This article was written by Tim Dolan (partner), Charlotte Collins (professional support lawyer) and Edmund Tyler (professional support lawyer).
What is happening?
On 3 July 2016, the Market Abuse Regulation (Regulation (EU) No 596/2014) (MAR) will take effect in the UK and across Europe, repealing and replacing the existing Market Abuse Directive (Directive 2003/6/EC) (MAD). MAR will broaden, and to an extent strengthen, the current EU market abuse regime; it aims to bring the regime up to date and was developed in parallel with the revised Markets in Financial Instruments legislative package, MiFID II, to ensure consistency in the scope of EU markets legislation.
Because MAR takes the form of a regulation rather than a directive, Member States have very limited discretion as to how they implement MAR domestically; one specific aim of the reform is to create a more harmonised market abuse regime across the EU. Although this means that extensive UK implementing measures are not required, MAR will result in substantive changes to UK legislation, and regulatory rules and guidance, to ensure that nothing in the UK regime is inconsistent with MAR. The practical impact is that market participants need to be prepared for changes to the location of the rules, as well as their content.
What are the key changes?
MAR aims to address some key problems identified since the implementation of MAD (which was implemented in the UK in July 2005). In particular, MAR will:
- extend the scope of the regime to cover new markets (such as multilateral trading facilities, including AIM in the UK, and organised trading facilities), additional financial instruments (such as emission allowances and related auctioned products) and trading strategies (such as algorithmic and high frequency trading). In particular, the new regime will capture insider dealing in relation to spot commodity contracts, and abusive behaviour that affects spot transactions that have an impact on commodity derivatives;
- introduce an expanded definition of “inside information”. While MAR retains the proviso that inside information is information that would be likely to have a significant effect on the price of a financial instrument, it goes on to say that such information is information which a reasonable investor would be likely to use as a basis for his or her investment decisions;
- extend the application of the market manipulation offence to capture attempted manipulation. MAR also brings benchmarks and (in some circumstances) spot transactions within scope of the manipulation offence;
- require issuers to have decision-making and record-keeping procedures where they delay announcing inside information in accordance with MAR and, upon announcing the information, to notify the regulator of any delay and explain how this complied with MAR (although Member States can specify that issuers need only provide an explanation if the regulator requests);
- formalise the process that should be used for “market soundings” (when, for example, an issuer or its representative discusses a potential transaction with prospective investors) and the process that should be followed before disclosing inside information in the context of a market sounding;
- clarify the rules on the use of Chinese walls, specifying that a person who makes a decision to deal will not be guilty of insider dealing if the person who has inside information is on the other side of an effective Chinese wall;
- harmonise the requirements for insider lists, requiring issuers and emission allowance market participants to prepare and maintain lists using prescribed data fields (which is intended to reduce the administrative burden of needing to draw up lists which comply with different specifications in different Member States, but will result in more prescriptive content than currently required). Issuers must also take all reasonable steps to ensure that those on insider lists acknowledge in writing the legal and regulatory duties this entails;
- shorten the time within which persons discharging managerial responsibility (PDMRs) and their close associates must report dealings in their company’s shares or derivatives to the company and to the appropriate regulator to three business days. Issuers must announce the dealing within the same period. MAR also extends the obligation to report to dealings by an investment manager on the PDMR’s own account and other areas such as inheritance and gifts, as well as dealings in a wider range of investments, including emissions allowances, debt securities and global depositary receipts. There will, however, be an annual de minimis threshold so only PDMRs who exceed the threshold must report in that year. There will also be a new EU-wide standard form for notifying dealings by PDMRs and their close associates;
- prohibit dealings by PDMRs during a “closed period” of 30 days before the issuer publishes its formal interim or year-end reports, with limited exceptions. As it currently stands, MAR will reduce the periods during which PDMRs can deal, as the publication of preliminary results will not end a closed period;
- revise the existing framework for conducting buy-back programmes and undertaking stabilisation measures, and extend the obligation to report suspicious transactions to include suspicious orders; and
- include enhanced supervisory, investigatory and civil enforcement powers that national regulators must have, and place greater obligations on ESMA to co-ordinate the investigatory work and enforcement action conducted by national regulators.
