On 3 July 2016, the Market Abuse Regulation (MAR) will come into force. MAR is an EU Regulation which has direct effect across all EEA member states and will supersede the existing Market Abuse regime.
MAR marks a step change in the market abuse framework. Taking the form of an EU Regulation, it differs from the current regime (implemented by way of an EU Directive) in that it will apply directly in all Member States. UK legislation is therefore not required to implement MAR. However, we will have to ensure that our existing laws and regulations are compatible with MAR. This includes the FCA's handbook and the AIM rules.
FCA consultation on changes to its handbook
The FCA handbook contains various provisions, including many implementing the current UK market abuse regime, which will be replaced by, or may conflict with, the directly effective provisions of MAR. The FCA therefore needs to revise the handbook to ensure it is compatible with the new regime. The specifics of these changes are set out in the FCA's consultation CP15/35. Comments should be received by the FCA by 4 February 2016.
As MAR has direct effect, Member States only have discretion in how to implement it where the regulation specifically provides for this. MAR only provides for this in two instances which we consider below. Therefore, once MAR takes effect on 3 July 2016, the handbook will simply provide guidance on matters governed by MAR but will not take the form of binding rules as it does now. As such, most of the consultation is based on determining whether existing provisions should be:
- removed and replaced with a signpost to the relevant MAR provision,
- retained with no changes,
- retained, but conformed to make terms consistent with MAR,
- deleted, or
- replaced with new guidance.
Importantly, the consultation makes it clear that, whilst provisions of the handbook may be retained or revised so as to provide guidance, this will only be where the FCA has decided it is appropriate to do so. The handbook will therefore not be the sole source for provisions relating to market abuse, and the FCA notes that persons to whom MAR applies will need to be aware of, and comply with, all its provisions.
Three areas of the handbook will be significantly affected. These are the Code of Market Conduct (CoMC), the Model Code, and the Disclosure Rules. Key points to note are:
CoMC – the Financial Services and Markets Act 2000 (FSMA) currently provides that the FCA must issue guidance as to what constitutes market abuse. Due to MAR's direct effect, this obligation will no longer be required, and the Treasury is expected to repeal the sections of FSMA imposing the requirement. Nonetheless, the FCA believes that preserving the CoMC's content as far as possible will help the industry to understand its views and expectations about market abuse in more detail. It therefore intends to preserve the content of the CoMC as far as legally permitted.
Model Code – the FCA considers that the Model Code is partially incompatible with MAR which includes new European rules governing dealing during closed periods. However, it understands that listed companies and their advisers are keen to retain the ‘benchmark’ of the current Model Code and therefore proposes to replace it with guidance for firms to use when developing their processes.
Disclosure Rules - due to the direct applicability of MAR, the Treasury proposes to repeal the FCA's powers to make the Disclosure Rules. The FCA is proposing to remove the rules and replace them with signposts to relevant MAR provisions. The Disclosure Rules will be renamed as ‘Disclosure Guidance’.
As mentioned, MAR provides Member States with two areas where they may exercise some discretion. These relate to the timings of disclosures of inside information to the market, and thresholds in respect of disclosures by persons discharging managerial duties (or persons closely associated with them) (PDMRs). The FCA is seeking views on the alternatives available.
Disclosure of inside information
As currently, MAR requires the disclosure of inside information which directly concerns the issuer. However, disclosure may be delayed under certain circumstances and provided that certain conditions are met. These are that:
- immediate disclosure is likely to prejudice legitimate interests of the issuer,
- delay of disclosure is unlikely to mislead the public, and
- the issuer is able to keep the information confidential.
This arrangement is similar to that under the current regime as set out in rule 2.5 of the FCA's Disclosure Rules and Transparency Rules.
In the event that an issuer delays its disclosure, MAR provides Member States with two alternatives. These are that:
- the issuer must inform the competent authority about the delay and provide a written explanation of how the above conditions were met as soon as the information is disclosed to the public, or
- the issuer must provide such an explanation only if required to do so by the competent authority (notification of the delay being required after the event in all cases).
