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Essential Corporate News – Week ending October 28, 2016

Publication October 28, 2016


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

ESMA: Q&A on the Market Abuse Regulation

On October 26, 2016 the European Securities and Markets Authority (ESMA) published an updated version of its questions and answers regarding the implementation of the Market Abuse Regulation (MAR).

The Q&A includes new questions regarding:

  • Exchange rates in managers’ transactions – For transactions carried out under Article 19(1) MAR in a currency which is not the Euro, the exchange rate to be used to determine if the threshold set in Article 19(8) MAR is reached is the official daily spot foreign exchange rate which is applicable at the end of the business day when the transaction is conducted. Where available, the daily euro foreign exchange reference rate published by the European Central Bank on its website should be used.
  • Whether a communication made orally or via electronic means can constitute an “investment recommendation” under MAR – Whether a specific oral or electronic communication, or a communication labelled as “morning notes” or “sales notes”, may be considered an investment recommendation within the meaning of MAR, should be established on a case-by-case basis. Where a standardised communication, including oral or electronic communication, is structured and pre-planned for distribution channels and it implicitly or explicitly suggests an investment strategy in relation to a financial instrument or issuer, it should be regarded as an "investment recommendation".
  • Whether communications that do not refer to either one or several financial instruments or issuers can be considered investment recommendations under MAR – Article 3(1)(35) MAR sets out that “investment recommendation” means "information recommending or suggesting an investment strategy, explicitly or implicitly, concerning one or several financial instruments or the issuers, including any opinion as to the present or future value or price of such instruments, intended for distribution channels or for the public". Therefore, a communication that does not refer to either a financial instrument or an issuer, should generally not be considered an investment recommendation. However, the producer’s assessment as to whether the communication may be an investment recommendation should be conducted on a case-by-case basis.
  • Whether an investment firm which produces an investment recommendation will be considered to fall within the scope of Article 3(1)(34)(i) of MAR, even though the production of such recommendation is not its main business – Any information that comprises direct or indirect investment proposals in respect of a financial instrument or an issuer will be considered as information recommending or suggesting an investment strategy as defined under point (i) of Article 3(1)(34) of MAR regardless of whether or not the production of investment recommendations is the main business of the investment firm.
  • Whether material intended for distribution channels or for the public concerning one or several financial instruments that contains statements indicating that the concerned financial instruments are “undervalued”, “fairly valued” or “overvalued” fall within the definition of “investment recommendation” under MAR – Such material which concerns one or several financial instruments admitted to trading on a regulated market or a multilateral trading facility or for which a request for admission to trading on such a market has been made, or, traded on a multilateral trading facility or an organised trading facility, is considered as information implicitly recommending or suggesting an investment strategy pursuant to Article 3(1)(34) of MAR, insofar as it contains a valuation statement as to the price of the concerned financial instruments.

(ESMA, Questions and Answers on the Market Abuse Regulation (ESMA/2016/1520), 26.10.16)

ESMA: MAR Guidelines – Delay in the disclosure of inside information

On October 21, 2016 the European Securities and Markets Authority (ESMA) published a set of guidelines on the delay in the disclosure of inside information under the Market Abuse Regulation (MAR). The Guidelines provide a non-exhaustive and indicative list of legitimate interests of issuers that are likely to be prejudiced by immediate disclosure of inside information and situations in which delay of disclosure is likely to mislead the public, in accordance with Article 17(11) of MAR. There has been no material change from the draft Guidelines published as an annex to ESMA’s Final Report on MAR in July 2016.

The Guidelines discuss the following:

  • Legitimate interests of the issuer for delaying disclosure of inside information – The Guidelines sets out cases where immediate disclosure of inside information is likely to prejudice the issuers’ legitimate interests, including: where the issuer is conducting negotiations and the outcome of such negotiations would likely be jeopardised by immediate public disclosure; where the financial viability of the issuer is in grave and imminent danger; where the inside information relates to decisions taken or contracts entered into by the management body of an issuer which need the approval of another body in order to become effective; where the issuer has developed a product or an invention and the immediate public disclosure of that information is likely to jeopardise the intellectual property rights of the issuer; where the issuer is planning to buy or sell a major holding in another entity and the disclosure of such information would likely jeopardise the implementation of such plan; and where a transaction previously announced is subject to a public authority’s approval which is conditional upon additional requirements and the immediate disclosure of those requirements will likely affect the ability for the issuer to meet them and therefore prevent the final success of the deal or transaction.
  • Situations in which delay of disclosure of inside information is likely to mislead the public – The situations in which delay of disclosure of inside information is likely to mislead the public includes where the inside information the issuer intends to delay is materially different from the previous public announcement on the matter to which the inside information relates; or where the inside information the issuer intends to delay regards the fact that the issuer’s financial objectives are not likely to be met, where such objectives were previously publicly announced; or where the inside information the issuer intends to delay is in contrast with the market’s expectations, where such expectations are based on signals that the issuer has previously sent to the market.

