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Essential Corporate News – Week ending November 30, 2018

Publication November 30, 2018


Introduction

Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

FCA: Consultation Paper 18/36 - Proposed changes to the Handbook and Binding Technical Standards - Second consultation

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).

Primary markets

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.

Listing Rules

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.

DTRs

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)

European Commission: Draft delegated regulation on the format, content, scrutiny and approval of prospectuses

On November 28, 2018 the European Commission published the draft text of its delegated regulation supplementing the new Prospectus Regulation (2017/1129).

The draft regulation will repeal and replace the Prospectus Regulation (809/2004) and it includes sections on the following:

  • The minimum information to be included in the registration documents, in the securities note and the additional information to be included in the prospectus in certain circumstances.
  • The format of a prospectus, the format of a base prospectus, categories of information to be included in the base prospectus and the final terms, and the use of a prospectus summary.
  • The content of the specific summary for the EU Growth prospectus, the content of the EU Growth equity registration document, the content of the EU Growth non-equity registration document, the content of the EU Growth equity securities note and non-equity securities note, and the format of the EU Growth prospectus.
  • Criteria for the scrutiny of the completeness of the information contained in the prospectus, criteria for the scrutiny of the comprehensibility of that information, criteria for the scrutiny of the consistency of that information, the proportionate approach in the scrutiny of draft prospectuses and review of the universal registration document, approval of the prospectus, approval and filing of the universal registration document, and changes to a draft prospectus during the approval procedure.

The regulation will enter into force on the 20th day following its publication in the Official Journal and will apply from July 21, 2019. Since this date falls after Brexit, it will not be converted into UK law pursuant to the EU Withdrawal Act and the UK Government will have to domesticate the provisions of the regulation into UK law if they are to apply in the UK.

(European Commission: Draft delegated regulation on the format, content, scrutiny and approval of prospectuses, 28.11.18)

FRC: 2018 UK Corporate Governance Code – FAQs

On November 28, 2018 the Financial Reporting Council (FRC) published a list of Frequently Asked Questions (FAQs) on the 2018 UK Corporate Governance Code (Code) published in July 2018 which applies to accounting periods beginning on or after January 1, 2019.

The FAQs include a number of general questions and then specific questions on particular Provisions and terms used in the Code. Questions include the following:

  • Why has a 10 year period been set for chairs but non-executive directors?
  • How does the Code’s definition of “senior management” fit with the definition in section 414C(8) Companies Act 2006?
  • Why does the Code not specifically refer to cyber risks?

The FAQs also note that the FRC intends to update its Guidance on Audit Committees to reflect the Code and that it will be making consequential changes to the Guidance on Risk Management, Internal Controls and Related and Financial Business Reporting. At the same time, it will assess whether further amendments are required in relation to internal controls and the viability statement in light of the completion of the various investigations into the collapse of Carillion.

(FRC, 2018 UK Corporate Governance Code – FAQs, 28.11.18)

Environment Agency: Business planning for climate change

On November 26, 2018 the Environment Agency published a press release encouraging businesses to prepare for climate change. The press release follows the Environment Agency’s report ‘Climate change impacts and adaption’.

Following the recently published UKCP18 projections, the Environment Agency notes that a worryingly low number of FTSE boards are disclosing the strategic risks to their shareholders brought about by the physical impacts of climate change. The Environment Agency emphasises that boards cannot continue to see extreme weather events, such as floods and heatwaves, as purely operational and encourages them to put aside capital expenditure for resilience measures to ensure business continuity. The Environment Agency has encouraged businesses to prepare and adapt, and suggests that governments, business, and communities work collaboratively in order to mitigate the impacts of climate change.

 (Environment Agency: Business planning for climate change press release, 26.11.18)


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