The Financial Conduct Authority (FCA), in a special Primary Market Bulletin, has published draft technical guidance clarifying the obligation on issuers to disclose, without delay, inside information arising through the production of periodic financial information.

The issue: poor practice on disclosure obligations during the pre-reporting period

As an issuer starts to prepare periodic financial information for preliminary or interim results, directors will naturally develop an increasingly clear picture of the financial position of the company. Even where that financial position of the company is at variance to market expectations, there can be a natural temptation to wait until the scheduled results announcement to prevent the drip feeding of information to the market and “losing control of the narrative”, especially if more positive developments are planned to be announced alongside the results. Equally, issuers may try to justify delaying disclosure on the basis that the information is not sufficiently “final” until the board and/or auditors have signed off on the statements.

This approach has always been inconsistent with a proper interpretation of the FCA’s disclosure framework (pre- and post-implementation of the Market Abuse Regulation (MAR) in 2016) which requires immediate disclosure of inside information to the market, save in limited circumstances. The new guidance seeks to further reinforce an issuer’s duty “to assess on an ongoing and case by case basis whether the information they hold fulfils the criteria defining inside information“.

What is inside information?

Under MAR, inside information is information of a precise nature, which has not been made public, relating, directly or indirectly to an issuer and/or its financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.

The way in which this test is interpreted means that inside information can arise much earlier than might be commonly understood

Information will be “of a precise nature” if it indicates:

• circumstances which exist or which may reasonably be expected to come into existence;

• or an event which has occurred or may reasonably be expected to occur

where the information is specific enough to enable a conclusion to be drawn as to its effect on price.

A reasonable expectation means “more than fanciful chance of occurring” or that there is a “realistic prospect” of it occurring; this threshold is definitely lower than a balance of probability test. It is not necessary to determine the quantum or direction of the resulting price movement.

Whether information would have a significant effect on price is determined by reference to a “reasonable investor” test. This means that, unless the resulting movement in price would be trivial, any information that a reasonable investor would use as part of the basis of his or her investment decisions is likely to be classified as inside information.

The FCA’s draft guidance

A starting assumption that information relating to financial results could constitute inside information

In its consultation draft on the new guidance, the FCA states that:

When preparing periodic financial reports, issuers should assess on an ongoing and case-by-case basis whether the information they hold fulfils the criteria defining inside information as set out in Article 7 of MAR. In undertaking this assessment, issuers should begin from the assumption that information relating to financial results could constitute inside information.

The FCA expects issuers to exercise judgment and to conduct this ongoing assessment in good faith. Issuers should record and be able to submit evidence of the assessment process to the FCA upon request.

It is not appropriate for issuers to take a blanket approach to the assessment of the status of the information they hold. Issuers should not consider that information to be included in periodic financial reports will always or never constitute inside information.”

When can an issuer delay inside information relating to periodic financial information?

Under MAR, issuers may only delay disclosure where each of the following three tests is satisfied:

  • immediate disclosure is likely to prejudice the legitimate interests of the issuer;
  • delay of disclosure is not likely to mislead the public; and
  • the issuer or emission allowance market participant is able to ensure the confidentiality of that information.

ESMA, the body of European securities regulators, has issued non-exhaustive guidance on what may constitute an issuer’s legitimate interests in this context. The FCA adds to this guidance by suggesting that immediate disclosure of inside information is likely to prejudice the legitimate interests of an issuer where the issuer:

“is in the process of preparing a periodic financial report and immediate public disclosure of information to be included in the report would impact on the orderly production and release of the report and could result in the incorrect assessment of the information by the public.”

In the accompanying bulletin, the FCA notes that:

We do not think – and issuers should not assume – that this interest will always be present. By its nature, this legitimate interest is limited to the situation in which the inside information emerges as part of the process of preparing a periodic financial report and is to be included in the report.”

The FCA cautions that:

In many cases, an issuer will be able to carefully and appropriately draft an announcement that will enable the correct assessment of the inside information by the public. We accept that in some cases this will not be practicable other than through publication of the full financial report.”

Delaying disclosure will not be permitted where the delay is likely to mislead the public. Again, ESMA has issued non-exhaustive guidance on the situations in which delay is likely to mislead the public. These include situations in which the inside information whose disclosure the issuer intends to delay:

  • is materially different from the previous public announcement of the issuer on the matter to which the inside information refers to; or
  • regards the fact that the issuer’s financial objectives are not likely to be met, where such objectives were previously publicly announced; or
  • is in contrast with the market’s expectations, where such expectations are based on signals that the issuer has previously sent to the market, such as interviews, roadshows or any other type of communication organized by the issuer or with its approval.

Clearly, these situations could be directly relevant to the circumstances addressed by the FCA’s guidance.

Osborne Clarke comment

In one sense, there is nothing particularly surprising or new in the FCA’s draft technical guidance. But for issuers navigating the complexities of the Market Abuse Regulation, it serves as a useful reminder of the key principles underlying the inside information disclosure regime in the context of the preparation of periodic financial information.