpreted where it relates to EU law or EU-derived law for matters arising on or after exit day. The FCA would expect financial institutions and other market participants to sensibly and purposively interpret non-Handbook guidance, taking into account the provisions of the European Union (Withdrawal) Act 2018 and any changes made to the underlying requirement as it is preserved or converted into UK law.
Responses to the consultation are requested by December 21, 2018. The FCA intends to provide feedback on the Consultation Paper and publish related near final instruments in early 2019.
(FCA: Consultation Paper 18/36: proposed changes to the Handbook and Binding Technical Standards - second consultation, 23.11.18)
(FCA: Consultation Paper 18/36: proposed changes to the Handbook and Binding Technical Standards - second consultation press release, 23.11.18)