The consultation notes that the FCA’s preference is for the second option. In arriving at this conclusion, the FCA notes that, whilst there may be benefits to requiring the explanation with notifications of decisions to delay disclosure, such a requirement may be burdensome for issuers as they would have to routinely provide this information for every notification of delay. Additionally, it notes that delays of disclosure of inside information may be a common occurrence for some issuers.
In a separate consultation (CP15/38), the FCA is consulting on a proposed change to its guidance relating to when an issuer may be justified in delaying a disclosure of inside information. We report separately on that consultation elsewhere in this newsletter. The FCA notes that it will assess feedback from both consultations to ensure a consistent approach.
Disclosures by PDMRs
MAR requires PDMRs to notify certain transactions in certain financial instruments to the issuer once a threshold has been passed within a calendar year. The issuer is then obliged to make the information public and the PDMR has to notify the competent authority.
MAR introduces a de minimis threshold of €5,000 within a calendar year below which transactions need not be notified. Alternatively, it provides that a Member State may decide to increase the threshold to €20,000.
Under the current regime, we can opt to either have a de minimis threshold of €5,000 or no threshold at all. Chapter 3 of the Disclosure Rules and Transparency Rules (DTR3) sets out the requirements for disclosures of dealings by PDMRs. Under this rule, there is currently no threshold.
The FCA states that it is not aware of any specific market conditions that adequately justify setting the threshold under MAR at €20,000. It is therefore, proposing to adopt the default position of a €5,000 threshold.
To read the consultation in full click here. Comments should be made in writing to the FCA before 4 February 2016. The FCA expects to publish its final handbook provisions in a Policy Statement in Spring 2016. If you have any queries on the consultation, please contact your usual Hogan Lovells contact or one of the listed contacts.
Impact on the AIM rules
In Inside AIM, the London Stock Exchange (LSE) has published its views on the impact MAR will have on the AIM rules.
MAR disclosure obligations will apply to financial instruments admitted to all multilateral trading facilities, as well as regulated markets. Accordingly, these obligations will apply to all issuers admitted to European growth markets including AIM.
The key disclosure obligations in MAR relate to the disclosure of inside information and disclosure of deals by persons discharging managerial responsibilities and closely associated persons. MAR will also introduce mandatory closed period rules.
Rules relating to disclosures by AIM companies are contained in AIM rule 11 and the LSE has therefore been considering whether it remains appropriate to retain these following implementation of MAR. On balance, it believes that retaining a disclosure rule in the AIM Rules is important to the integrity of AIM and the maintenance of an orderly market. It also considers that the disclosure requirements of AIM Rule 11 (as currently drafted or with minor amendments) will continue to reinforce its expectations of AIM companies to provide equality of information on a timely basis, allowing investors to make informed investment decisions. It also states that retaining AIM Rule 11 should not materially change a company’s approach to disclosure compared to existing market practice.
However, the LSE does note that retaining the AIM disclosure rules will mean that AIM companies will have obligations to both AIM Regulation and the FCA, which will be the competent authority for the purposes of MAR. The LSE therefore intends to work closely with the FCA to minimise any duplication. For example, in respect of real time disclosure, it is currently envisaged that in the first instance AIM Regulation will continue to have discussions with nominated advisers and will co-ordinate with the FCA as necessary. Whilst the LSE considers that the above approach will mitigate the need for an AIM company to engage separately with two regulators in most situations, it should be noted that only the FCA, as the competent authority under MAR, will be able to opine on MAR compliance and will retain the right to engage directly with an AIM company if necessary.
The LSE notes that, whilst it has already sought views from various market participants, it will undertake a market consultation if changes to the AIM Rules are required. In the meantime, it would welcome further feedback from market participants which should be addressed to email@example.com.