To the extent that provisions in MAR refer to certain new terms which are defined under MiFID II (organised trading facilities, small and medium-sized enterprise growth markets, and emission allowances or auctioned products based thereon), the application of those provisions to these new concepts will be tied to the implementation date for MiFID II (which is being postponed to 3 January 2018).
What is happening in the UK?
FCA and UK government approach
As mentioned above, it has been necessary for the UK authorities to consult upon extensive changes to UK legislation, and regulatory rules and guidance, to ensure that nothing is retained which is inconsistent with MAR. In November 2015, the FCA launched two consultations on changes to its Handbook as a consequence of MAR (CP15/35 and CP15/38), and HM Treasury made available for comment a draft statutory instrument containing proposed changes to UK legislation. In April 2016, the FCA launched a further consultation on changes to its Decision Procedure and Penalties Manual and the Enforcement Guide (CP16/13) and published its Policy Statement providing feedback and final rules in relation to the matters consulted on in November 2015 (PS16/13).
Most notably, the proposed amendments to legislation include deleting most of the market abuse provisions in Part 8 of the Financial Services and Markets Act 2000 (including the removal of the FCA’s power under section 119 to make a code giving guidance on whether or not behaviour amounts to market abuse, currently the Code of Market Conduct), adding in new provisions to Part 8 relating to the FCA’s supervisory and enforcement powers, and removing the FCA’s powers in Part 6 to make the Disclosure Rules.
There are two main areas under MAR where the FCA does have discretion:
- The first relates to the obligation under MAR for PDMRs and their close associates to disclose dealings. MAR introduces a threshold of €5,000 (without netting) of transactions per calendar year; once this threshold is reached, all subsequent transactions must be disclosed (currently in the UK there is no threshold). While MAR permits national regulators to increase this threshold up to €20,000, the FCA has decided not to raise the threshold. The FCA notes that ESMA is considering how to deal with currency conversion issues when applying this threshold. The FCA has confirmed that PDMRs can continue to disclose all transactions if this is more convenient.
- The second relates to decisions by issuers and emission allowance market participants to delay the disclosure of inside information. Under MAR, upon announcing inside information issuers must notify the regulator of any delay, but the FCA may decide whether to require issuers always to provide an explanation for the delay, or to do so only upon request by the FCA. The FCA has decided that it will only require an explanation on request (although issuers will still need to ensure that they follow the procedures and record-keeping requirements under MAR in order to be able to meet these requests).
Key changes to the FCA Handbook
There will be substantial changes to the FCA Handbook to ensure compatibility with MAR, resulting in the loss of most of the FCA’s rules and large amounts of guidance. Key changes include:
- changes to the Code of Market Conduct. The FCA will no longer have a statutory power to issue the guidance contained in the Code, but will preserve part of the content of the Code as far as legally possible;
- deleting the Model Code in its entirety (the FCA’s original proposal to replace the Model Code with guidance for firms to use when developing their processes to allow PDMRs to apply for clearance to deal will not be implemented; however, the FCA has said it would support an industry-led development of a share dealing code or best practice); and
- replacing the Disclosure Rules with “Disclosure Guidance” which will include signposts to MAR.
The FCA has decided not to “copy out” sections of MAR into the Handbook, but rather to include “signposts” to relevant provisions (which unfortunately will not link directly to those provisions). There will not be signposts to the relevant MAR recitals as these are not legally binding. As a result, market participants will need to familiarise themselves with MAR and the related EU subordinate legislation and guidelines. As of 3 July 2016, this will be the primary authority on the civil market abuse regime in the UK, supplemented in part only by FCA guidance and UK legislation. Market participants need to be prepared for this significant change and ensure they are aware of where to look for source material post 3 July.