The Guidelines apply from December 20, 2016.

(ESMA, MAR Guidelines: Delay in the disclosure of inside information, 21.10.16)

ESMA: MAR Guidelines – Persons receiving market soundings

On October 21, 2016 the European Securities and Markets Authority (ESMA) published a set of guidelines on persons receiving market soundings under Article 11(11) of the Market Abuse Regulation (MAR). There has been no material change from the draft Guidelines published as an annex to ESMA’s Final Report on MAR in July 2016.

Article 11(11) of MAR requires ESMA to issue guidelines addressed to persons receiving market soundings (MSRs) regarding the factors that MSRs are to take into account when information is disclosed to them as part of a market sounding in order for them to assess whether the information amounts to inside information, the steps that MSRs are to take if inside information has been disclosed to them in order to comply with Articles 8 and 10 of MAR and the records that MSRs are to maintain in order to demonstrate that they have complied with Articles 8 and 10 of MAR.

The Guidelines provide guidance on the following:

  • Internal procedures and staff training – MSRs should establish, implement and maintain internal procedures that are appropriate and proportionate to the scale, size and nature of their business activity and ensure that the staff receiving and processing the information obtained in the course of the market sounding are properly trained on the relevant internal procedures and on the prohibitions, under Articles 8 and 10 of MAR, arising from being in possession of inside information.
  • Communicating the wish not to receive market soundings – After being addressed by a disclosing market participant (DMP), the MSR should notify it whether they wish not to receive future market soundings in relation to either all potential transactions or particular types of potential transactions.
  • MSR’s assessment as to whether they are in possession of inside information as a result of the market sounding and as to when they cease to be in possession of inside information – MSRs should independently assess whether they are in possession of inside information as a result of the market sounding, taking into consideration as relevant factors the DMP’s assessment and all the information available to the individual(s), function or body entrusted within the MSR to conduct that assessment, including information obtained from sources other than the DMP. In conducting that assessment, the individual(s), function or body should not be required to access information behind any information barrier established within the MSR.
  • Assessment of related financial instruments – Where the MSR has assessed they are in possession of inside information as a result of a market sounding, for the purposes of complying with Article 8 of MAR the MSR should identify all the issuers and financial instruments to which they believe that inside information relates.
  • Record keeping – MSRs should keep records of all of the above as well as persons working for them under a contract of employment or otherwise performing tasks through which they have access to the information communicated in the course of the market soundings in a durable medium that ensures accessibility and readability for a period of at least five years.
  • Written minutes or notes – Where the DMP has drawn up written minutes or notes of unrecorded meetings or unrecorded telephone conversations, MSRs should, within five working days after receipt, sign those minutes or notes, where they agree upon their content, or provide the DMP with their own version of those minutes or notes duly signed, where they do not agree upon their content.

The Guidelines apply from December 20, 2016.

(ESMA, MAR Guidelines: Persons receiving market soundings, 21.10.16)

FRC: Technical findings of Conduct Committee’s Financial Reporting Review Panel 2015-2016

On October 24, 2016 the Financial Reporting Council (FRC)  published a presentation describing the accounting and corporate reporting issues most often raised by Corporate Reporting Review activity conducted in the year ended March 2016. This supplements the wider discussion of the quality of corporate reporting in the UK in the FRC’s Annual Review of Corporate Reporting 2015-2016 published on October 21, 2016.

The most frequent areas of questioning by the Financial Reporting Review Panel (FRRP) concerned the following:

