Regulation and liability

Reporting obligations

Are there any reporting obligations that are imposed after offering of debt securities? What information would be included in such reporting?

The EEA’s transparency regime (derived from the Transparency Directive) and market abuse regime (derived from the Market Abuse Regulation) impose reporting ongoing reporting obligations on the issuer during the life of the bonds. The issuer must also comply with the rules and regulations of the LSE and any additional contractual reporting obligations set out within the terms of the bonds and the transaction documentation.

The United Kingdom has implemented the Transparency Directive into UK domestic regulation via the Disclosure and Transparency Rules in the FCA handbook. The transparency regime requires all issuers to publish periodic financial information including annual reports and issuers of low denomination debt also to publish half-yearly reports. Issuers are also required to publish information related to changes to the issuer’s constitution and changes to the rights of holders.

As an EU regulation, the Market Abuse Regulation is directly applicable in the United Kingdom. The market abuse regime requires issuers to announce inside information that directly concerns the issuer and comply with a number of related record-keeping and procedural requirements. Inside information is information that is precise, not generally available, that would likely have a significant effect on the price of the issuer’s securities if it were made generally available. Inside information is further defined to mean information a reasonable investor would be likely to use as part of the basis of his or her investment decision.

Liability regime

Describe the liability regime related to debt securities offerings. What transaction participants, in addition to the issuer, are subject to liability? Is the liability analysis different for debt securities compared with securities of other types?

A prospectus may give rise to liability under a number of different civil and criminal liability causes of action under statute or common law.

There may be common law tortious liability for negligent misstatement where a person making a statement breaches the implicit duty of care owed by him or her. There may be statutory contractual liability for negligent misstatement under the Misrepresentation Act where an investor acted on an incorrect or misleading statement. Liability may also arise under the tort of deceit. FSMA also contains specific liability regimes for untrue or misleading statements in a prospectus and omissions from a prospectus.

The Fraud Act and FSMA set out a number of criminal offences related to market abuse and false representation with the intent of making a gain or causing a loss.

Given the broad range of potential causes of action, it is possible that, in addition to the issuer, the managers may be subject to liability for misleading prospectuses in certain circumstances. The liability analysis is similar for all types of securities.

Remedies

What types of remedies are available to the investors in debt securities?

The remedy available to the investor depends on the relevant head of liability. FSMA sets out a specific compensation regime payable to any person who suffers loss as a result of an untrue statement in a prospectus or the omission of information required to be included in a prospectus. If the investor is able to prove misrepresentation, he or she may be entitled to damages, the measure of damages will depend on the head of liability, typically damages in tort seek to put the claimant back in his or her original state before the tort whereas damages in contract seek to put the claimant in the position he or she would have been in had the contract been performed on its terms.

Enforcement

What sanctioning powers do the regulators have and on what grounds? What are the typical results of regulatory inquiry or investigation?

Under FSMA, the FCA has a statutory power to impose a penalty on an issuer who has contravened any provision of the FCA handbook or FSMA. The FCA may also censure any person instead of imposing a penalty upon him or her. The nature of any penalty or censure tends to be extremely fact specific and tailored to the particular circumstances at hand.

Tax liability

What are the main tax issues for issuers and bondholders?

Payments of interest on bonds may be made without deduction of or withholding for or on account of UK income tax provided that bonds carry a right to interest and the bonds are and continue to be listed on a ‘recognised stock exchange’. The LSE is a recognised stock exchange for the purposes of UK legislation.

Interest on money market instruments that have a maturity of fewer than 365 days may also be paid without withholding or deduction on account of UK income tax.

In other cases, and subject to the availability of another exemption, an amount must generally be withheld on account of UK income tax at the basic rate (currently 20 per cent) from any payments of interest on bonds that has a UK source. However, where an applicable double tax treaty provides for a lower rate of withholding tax (or for no tax to be withheld) in relation to a holder, HM Revenue and Customs can issue a direction to the issuer to pay interest to the holder without deduction of tax (or for interest to be paid with tax deducted at the rate provided for in the relevant double tax treaty).

Where interest has been paid under deduction for or on account of UK income tax, holders who are not resident in the United Kingdom may be able to recover all or part of the tax deducted under an appropriate provision in any applicable double taxation treaty.