The FCA’s second Policy Statement is due in June and the changes to the Handbook will take effect from 3 July 2016. As many of the implementing measures at an EU level have not yet been finalised, the FCA will need to add cross-references into its Handbook material in due course, and may also need to reassess some of its Handbook provisions in light of the final EU measures, which may require further consultation. The FCA has also indicated that it may in future consult on new guidance to address queries on the interpretation of certain aspects of MAR raised during the consultation process (listed in Chapter 4 of PS16/13), if it considers this appropriate.
One area where the FCA has sought to provide clarity for market participants is in relation to suspicious order and transaction reporting. As the relevant Level 2 measures are not yet finalised, the FCA has indicated on its website what its supervisory approach will be, and what it will expect of market participants from 3 July 2016, in light of the fact that it may not be possible for market participants to have fully effective surveillance in place to meet the eventual requirements from this date.
MAR will apply to AIM companies, with its main impact being on the rules governing announcing information to the market and dealings by directors and senior management. Key changes that the London Stock Exchange is proposing to make to the AIM Rules for Companies include:
- AIM companies must continue to announce price sensitive information in line with the current AIM Rule 11, as well as complying with the MAR obligation to announce inside information as soon as possible. Compliance with one rule will not automatically mean the other rule is satisfied. AIM says that "inside information" under MAR has a specific and technical definition, whereas AIM Rule 11 involves principles-based considerations in the context of maintaining fair and orderly markets.
- The MAR rules on reporting dealings by PDMRs and their close associates and the restrictions on dealing during closed periods will replace the equivalent regime in the AIM Rules, but an AIM company must also have in place a “reasonable and effective dealing policy”.
The changes that MAR makes to the UK civil market abuse regime will not affect the separate UK criminal offences of insider dealing and disclosure of inside information under the Criminal Justice Act 1993, or offences relating to the publication of misleading statements and benchmarks under the Financial Services Act 2012. For the time being, the UK has elected not to opt into the EU Directive on criminal sanctions for market abuse (Directive 2014/57/EU), which other EU Member States must implement by 3 July 2016 – this requires that serious cases of market abuse, such as insider dealing, market manipulation or unlawful disclosure of inside information committed with intent, constitute criminal offences.
There are separate plans to review the sanctions that apply under the UK criminal regimes, and changes also may be made to penalties in light of the Bank of England’s Fair and Effective Markets Review Final Report (published in June 2015), which recommended that the maximum sentence in the UK for both insider dealing and market manipulation should be extended from seven to ten years, in line with other fraud and bribery offences. The Final Report also recommended that a new statutory civil and criminal market abuse regime should be created in the UK for spot foreign exchange, which could allow for the possible extension to other over the counter fixed income and commodities markets outside the scope of MAR.
It is expected that the Fair and Effective Markets Review progress report, due in July 2016, will indicate whether and how the above recommendations will be taken forward.
What should I be doing prior to implementation?
Market participants should be preparing as far as possible for the 3 July 2016 implementation date, while remaining mindful of the fact that certain elements of the regime are still to be finalised.
Companies already within scope of the market abuse regime, and those currently subject to equivalent regimes such as AIM companies, should review and update their policies and procedures (including record-keeping arrangements) to ensure compliance with MAR. This should include, in particular, those which address:
- control of inside information, its announcement to the market, and decisions to delay announcements – to comply with the new procedures and record-keeping requirements;
- insider lists – to comply with the new standard formats (companies should also check that their advisers are doing the same) and the requirement for those on insider lists to acknowledge their obligations in writing;
- market soundings – to comply with the procedural and record-keeping requirements for the new safe harbour; and
- PDMR dealing and reporting – to adopt the new standard form for reporting transactions, and amend the share dealing code to address, among other things, the new €5,000 threshold, the time period for announcement, permitted dealing windows, and the exceptional circumstances when dealings can be permitted during closed periods.
Companies will also need to provide training to directors, other PDMRs, insiders and other relevant employees on their obligations under MAR and the consequent changes to internal policies and procedures. Compliance officers and in-house lawyers will need to be able to advise comfortably on the regime using the new source material and, in many cases, in the absence of the FCA guidance that they may have been using to support their analyses for many years.
Please contact us if you require advice in relation to MAR and its implementation and we would be happy to assist.