On 17 March 2020, the Financial Conduct Authority published a special Covid-19 edition of the Primary Market Bulletin (PMB). PMBs are the means by which the FCA communicates commentary on market obligations to issuers and market participants. Consistent with the rapidity with which the situation is developing, the FCA states its intention to keep under consideration the matters reported on in the PMB and keep the relevant information updated.
The FCA reports that its core focus at this time is to ensure consumer protection and orderly functioning capital markets and the PMB certainly makes it clear that the FCA is not currently minded to make concessions at this stage in relation to issuers’ reporting and transparency obligations. The PMB covers six areas: ongoing disclosure under the Market Abuse Regulation (MAR), market volatility and suspension of trading, transaction notifications, delays in corporate reporting, shareholder meetings and corporate transactions and admissions. This Law Now considers each of these in turn.
In addition, the Financial Reporting Council (FRC) has published 'Guidance on audit issues arising from the covid 19 pandemic' and 'Advice on Coronavirus risk disclosures', setting out the FRC’s views on how auditors and companies can or should fulfil their reporting obligations at this time. These publications indicate that, like the FCA, the FRC is focussed on ensuring companies and auditors adequately focus on meeting their obligations, including any specific disclosures of risks posed by the pandemic, during this period, rather than on offering any relaxation of deadlines or content requirements in light of logistical challenges. The FRC advice is considered below under “Delays in corporate reporting”.
Both the FCA and the FRC very much set a “business as usual” tone when it comes to issuers complying with their regulatory and reporting obligations. Both supervisors note the speed with which the situation is developing and leave the door open to a further review of the position, but we think any future relaxation of the rules will be limited in scope in order to maintain market confidence. This is somewhat in contrast with the Companies House approach announced on 11 March 2020 that companies which are unable to file their accounts on time due to coronavirus issues can notify Companies House accordingly and will not be fined as a result.
Ongoing disclosure under the Market Abuse Regulation (MAR)
There is no change to issuers’ obligations with respect to ongoing disclosure under MAR and related rules. The PMB alerts issuers to the fact that, in some cases their own operational response to the pandemic may meet the requirements for disclosure under MAR. Notwithstanding challenges in the convening and operation of disclosure committees, issuers are expected to make every effort to meet their disclosure obligations in a timely fashion albeit the FCA, somewhat reassuringly, acknowledges the possibility of slight delays as new processes are put in place. We would suggest that, if not already done, Boards and disclosure committees should put in place regular reviews to assess whether the pandemic has or may have any business impact that requires disclosure to the market. As always, issuers should seek advice from their brokers and lawyers in cases of doubt.
Market volatility and suspension of trading
In line with its stated aim of maintaining open and orderly markets, the FCA signals that it will continue to consider requests from issuers to suspend trading according to the FCA’s assessment of risks to the smooth operation of the market and the risk of harm to investors. The FCA will challenge the need for suspension where it thinks the situation is more appropriately addressed by an announcement to the market. The clear implication is that the mere fact of business disruption and uncertainty is unlikely, of itself, to justify a request for suspension, and issuers should ensure they have thoroughly examined the justification for this.
Issuers who, notwithstanding the above, think a request for suspension of listing is required to prevent a disorderly market, or to protect investors, should contact the Primary Market Monitoring team emergency line on 020 7066 8354, or by email to [email protected].
Unsurprisingly, the PMB sets out the FCA’s expectation that persons discharging managerial responsibilities (PDMRs), and ‘persons (who are) closely associated’, should continue to meet their notification requirements under MAR within the prescribed time frame.
Delays in corporate reporting
Given the timing of the pandemic has coincided with peak reporting season, issuers and indeed auditors had perhaps hoped for some concessions on deadlines for reporting periods. If they did, the PMB and the FRC advice will be disappointing.
The PMB reiterates the regulatory timeframes for issuers to publish their annual (4 months after the financial year-end) and interim (3 months after the end of the period) financial results and notes that from the FCA’s perspective, these remain unchanged. The PMB sets out the FCA’s expectation that issuers will put in place contingency plans to minimise the impact of logistical issues on meeting these deadlines for upcoming reporting periods – for example, consideration of whether there are non-essential parts of annual reports and the reporting cycle that could be deprioritised. Reading between the lines, we infer that issuers might consider deprioritising the design aspects of their annual reports.
An issuer that does not believe it is able to meet its continuing obligations should take appropriate advice and contact the FCA to discuss the issues. Issuers should also engage with their auditors, who should contact the FRC, as appropriate.
In a glimmer of hope for those particularly badly impacted by the pandemic, the PMB does state that the FCA will keep this area under review, and liaise closely with the FRC and the Department for Business, Enterprise and Industrial Strategy.
The FRC advice to companies and auditors on risk disclosures focusses on ensuring that companies have given sufficient thought to, and made sufficient disclosures about, the possible impact of COVID-19 on their business in their reporting of principal risks and uncertainties, as well as considering the impact on the carrying value of assets and liabilities and whether additional impairment tests need to be performed or leases be assessed to determine whether they have become onerous. For December year-end reporting companies, these events would be likely to represent non-adjusting post balance sheet events as at 31 December 2019, given that, at that date, few cases had been confirmed and the virus only just identified. However, for companies with later reporting dates, year-end balances might be affected.
The FRC guidance on audit issues is principally aimed at auditors and the issues and challenges they need to consider and overcome in order to be able to sign off on audits, particularly for companies with a 31 December 2019 reporting date. From a company perspective, the FRC asks auditors to engage with their audit clients to ensure that: (1) the auditor sets clear expectations as to the level of disclosure they expect to see in annual reports to communicate the impact and risk of COVID-19 on the company; and (2) companies, and in particular their audit committees, understand that auditors must have sufficient time and support to carry out their work to an appropriate standard, including reassessing work done to reflect changed circumstances . The FRC notes that in some cases, this may need companies to reconsider their reporting deadlines. How this fits in with the FCA’s statement that regulatory deadlines remain unchanged is not clear. Again, companies may need to consider whether some of the design elements of the annual reporting cycle can be deprioritised for the current cycle.
Noting that the rules on Annual General Meetings and other General Meetings are determined by the Companies Act 2006, companies' own articles of association, and/or relevant home state legislation, the PMB has little on say on shareholder meetings other than that the FCA supports the effective exercise of the rights of shareholders, while recognising that as a result of coronavirus this may need to involve the use of virtual methods. This is particularly relevant in the premium listing category, where various FCA rules require issuers to engage with shareholders on certain matters.
For further information on Annual General Meetings at this time, see our Law Now here.
Corporate transactions and admissions
The FCA reassures issuers that it will continue reviewing documentation for corporate transactions in line with established principles. Issuers looking to carry out urgent transactions should, in the first instance, engage with their relevant sponsor firm or adviser.