On 28 February 2019, the FCA published near final rules and guidance (PS19/5) that will apply if the UK leaves the EU with no deal. This follows consultations on the changes in CP 18/36 (published on 23 November 2018) and CP 18/28 (published in October 2018). This includes the proposed amendments to the Listing Rules, Disclosure Guidance and Transparency Rules (DTRs) and Prospectus Rules.
The FCA had intended to publish the final instruments on 28 March 2019 if the Withdrawal Agreement is not ratified. See Brexit negotiations: recent developments for the current status of the Withdrawal Agreement.
On 20 March 2019, the FCA published Primary Market Bulletin No. 22 which summarises the key changes to the Listing Rules, the Disclosure Guidance and Transparency Rules and the Prospectus Rules that will apply if the UK leaves the EU with no deal.
The FCA’s amendments follow the Treasury’s paper setting out its approach to financial services legislation under EUWA. In that paper the Treasury indicated that, in the event of a no deal, it will, in general, treat the EU and its member states in the same way as it treats non-EU or third countries, although there will be instances where the Treasury will diverge from this approach where necessary. The government also published the draft Official Listing of Securities, Prospectus and Transparency (Amendment) (EU Exit) Regulations on 12 December 2018, together with explanatory information.
Set out below is a summary of the final proposed amendments to the Listing Rules, DTRs and Prospectus Rules.
When making changes to the FCA Handbook (as a whole) and the Binding Technical Standards (BTS), the FCA has taken the following approach:
- in general, it treats the EU and its member states in the same way as it treats non-EU or third countries, although there will be instances where it will diverge from this approach
- references to EU law that will no longer apply after Brexit have been removed and replaced with references to UK law
- passporting provisions that will no longer apply after Brexit have been removed, as have references to "home" and "host" state regulators
- references to European institutions (such as the European Commission) have been removed or replaced, and
- references to "other member/EEA states" and "other competent authorities" have been removed.
EU guidelines, recommendations, opinions and Q&A produced by, among others, ESMA (Level 3)
The FCA expect firms and market participants to continue to apply ESA Guidelines to the extent that they remain relevant, as they did before exit day. Market participants will need to interpret the materials sensibly and in light of the Brexit-related amendments to UK law. Queries regarding Level 3 material can continue to be raised with the FCA and it will provide a repository of all EU Level 3 material in effect at exit on its Handbook website.
FCA Knowledge Base and Handbook forms
The FCA is not making changes to forms at this stage but has set a default approach to interpreting certain EU-based references. References to UK legislation should be read as references to the legislation as amended under the EUWA.
The main changes in PS 19/5 include the following:
Free float requirements
Instead of applicants and listed companies having to show that at least 25% of the shares (or any such other level that has been agreed) are in public hands in one or more EEA states, shareholders in any jurisdiction will count towards the free float. The FCA concluded (in CP 18/36) that replacing the EEA with the UK would have been too restrictive and it is therefore removing any reference to “EEA states” instead. This applies to premium and standard listings of equity shares and depositary receipts.
Admission to trading
Shares will have to be admitted to trading on a UK regulated market instead of an EU regulated market operated by an RIE. References to “regulated market” in the Listing Rules will be to a regulated market which is a UK RIE (which excludes recognised overseas investment exchanges).
Shares of an applicant incorporated in a third country (which replaces applicants incorporated in non-EEA states only) that are not listed either in its country of incorporation or in the country in which a majority of its shares are held, will not be admitted to listing unless the FCA is satisfied that the absence of the listing is not due to the need to protect investors.
The main changes in PS 19/5 include the following.
When is a prospectus required and passporting
The prospectus regime in the UK will apply to all issuers that:
- have securities admitted to trading, or have applied to admit securities to trading, on a regulated market in the UK or admitted to listing in the UK, or
- are making an offer to the public in the UK.
This will apply regardless of the country that the issuer is incorporated in.
The current Prospectus Rules allow a company to offer shares throughout the EU using a prospectus which has been approved in only one member state (this transferability is known as “passporting”). Passporting will, however, cease if there is a no deal exit. Instead issuers incorporated in an EU member state will need to have a prospectus approved by the FCA as well as by its own home state authority.
There will be a grace period so that any prospectuses that are valid in the UK before exit day (including those approved by a competent authority in a different EU member state) will remain valid for 12 months after their date of approval. This also applies to supplementary prospectuses.
There are no reciprocal arrangements in the remaining EU member states for UK approved prospectuses after exit day. New Q&As on Prospectuses, published by ESMA in January 2019, confirm that, as the UK will be a third country after exit day if there is no deal, prospectuses and supplements approved by the FCA before the exit date cannot be used in EU27/EEA EFTA after exit date.
Transparency requirements and vote holder notifications
DTR 1A and Chapters 4 to 6 of the DTRs currently 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. DTR 5 also applies to issuers admitted to a UK "prescribed" market (such as AIM).
After exit, these chapters will apply to issuers with securities admitted to trading on a UK regulated market, wherever the home competent authority is. This means that an issuer on, for example, the Main Market, whose home competent authority is not the FCA will become subject to these rules. Consequently, issuers that are required to comply with corresponding requirements in a remaining EEA member state will no longer be exempted from complying with the DTRs.
Issuers will be required to use IFRS adopted by the UK to prepare their consolidated accounts, instead of IFRS adopted by the EU. After exit, issuers from third countries (which will include issuers from the EEA) will continue to be able to use other accounting standards if these have been deemed equivalent to UK-adopted IFRS, and the FCA have granted an exemption for that standard. The FCA states that the existing Commission equivalence decisions and FCA exemptions will continue to apply after Brexit to the amended rules. To allow for a transition period, the UK government intends issuing an equivalence decision so that issuers can continue to use EU-adopted IFRS, for Transparency Directive requirements and to prepare a prospectus for any financial year beginning before the exit day but will have to use IFRS adopted by the UK for any financial year starting on or after exit day. The DTRs will include transitional provisions to allow for this.
An issuer must currently have an audit committee, unless it is a subsidiary undertaking and its parent undertaking is required to have an audit committee under the DTRs or certain requirements in another EEA member state.
After exit, this exemption will only be available if the parent undertaking must have an audit committee as required by DTR 7.1. The other limb of the existing exemption will continue to apply for any financial year beginning before exit day.
Currently UK traded non-EEA issuers can use an EEA auditor to provide the audit report for their annual financial statement. After a no deal exit, EEA auditors will become subject to the same rules as third country auditors and will have to register with the FCA.
Non-registered EEA auditors will be able to audit results for financial years beginning before exit day, but they will need to register for any financial years beginning on or after exit day.
Dissemination of information
Issuers can currently choose whether to disseminate information using a Primary Information Provider (PIPs) or an incoming information society service established in an EEA state. After exit, only PIPs can disseminate the information.
Corporate governance statements
After exit, an overseas company with a premium listing must comply with the requirements in DTR 7(2) about corporate governance statements, regardless of whether it already complies with similar requirements imposed by another EEA state. Any regulated information will also have to be disclosed in English.