Summary of the changes
On 26 November 2015, the UK completed the implementation of the Transparency Directive Amending Directive. This has entailed amendments to the Financial Services and Markets Act 2000 (FSMA) and to the Disclosure and Transparency Rules (DTRs). Key changes include:
- a new power for the Financial Conduct Authority (FCA) to apply to court for an order suspending the voting rights of shares, for serious breach of the major shareholdings notifications regime;
- a requirement for the FCA to publish information on the type and nature of breaches of the transparency regime, together with the identity of the person sanctioned, subject to a discretion to publish anonymously in certain circumstances;
- extending the deadline for publishing half-yearly financial reports from two to three months after the end of the reporting period;
- increasing the period during which half-yearly financial reports must remain publicly available from five to ten years;
- a new exemption from the notification obligations for voting rights attached to shares that have been acquired for stabilisation purposes; and
- removing the exemption for stock lending, so that it must be disclosed by both lender and borrower at the 5%, 10% and higher thresholds required by the Transparency Directive.
Background and consultation
The Transparency Directive was designed to implement a common basis for the reporting by issuers of periodic information, notifications relating to major shareholders and the dissemination and storage of regulated information. Following a European Commission review, the Transparency Directive Amending Directive ((2013/50/EU) (TDAD) came into force on 26 November 2013. One of its main purposes was to put in place a minimum standard harmonised approach across Member States to sanctions imposed for breaches of relevant transparency rules.
The UK opted for early implementation of two aspects, which were the requirement for companies in certain sectors to report on payments to governments (DTR 4.3A) and the removal of the requirement to publish interim management statements (old DTR 4.3).
As noted in Rosie Graham’s article earlier this year (‘Implementation of the Transparency Directive Amending Directive’), HM Treasury and the FCA published a joint consultation paper (CP15/11) in March on implementing the remaining aspects (https://www.fca.org.uk/your-fca/documents/consultation-papers/cp15-11). The consultation paper also outlined some other changes to the DTRs that the FCA considered appropriate in order to ensure proper regulation of the market.
HM Treasury and FCA response and amendments
In October, HM Treasury published a statutory instrument amending FSMA for the suggested changes to that Act outlined in the consultation paper: the Transparency Regulations 2015 (SI 2015/1755) (Transparency Regulations) (http://www.legislation.gov.uk/uksi/2015/1755/pdfs/uksi_20151755_en.pdf).
HM Treasury and the FCA published a policy statement (PS15/26) summarising the responses received on the consultation paper on 6 November (Policy Statement) (available at http://fca.org.uk/your-fca/documents/policy-statements/ps15-26). Overall, most respondents agreed with the suggested changes. The key amendments are described below.
The Transparency Regulations and the Policy Statement confirm that the relevant changes to FSMA and the DTRs will be effective from 26 November 2015 i.e. the final date for implementation of the TDAD.
On 22 October 2015, the European Securities and Markets Authority (ESMA) issued a revised version of their Questions and Answers document in relation to the Transparency Directive pending the entry into the force of the Directive as amended (http://www.esma.europa.eu/system/files/esma-2015-1595_document_qas_on_td.pdf).
Key amendments to FSMA
Voting rights suspension
The Transparency Regulations have inserted a new provision into FSMA allowing the FCA to apply to court for a voting rights suspension order against a “voteholder” regarding shares in a company which are admitted to trading on a regulated market (note, therefore not including AIM) where that voteholder has breached the significant shareholder notification regime (new section 89NA FSMA, transposing Article 28b(2) of the Transparency Directive pursuant to the TDAD).
All respondents to the consultation paper agreed that this new power should only be capable of being used by the FCA for the most serious breaches. New section 89NA sets out a non exhaustive list of criteria to which the court may have regard in considering the gravity of non compliance by a voteholder and in deciding whether to grant a voting suspension order:
- whether the contravention was deliberate or repeated;
- the time taken for the contravention to be remedied;
- whether the voteholder ignored warnings or requests for compliance from the FCA;
- the size of the holding of shares to which the contravention relates;
- any impact of the contravention on the integrity of the UK financial system; and
- the effect of the contravention on any company merger or takeover.
