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This publication is available at https://www.gov.uk/government/publications/draft-official-listing-of-securities-prospectus-and-transparency-amendment-eu-exit-regulations-2019/draft-official-listing-of-securities-prospectus-and-transparency-amendment-eu-exit-regulations-2019-explanatory-information
The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.
The EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.
HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.
This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU, and forms part of HMT’s contingency planning for a no-deal scenario. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. We will be laying this legislation as a contingency; however, the changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.
The accompanying draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. e. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.
3. Policy background and purpose of the SI
3.1 What does the underlying EU regulation and UK law do?
The Prospectus Directive (PD), Transparency Directive (TD) and Consolidated Admissions and Reporting Directive (CARD) form part of the regulatory framework governing primary market activity in the EU.
A prospectus is a legal document containing important information used by investors when deciding whether to invest in a company’s securities. The Prospectus Directive (2003/71/EC) contains the harmonised rules governing the content, format, approval, and distribution of the prospectuses that are published when securities (such as shares and bonds) are offered to the public or admitted to trading on a regulated market in an EU member state.
The Transparency Directive (2004/109/EC) provides for the harmonisation of transparency requirements across the EU by requiring issuers of securities admitted to trading on a regulated market to disclose a minimum level of information to the public. It aims to ensure transparency of information for investors through a regular flow of regulated information and the dissemination of such information to the public. Regulated information consists of financial reports, information on major holdings of voting rights and information disclosed pursuant to the Market Abuse Regulation (EU No 596/2014) and the UK’s Listing Rules. The TD is built on and also amended the Consolidated Admissions and Reporting Directive (2001/34/EC), which sets out rules governing the admission of securities to official stock exchange listing and the information to be published on those securities.
3.2 Deficiencies this SI remedies
This SI addresses deficiencies in the PD and the TD that arise from the UK leaving the EU. There are no policy deficiencies related to the CARD.
It ensures that the prospectus regime will be applicable to issuers making an offer to the public in the UK or applying to admit securities to a regulated market in the UK, and the transparency framework will be applicable to issuers with securities traded on regulated markets in the UK, and will continue to operate effectively in a UK-only context. The official listing regime, applicable to firms seeking, or having secured, admission of their securities to the Official List of the Financial Conduct Authority, will also meet this objective.
The SI replicates, as far as possible, the current effects of the prospectus regime, the transparency rules and the listing rules that apply across the EU. Details of specific changes include:
Approval of prospectuses
Under the current PD, once a prospectus has been approved by one EEA state’s competent authority, it can be “passported” into all other EEA states for offers to the public or applications for admission to trading on a regulated market, without the need for approval of a prospectus from those EEA states.
If the UK leaves the EU in March 2019 without a deal, the UK will, in general, default to treating EEA states and EEA issuers in the same way as other third countries and their issuers, including with regard to approving prospectuses. This means issuers wishing to access the UK’s capital markets for offers to the public or admissions to a regulated market will, going forwards, be required to secure approval of their prospectuses from the Financial Conduct Authority (FCA). This will be the case irrespective of whether the prospectus has already been approved by a national competent authority of an EEA member state.
Prospectuses approved pre-Exit
The current framework affords prospectuses approved by a national competent authority in an EEA state (for instance, the FCA in the UK) automatic validity for a period of up to twelve months. The prospectus can subsequently be ‘passported’ into all other EEA member states throughout this period.
The government has determined that prospectuses ‘passported’ into the UK before Exit day will be grandfathered for use in the UK until their validity expires. This means that only prospectuses whose validity straddles Exit day will be grandfathered and issuers will be able (following approval by the FCA) to supplement these where necessary during their validity; those prospectuses that have expired already will not be eligible for use in the UK.
Exemptions from the obligation to produce a prospectus and make disclosures under the TD: public bodies
Under current PD rules, an issuer is required to produce an approved prospectus before it offers securities to the public or requests the admission of securities to trading on a regulated market. Once securities are admitted to trading on a regulated market, issuers must make ongoing disclosures in accordance with requirements in PD and TD, which are reflected in the Financial Services Markets Act 2000 and the FCA Handbook.
However, certain public bodies (including EEA states, EEA local authorities, EEA central banks and public international bodies of which one or more EEA states are a member) are exempt from this requirement to produce a prospectus when they wish to offer certain securities to the public. A different, but overlapping group of issuers is exempt from the need to make certain ongoing disclosures under the TD. At present, the exemptions from PD and TD rules apply only to issuers from EEA member states. To address this deficiency, the government plans to extend the existing exemptions for EEA public sector bodies to certain third country public sector bodies and international bodies of which a state is a member.
We are not taking this approach in relation to central banks’ ability to withhold disclosures of major shareholdings in the context of carrying out their functions as monetary authorities. Post Exit date this exemption will only be available for the Bank of England.
With respect to both EU PD and TD, the European Commission can make equivalence determinations on the basis of assessment of third countries’ regulatory or supervisory regimes. When the UK leaves the EU, the UK will no longer fall under the jurisdiction of the European Commission or regulatory procedures of the European Supervisory Authorities (ESAs). To ensure the continued operability of these regimes at the point of exit, the functions of the Commission and the ESAs in making equivalence decisions will need to be transferred to UK authorities.
