The FCA’s Review of Delayed Disclosure of Inside Information

Introduction

The FCA has undertaken a review of notifications made to it in circumstances where the disclosure of inside information has been delayed under Article 17(4) of the Market Abuse Regulation (MAR). The report has provided the FCA with an opportunity to remind issuers of a number of its expectations in this area, particularly in relation to periodic and unscheduled financial information.

What is a Delayed Disclosure of Inside Information notification (DDII)?

Where disclosure has been delayed, Article 17(4) of MAR requires companies to notify the FCA following the announcement of the inside information. The FCA may also request a written explanation of how the conditions for delayed disclosure were satisfied. These are that:

a) immediate disclosure is likely to prejudice the legitimate interests of the issuer or emission allowance participant;

b) delay of disclosure is not likely to mislead the public; and

c) the issuer or emission allowance market participant is able to ensure the confidentiality of that information. 

Why was the review conducted?

The FCA conducted the review in part as a result of ESMA’s concerns in relation to the low number of DDIIs across the EU and whether this reflected an underinvestment by issuers in their inside information procedures. 

In addition, the FCA noted that DDIIs are a relatively novel requirement. The review was intended to help the FCA better understand how it has been adopted before assessing whether any more formal intervention was required.  

What did the FCA review?

The FCA reviewed 1,610 DDIIs received between July 2016 (when MAR came into force) and November 2018.  

The review was focused specifically on the number of DDIIs, the type of announcements they related to, any share price movement and the period of delay. It does not appear that the FCA conducted a more general analysis of announcements containing inside information during the relevant period (including, for example, the number of results announcements which were preceded by a trading update or other unscheduled announcement in the same timeframe). Nor does the review include any general discussion of the extent to which the FCA believed that the conditions for delayed disclosure were satisfied in respect of the DDIIs (beyond the point made in relation to Director/Board changes noted below). 

Key findings

Findings of the review include:

• The 1,610 DDIIs received during the relevant period were broken down into a number of categories, including: 
  • 159 DDIIs concerning periodic financial information (in the context of the over 10,000 announcements of periodic financial information made during the same period, the FCA considers this to be low). 
  •  49 DDIIs concerning unscheduled financial information (such as a profit warnings or trading updates). 
  • 86 DDIIs concerning Director/Board changes (although the FCA noted this was not identified in ESMA’s guidelines as a specific legitimate interest for delaying disclosure).  
• The average number of days of delay was longer in relation to unscheduled financial information (21 days) than in relation to periodic financial information (17 days). The FCA had expected this to be the other way round for the reasons noted below.

Summary of FCA commentary on findings

The FCA is concerned that some issuers may not be identifying inside information early enough or, alternatively, be unaware of (or failing to comply with) the requirement to notify the FCA where the disclosure of inside information has been delayed.   

The FCA reminds issuers that the starting assumption in relation to periodic financial information is that this could be inside information (see further detail in Technical Note 506.2 Periodic financial information and inside information). However, comments in the review would appear to suggest that issuers could face scrutiny where the conclusion reached is that no inside information exists (particularly where there is a significant price movement post announcement), thereby highlighting the importance of contemporaneous records (see further below).    

The FCA expected to see a greater volume of DDIIs in relation to periodic financial information, given that it has issued guidance that delaying disclosure of information to be included in a periodic financial report may be in a company’s legitimate interests in certain circumstances (again, see Technical Note 506.2). It also expected the period of delay in relation to this category of information to be lengthier, given such information is potentially available to the company for a longer period (for example, in the case of the year end process financial information may be available for several weeks before announcement). Whilst it acknowledges that an alternative explanation for the relatively low number of DDIIs in relation to scheduled financial information is that issuers are disciplined in terms of identifying inside information and expediting its announcement, the FCA appears sceptical on the basis that, in its view, this would have led to a greater volume of DDIIs in relation to unscheduled financial information unless (which appears unlikely) such information was disclosed “intraday”.  

By way of contrast, the FCA expected to see a lower volume of DDIIs in relation to unscheduled financial information given the absence of a specific legitimate interest in relation to this category of information in guidance issued to date and the fact that, due to the nature of the information, the FCA considers issuers would “have little grounds to delay disclosure.” Further, whilst a short delay is contemplated under the DTRs where an issuer is faced with an unexpected and significant event, the FCA was not expecting such a large average delay. 

The FCA will be undertaking further monitoring in this area.

What should issuers do next?

The commentary in the review indicates that issuers can expect scrutiny from the FCA in relation to judgements around whether inside information exists, particularly in the context of processing periodic financial information. Whilst we consider that the commentary stops short of requiring a change in market practice, companies will need to give careful thought to these decisions and ensure that they document the rationale contemporaneously in order to be in a position to explain the view reached in the event of subsequent challenge.

In addition, issuers should consider:

• Whether to seek advice regarding disclosure of inside information and any delays.
• Whether staff receive sufficient training and guidance on the process and decision making.
• Whether appropriate information provision and governance arrangements are in place.
• Whether procedures could be improved for the identification, handling and disclosure of inside information.
• Whether, in the event that inside information disclosure has been delayed, conditions for delay continue to be met and the issuer can ensure confidentiality of information.

It is clear that market disclosure is an area of focus for the FCA, particularly since the outset of the pandemic  (see our previous articles on Market Watch 63: Market Abuse Regulation: UK FCA sets out expectations of market conduct in light of COVID-19, the heightened risk of market abuse in a remote working context and subsequent follow up article) and we expect to see an increase in enquiries, investigations and enforcement around the identification of inside information and decisions made in relation disclosure and/or delayed disclosure. 

How we can help?

We have extensive experience of advising companies on their disclosure obligations under MAR and on internal policies and procedures in this area, and regularly provide training (including refresher training) on this topic to boards and disclosure committees. 

We also advise companies in relation to FCA investigations and disciplinary matters, including in relation to disclosure issues and so we are well placed to provide input as to the FCA’s approach and expectations.