Extension of the range of persons to whom sanctions may be applied
Another notable amendment to FSMA (effected by changes to sections 91 (penalties for breach of transparency rules) and 97 (appointment by FCA of persons to carry out investigations)) allows sanctions to be applied not only to directors, but also other similar officers and, if the affairs of an entity are managed by its members (as would be the case with e.g. a limited liability partnership), against a member of the entity. This is to implement amended Article 28(2) of the Transparency Directive, which requires that sanctions can be applied to “the members of administrative, management or supervisory bodies of the legal entity concerned and to other individuals who are responsible for the breach under national law”.
FSMA itself, as amended pursuant to the changes made by the Transparency Regulations, uses its own term of “relevant officer”, defined as a director or “similar officer”, or “if the affairs of the person are managed by its members, a member of the person”. At the time of writing, no guidance is provided as to the meaning of “similar” or as to when a person is managed by its members; the latter would obviously capture members of limited liability partnerships, but perhaps is also broad enough to be capable of being construed so as to apply to a controlling shareholder of an issuer.
Requirement to publish information about breaches
Other changes to FSMA include a new section 391B which requires the FCA to publicly release “information on the type and nature of the breach” of any transparency rules pursuant to the Transparency Directive regime, together with “the identity of the person on whom the sanction or measure is imposed”, subject to a discretion that allows the FCA to moderate the timing or anonymise such disclosure where to do otherwise would “seriously jeopardise the stability of the financial system or an ongoing official investigation or would cause disproportionate and serious damage to the persons involved”.
Key changes to the DTRs
Publication and availability of financial reports
The TDAD has extended the deadline for publishing half-yearly financial reports from two months to three months after the end of the period to which the report relates. DTR 4.2.2R(2) is being amended to reflect this change. Issuers will have to keep annual financial reports and half-yearly financial reports publicly available for ten years, rather than five years. DTR 4.1.4R and DTR 4.2.2R(3) are being amended to reflect this change.
The TDAD has created a new exemption from the voteholder notification obligations for voting rights attached to shares that have been acquired for stabilisation purposes. This is reflected in a new DTR 5.1.3R(7).
Draft amendments to the issuer’s constitution
The TDAD removes the requirement for issuers to communicate draft amendments to their constitution to the competent authority and the market, because this is covered by the Shareholders’ Rights Directive. DTR 6.1.2R, which required issuers to communicate draft amendments to articles to the FCA and the market, has been deleted.
DTR 5 has been amended to require borrowers and lenders under a stock lending contract to disclose their respective transactions at the 5%, 10% and higher thresholds required by the Transparency Directive. This does not arise from the TDAD but follows ESMA guidance in 2014 suggesting that stock lending transactions should be included in the disclosure requirements.
Client-serving intermediary exemption
The UK regime already required disclosure contracts for differences and other financial instruments with a similar economic effect to qualifying financial instruments. The TDAD has now introduced this requirement at EU level. As the UK regime was “super-equivalent”, few changes have been required, but as the TDAD does not provide for a stand-alone exemption from the disclosure requirements for client-serving intermediaries, DTR 5.3.1R(2) and all other related provisions have been deleted.
Home member state notification
The FCA has published a standard form for issuers to use when notifying it of their home member state in accordance with the revised requirements of DTR 6.4 which came into effect on 26 November 2015. The FCA:
- asks issuers who have a choice of home member state but who have not yet notified it of their choice to do so by 26 February 2016 using the standard form;
- requested issuers incorporated in a member state who do not have a choice of home member state to inform the FCA of their home member state by 26 November 2015 (if they have not already done so); and
- asks all existing issuers to update their home member state notifications using the revised form, as it seeks more detail than was formerly requested.