  • Strategic Report – The FRRP challenged companies where the business review did not appear appropriately balanced, where it did not discuss all relevant aspects of performance, or where there were issues with the comprehensiveness of the review of the financial position. While the FRRP noted improvements in the reporting of principal risks and uncertainties it challenged where there was a question as to whether all principal risks and uncertainties disclosed were genuinely principal or there was no discussion of how risks were managed or mitigated, and where there was a lack of linkage between KPIs and strategic elements of the business, or KPIs were not adequately identified and discussed.
  • Accounting policies – The FRRP questioned lack of policies for transactions or balances that were material to the business and accounting policies that had not been updated for new accounting standards. The FRRP expects companies to replace boilerplate statements lifted from accounting standards with tailored, relevant disclosures. It also informed companies where it identified accounting policies for items or transactions that were immaterial, no longer relevant or non-existent and where there was unnecessary repetition of accounting policy descriptions and other narrative.
  • Critical judgements – The FRRP expects critical judgement disclosures to state explicitly what those judgements are and differentiate them from estimates. It also queried lack of disclosure where needed to understand how management applied its most significant accounting policies.
  • Estimation uncertainties – Companies need to disclose the relevant amounts or provide other useful information such as sensitivities and if the audit committee report or audit report mention judgements and estimates not identified in the financial statements, the FRRP may ask if these disclosures should have been expanded in the notes.
  • Revenue recognition – Companies whose accounting policies are insufficiently tailored to their significant revenue streams were challenged, as were those that did not explain how they applied the percentage of completion model to long-term contracts or failed to disclose revenue by category.
  • Impairment – The FRRP notes issues with, among other things, discount rates, levels at which goodwill impairment was tested and failure to describe each key assumption driving the cash flow projection determining value in use.
  • Other common areas of questioning – These include business combinations, financial instruments, exceptional and other items, income taxes, complex supplier arrangements, pensions, cash flow statements, capital management, presentation of financial statements, consolidation and intangible assets.

(FRC, Technical findings of the Conduct Committee’s Financial Reporting Review Panel 2015 – 2016, 24.10.16)

HM Treasury: Consultation on distributable profits of long-term (life) insurers

On October 25, 2016 HM Treasury published a consultation document seeking views on proposed changes to Part 23 of the Companies Act 2006 (CA 2006) concerning distributions so as to include a new section 843A enabling the distributable profits of a long-term insurance business which is a Solvency 2 firm to be calculated. The changes are needed as a result of the implementation of the Solvency 2 Directive on January 1, 2016. The Directive and regulations made under it  require insurers to segregate life and non-life business. Previously firms could maintain life funds within a “long-term fund” but a change in the Prudential Regulation Authority rulebook following the introduction of Solvency 2, means that the “long-term fund” concept, as referred to in section 843 CA 2006, is no longer used for Solvency 2 firms.

HM Treasury is consulting on an alternative methodology that will ensure firms only make distributions out of realised profits and it draws on the Solvency 2 framework. The first step in the new approach will be to identify and value an insurance firm’s assets and liabilities, with the liabilities then being deducted from the assets. The second step will be to deduct the value of any assets which cannot reasonably be considered distributable from the excess of assets over liabilities and the result will be the amount of profit which the firm may distribute to shareholders. It notes that the new approach to insurers and reinsurers may be stricter than section 831 CA 2006 (this section requires a public company to meet a net assets test prior to a distribution of profits), so HM Treasury believes that a distribution which satisfies the new approach should also satisfy section 831.

HM Treasury notes that extensive discussion with the insurance industry has already taken place and since the industry wants the issues resolved swiftly, comments are requested by November 15, 2016.

(HM Treasury, Distributable profits of long-term (life) insurers: a consultation, 25.10.16)

FCA: Our Future Mission – Consultation

On October 26, 2016 the Financial Conduct Authority (FCA) published a consultation paper on its future mission, which is designed to provide a guiding set of principles around the strategic choices the FCA makes. It will inform the FCA’s strategy and day-to-day work over the coming years.

Key themes the FCA is consulting on include:

  • Protecting consumers – In an environment where consumers are increasingly expected to take responsibility for their own financial decisions, what is the right level of consumer protection and how does the FCA  balance the responsibilities of firms and consumers?
  • Vulnerable consumers – Should the FCA prioritise the protection of vulnerable consumers and if so how?
  • Delivering consumer redress – What should the role of the FCA be in redress schemes, for example, in dealing with activity outside the FCA’s remit?
  • When the FCA intervenes – How should the FCA identify harm and how should it decide which approach to take to address it; and how can the FCA be clearer for firms, consumers and stakeholders on what it is doing and why?
  • The scope of regulation – Explaining the remit the FCA has for taking action and the circumstances in which the FCA may intervene with regard to unregulated activities;
  • The interaction between regulation and public policy – Explaining this interaction using examples including access to financial services and price discrimination;
  • Competition, supervision and enforcement – Providing clarity and seeking feedback on the FCA’s current approach to using its different regulatory powers and tools;
  • FCA Handbook – The FCA is seeking suggestions on a proposed review of the FCA Handbook which sets out the rules for firms.

The FCA is requesting comments on the consultation by January 26, 2017.

(FCA, Our Future Mission, 26.10.16)

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