Essential Corporate News: Week ending December 4, 2020

FCA: Primary Market Bulletin No. 32

On December 3, 2020, the Financial Conduct Authority published Primary Market Bulletin No 32 (PMB 32) to remind issuers, investors and other market participants of the changes that will take place when onshored legislation comes into force, as well as to provide an update on the FCA’s work to implement some aspects of onshored legislation.

Brexit update

The FCA points out that it is continuing to update its website with new Brexit material, including an updated version of the FCA Handbook which allows users to ‘time travel’ to a date beyond the end of the Transition Period (TP), being December 31, 2020, to see what rules will apply to them. The Handbook incorporates amendments made by all of the FCA’s Brexit-related instruments to the end of September 2020.

Short Selling Regulation

PMB 32 reiterates key messages in Primary Market Bulletin No 21 (PMB 21) on the new regulatory requirements that will need to be implemented to comply with the changes introduced by the Short Selling (Amendment) (EU Exit) Regulations 2018. It looks in particular at the new requirements for the market making exemption and gives an update on how the net short position reporting will work from the end of the TP.

Market Abuse Regulation

As discussed in PMB 21, at the end of the TP, the Market Abuse Regulation (MAR) will be converted into UK law and amendments made under the Market Abuse (Amendment) (EU Exit) Regulations (UK MAR) will take effect. UK MAR retains the same scope of financial instruments admitted to trading or traded on UK and EU trading venues. Key changes relate to Article 17 (Public Disclosure of Inside Information) and Article 19 (Managers’ (PDMR) transactions). These changes take effect from the end of the TP:

• Article 17 (Public Disclosure of Inside Information) – Issuers whose financial instruments are traded on a UK trading venue will need to notify the FCA of any delayed disclosure of inside information under Article 17(4) of UK MAR. This is regardless of any additional obligation under EU MAR to notify the delay to an EU competent authority where the issuer is registered in an EU member state or has instruments traded on an EU trading venue. Similarly, financial institutions and credit institutions that need to seek consent to delay the disclosure of inside information under Articles 17(5) and(6) of UK MAR need to notify and seek the FCA’s consent as well as notify and seek the consent of any relevant EU competent authority where that institution is registered in an EU member state or has instruments traded on an EU trading venue.
• Article 19 (Managers’ (PDMR) transactions) – UK MAR retains broadly the same requirements for persons discharging managerial responsibilities (PDMRs) of issuers and persons closely associated with PDMRs. However, PDMRs within any issuer that has requested or approved admission to trading or approved trading of its financial instruments on a UK trading venue (and persons closely associated with them) will need to send their transaction reports to the FCA under Article 19 of UK MAR. This is regardless of whether they are also required to report to an EU competent authority under EU MAR, (for example, as the issuer is registered in an EU member state).
• Article 5 (Exemption for buy-back programmes and stabilisation) – UK MAR will retain the same exemptions for buy-backs and stabilisations on UK and EU trading venues and in PMB 32 the FCA clarifies the nature of the reporting requirements for these exemptions, including when buy-back and stabilisation transactions need to be reported to the FCA.

Passporting prospectuses

As previously clarified by the FCA, prospectuses passported in to the UK before the end of the TP will remain valid in the UK until their expiry (i.e. one year from the date of the original approval of the prospectus) but it will not be possible to passport prospectuses into an EEA country after the end of the TP.

The FCA strongly encourages issuers and their advisers to arrange any passporting request with the relevant EU national competent authorities well in advance of December 31, not least because ESMA’s new prospectus register systems will change the way that national competent authorities (NCAs) send and receive passported prospectuses.

ESMA Q&A concerning the Prospectus Regulation

The FCA refers to a statement published by ESMA in September 2020 on its work on the Prospectus Q&A and states that in relation to any Q&A published by ESMA between now and the end of the TP, the FCA’s approach will be as follows: ‘We will continue to have regard to other EU non-legislative material where and if they are relevant, taking account of Brexit and on-going domestic legislation. Firms, market participants and other stakeholders should also continue to do so.’ In relation to ESMA Q&A published after the TP, the FCA will consult where appropriate in relation to the treatment of such Q&A in the UK. In relation to disclosure requirements under the Prospectus Regulation after the end of the TP for UK approved prospectuses, the FCA refers issuers and advisers to the ESMA CESR recommendations.