In respect of the PD, HM Treasury will take on the Commission’s function of determining the equivalence of third country jurisdictions, while the FCA will adopt ESA functions of providing technical assessments of third country regimes. This transfer of functions mirrors the current split between the legislative powers of the Commission and the regulatory role of the ESAs. Existing European Commission equivalence decisions regarding the presentation of historical financial information within a prospectus will also be domesticated into UK legislation.
For the TD and the PD, HM Treasury will take on the Commission’s function of determining whether third-country jurisdictions’ accounting rules meet the necessary standards to be deemed equivalent. This determination will be made to ensure that an investor has sufficient information to make a similar assessment of the financial position of the issuer for the purpose of information provided under the TD. This will also be reflected in the PD Regulation. This assessment, and HMT decision, will be undertaken after consultation with the Department for Business, Energy and Industrial Strategy.
At present, issuers with securities admitted to trading on a regulated market in the EU are required to make use of International Financial Reporting Standards, as adopted by the EU, for their consolidated accounts. This is unless their home jurisdiction’s standards are deemed equivalent by the European Commission and the FCA has, for TD purpose, assessed the standards and granted an exemption for that jurisdiction. The Commission is empowered to determine such equivalence for third country issuers of securities under Commission Regulation (EC) No1569/2007, a delegated act made pursuant to the Transparency Directive and the Prospectus Directive.
The Government’s approach is to provide continuity, where possible, following the UK’s exit from the EU. Therefore, in a no-deal scenario, HMT 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 TD requirements and for the purposes of preparing a prospectus under the PD. This will allow issuers registered in EEA states with securities admitted to trading on a regulated market in the UK or making an offer of securities in the UK to continue to use EU-adopted IFRS when preparing consolidated accounts. Also, all issuers will be able to prepare financial accounts under EU-adopted IFRS, for financial years starting before Exit day. The UK will keep this decision under review.
More broadly, as set out in the Government’s White Paper on the future relationship between the UK and the EU, the Government intends to seek equivalence on accounting under the EU’s existing third country regimes to help provide certainty in the future.
When the UK is no longer part of the single market, it will not be appropriate for UK authorities to be unilaterally obliged to share information or cooperate with EU authorities, without any guarantee of reciprocity. As such, provisions in legislation relating to cooperation and information sharing have been removed. However, this will not preclude UK supervisors from sharing information with EU authorities where necessary. This is because the existing domestic framework for cooperation and information sharing with countries outside the UK already allows for this on a discretionary basis.
3.3 Other issues to note
In July 2017 the Prospectus Regulation (EU) 2017/1129 (PR) came into force. Certain provisions have applied since July 2017 and July 2018, with the remainder of the legislation due to apply from July 2019, after the UK leaves the EU. Though it is the Government’s intention to domesticate the remaining provisions of the PR, the EU (Withdrawal) Act will only convert EU legislation into UK law that is in force and applies immediately before exit day.
Transparency Directive and Prospectus Directive (and Prospectus Regulation)
Please note that necessary references in this SI, concerning the future adoption and use of UK adopted International Accounting Standards, have been omitted. The Department for Business, Energy and Industry Strategy (BEIS) will lay an SI that gives the UK the powers to adopt these standards at Exit. As this SI has not yet been laid in parliament (we expect it to be laid in January 2019), and therefore does not constitute existing legislation, we have been unable to make the necessary references to it in this SI. HMT has the necessary powers to make these amendments prior to Exit day, using a subsequent SI, to take account of these references.
3.4 Relevant Rulebook and Binding Technical Standard changes
The FCA will be updating its Rulebook and relevant Binding Technical Standards to reflect the changes introduced through this SI, and to address any deficiencies as a result of the UK leaving the EU. The FCA has confirmed its intention to consult on these changes in the Autumn.
Key stakeholders are those engaging with capital markets. This includes investment managers (asset managers, wealth managers, hedge funds, private equity and venture capital firms), investment banks (including advisory boutiques and brokers), professional services firms (lawyers, accountants, consultants), investors (credit institutions, pension funds, insurance firms, individuals, charitable foundations, and endowments), infrastructure firms (stock exchanges, post-trade services), and issuers (companies, banks, governments, and government agencies).
This SI seeks to replicate the current effects of the prospectus regime, transparency rules and listing rules that apply across the EU, transposed into a functioning and wholly domestic financial services regime. There will be little impact on issuers that are incorporated in the UK and admitted to trading in regulated markets in the UK. There will be some international impact, particularly in the extension of the public bodies exemption from the requirement to produce a prospectus to non-EEA countries, and the transfer of the exercise of equivalence assessments from the Commission to HM Treasury. Issuers will also no longer be able to passport prospectuses, though as prospectus exemptions will remain available to all international issuers, international issuers will continue to be able to raise capital in the UK from institutional investors through exempt offers, as they do now.
This SI does not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK Government’s Statement in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.
4. Next steps
HM Treasury plans to lay this instrument before Parliament before exit.
5. Further information
If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.