Takeovers, mergers or divisions: Prospectus exemptions

The FCA refers to its Technical Note (TN/602.3) in relation to these exemptions, particularly the statement; ‘Where applicable, issuers will have to submit their application for approval of an exemption document to the FCA.’

(FCA, Primary Market Bulletin No.32, 03.12.2020)

FRC: Audit Committee chairs’ views on, and approach to, audit quality

On December 2, 2020, the Financial Reporting Council (FRC) published the results of research it commissioned which involved interviews with 50 chairs of the Audit Committees of public interest entities (including FTSE 350 companies and smaller listed entities) to explore their views on, and approach to, audit quality. These views will help inform the FRC’s work to support Audit Committee’s in their work on driving high quality audits.

The FRC notes that the key theme that emerges from this research is that Audit Committee chairs have different views on, and approaches to, audit quality and the findings suggest that while some Audit Committees may be very focused on the quality of an audit, there could be inconsistencies in how they go about promoting audit quality. The FRC states that this lends weight to proposals for reforms in the audit sector, including the introduction of standards for Audit Committees.

Other key themes include the following:

• Defining a good quality audit – While most Audit Committee chairs reported measuring the quality of an audit by its assurance of the financial statements, they also frequently defined a good audit with reference to the auditors. However, it was not always clear that Audit Committee chairs distinguished between a good quality service and a good quality audit.
• Planning and executing an audit – Some Audit Committee chairs reported difficulties in assessing quality throughout an audit and it appeared that many Audit Committee chairs sought to balance this by focusing their efforts on ensuring a rigorous audit tender process and using a number of proxy measures. In terms of challenging the auditors, many Audit Committee chairs reported that this mostly happened during the planning phase of the audit. Challenge was less apparent in relation to auditors’ judgements and findings. Few Audit Committee chairs mentioned regularly challenging company management as well as the auditors and a majority suggested shareholders were not engaged in their audits. There was a feeling that shareholders were uninterested, or that audit was not readily accessible to them.
• Selecting an auditor – On average, the Audit Committee chairs started thinking about the audit tender process 12 to 18 months ahead of it starting and invited around four to five audit firms to bid. Most Audit Committee chairs cited the lead partner as the key criterion when selecting an audit firm. Another important criterion was the wider audit team. In reaching a decision on which audit firms to propose to their boards, most Audit Committee chairs said the choice of auditor was often between two Big Four firms.
• Changes in the audit sector – Audit Committee chairs wanted to see a range of outcomes from the recent reviews into the audit sector. Some supported a redefinition of audit and transforming the FRC into the Audit, Reporting and Governance Authority (ARGA). Many wanted greater transparency of the issues when audits go wrong; to learn lessons from high profile audit failures and from this, develop a better sense of what a good audit looks like. Many Audit Committee chairs said they would welcome further information and support from the FRC to help in their work on audit quality.

(FRC, Audit Committee chairs’ views on, and approach to, audit quality, 02.12.2020)

FCA: Handbook Notice No 82: Changes to DTRs and Prospectus Regulation Rules

The Financial Conduct Authority (FCA) has published Handbook Notice No 82 which sets out changes to the FCA Handbook made in October and November 2020. These include changes to the Disclosure Guidance and Transparency Rules (DTRs) and to the Prospectus Regulation Rules (PRR).

So far as the DTRs are concerned, Disclosure Guidance and Transparency Rules Sourcebook (Electronic Reporting Format) Instrument 2020 Technical Standards (Electronic Reporting Format) Instrument 2020 have made amendments to the Glossary and TP 1.2.7.

In summary, these Instruments have pushed back by one year mandatory requirements related to the European Single Electronic Format and will come into force on IP completion day as defined in the European Union (Withdrawal Agreement) Act 2020. The changes were consulted on in CP20/12 and the results of the consultation were set out in PS20/14.

In relation to the PRR, the Prospectus Regulation Rules (Amendments) Instrument 2020 has made changes to PRR 2.2, 2.3, 2.5, 2.6, 3.1 and 3.4 This Instrument ensures the copy-out of EU legislation in the PRR sourcebook accurately reflects the underlying EU legislative framework it is based on. This instrument will also come into force on IP completion day as defined in the European Union (Withdrawal Agreement) Act 2020.

(FCA, Handbook Notice No 82, 27.11.2020)