A significant portion of the law and regulation applicable in the United Kingdom (the "UK") pre-Brexit is derived from the European Union ("EU"). In order to avoid confusion and gaps in UK law when Brexit takes effect and EU law will otherwise cease to apply in the UK (currently scheduled for "exit day," 11:00 pm on March 29, 2019), the European Union (Withdrawal) Act 2018 (the "EUWA") aims at preserving UK legislation that implements EU obligations and converting directly applicable EU legislation into domestic law (so called "on shoring").
If the withdrawal agreement negotiated between the UK government and the EU is approved by the UK Parliament and comes into effect, an implementation (or transition) period will apply from exit day until the end of December 2020. During that time, EU law will remain applicable in the United Kingdom, notwithstanding that the United Kingdom will no longer be an EU member state. The implementation period should enable the on shoring process to happen smoothly, taking into account any subsequent agreement reached as to the future relationship between the United Kingdom and the European Union.
If that approval is not forthcoming and the Article 50 notice is not extended or withdrawn, a "no deal Brexit" will occur on March 29, 2019 without the benefit of an implementation period. The Statutory Instruments ("SIs", a form of secondary legislation) described in this note are being brought into effect to address that possibility. They are being promulgated by Her Majesty's Treasury ("HMT") pursuant to powers in the EUWA for ministers to pass secondary legislation to ensure that retained EU law functions effectively when the United Kingdom leaves the European Union on March 30, 2019.
Accordingly, the SIs described below represent, at this stage, a contingency against a scenario in which the implementation period, which has been agreed as part of the United Kingdom's withdrawal agreement with the European Union, does not take effect on March 29, 2019.
In general terms, HMT's approach (and that of the UK's Financial Conduct Authority (the "FCA") and Prudential Regulatory Authority (the "PRA"), which have confirmed that they will follow the same path) is not to rely on any new or specific arrangements being in place between the United Kingdom's and the European Union after Brexit, but to treat EU member states as third (non-EU) countries pursuant to the UK's existing financial services legislation. So, for example, the draft Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018 make a number of changes to the UK's existing Financial Services and Markets Act 2000 ("FSMA") and Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, such as (i) changing the territorial scope of the legislation from the European Union to the United Kingdom, (ii) modifying definitions that relate to third-country activities or entities so that they cover entities from the European Union, (iii) revoking so called "passporting rights" (in summary, the rights of entities in the European Union to notify the permissions granted to them by their home member state regulators to undertake regulated activities and, thereby, undertake such regulated activities in the United Kingdom without the further permission of the FCA or, as the case may be, the PRA) and (iv) transferring functions of the European Securities and Markets Authority ("ESMA") to the relevant United Kingdom regulator – be it the FCA or the PRA – and the functions of the European Commission to HMT.
OFFERS OF SECURITIES AND LISTING OF SECURITIES IN THE UNITED KINGDOM
Currently, pursuant to Article 3 of Directive 2003/71 (EC) (as amended, the "Prospectus Directive"), member states of the European Union shall not allow an offer of securities to be made to the public within their territories or admission of securities to their respective regulated markets without, in each case, the publication of a prospectus that is either approved by the competent authority of the relevant member state or approved by the competent authority of another EU member state and passported into the relevant member state under the "mutual recognition" regime for EU prospectuses set out in the Prospectus Directive.
The Prospectus Directive has been transposed into UK law by FSMA so, for example, pursuant to section 85(1) of FSMA it is unlawful for transferable securities to be offered to the public in the United Kingdom unless an approved prospectus has been made available to the public before the offer is made.
Regulation 2017/1129 (the "Prospectus Regulation") was adopted by the European Council on May 16, 2017, with certain of its private placement exemptions applying from July 21, 2017 and July 21, 2018, respectively, and the remainder of the Prospectus Regulation due to apply across the European Union from July 21, 2019 – so, after the United Kingdom leaves the European Union. Because on shoring under the EUWA only applies to European Union law in force as at exit day, the parts of the Prospectus Regulation that are not then in force (which comprises most of the substantive aspects of the Regulation) will not apply in the United Kingdom pursuant to the EUWA.
HMT intends, however, to use the EUWA powers to domesticate the remaining provisions of the Prospectus Regulation as part of its approach to on shoring financial services legislation. Accordingly, HMT published on November 21, 2018 guidance on its proposed "Draft Official Listing of Securities, Prospectus and Transparency (Amendment) (EU Exit) Regulations 2019,"4 which will replicate in the United Kingdom the European prospectus, transparency, and the listing regime that will apply across the European Union post-Brexit. In addition, the SI will:
- require issuers wishing to offer securities to the public in the United Kingdom or have securities admitted to trading on the London Stock Exchange's regulated market to seek approval of their prospectuses by the FCA;
- provide that prospectuses "passported" into the United Kingdom prior to March 30, 2019 will be grandfathered for use in the UK until their validity expires but, that, from March 30, 2019, pass porting of prospectuses approved by the regulators of the 27 EU member states will no longer be permissible (an additional approval of such prospectuses by the FCA will be required); and
- ensure that EU issuers are treated in the same manner as any other third-country issuer in terms of the private placement exemptions available to them from the requirement to publish a prospectus.
OFFERS OF PACKAGED RETAIL AND INSURANCE-BASED INVESTMENT PRODUCTS TO UK RETAIL INVESTORS
Regulation (EU) 1286/2014 (as amended, the "PRIIPs Regulation") requires a key information document ("KID") to be issued and distributed to retail investors in the European Union when packaged investment or insurance-based investment products ("PRIIPs") are offered and sold to them.
HMT has published a draft version of the "Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019,"5 accompanied by an explanatory note. The SI corrects deficiencies in (a) the directly applicable PRIIPS Regulation (and its secondary legislation) and (b) the U.K. Packaged Retail and Insurance-based Investment Products Regulations 2017 No. 1127 (which implement the PRIIPs Regulation in the United Kingdom) that are, in each case, to be retained on Brexit. The draft SI:
- narrows the scope of the PRIIPs Regulation so that it applies only to those UK or third-country firms that manufacture, advise on or sell PRIIPs to investors in the United Kingdom (post-Brexit, UK firms that manufacture, advise on or sell PRIIPs to investors in the European Union or another third-country will not in doing so be subject to the UK PRIIPs regime, but will be subject to the PRIIPs Regulation or relevant third-county regulations);
- ensures that, after Brexit, the United Kingdom treats EU member states in the same way as other third countries in relation to the existing exemption under the PRIIPs Regulation from the requirement to prepare and distribute a KID for certain products that are outside the scope of the Prospectus Directive and Prospectus Regulation; and
- provides that functions currently carried out by ESMA and the European Insurance and Occupational Pensions Authority under the PRIIPs Regulation will be carried out by the FCA and that functions carried out by the European Commission will be transferred to HMT.
INSIDER TRADING AND MARKET ABUSE RULES
HMT has published a draft version of the "Market Abuse (Amendment) (EU Exit) Regulations 2018"6 that seek to ensure that the retained EU law relating to market abuse, which stems from Regulation (EU) 596/2014 (as amended, the "Market Abuse Regulation" or "MAR"), continues to operate effectively post-Brexit. The SI:
- ensures that the scope of the market abuse regime applicable in the United Kingdom captures conduct related to instruments admitted to trading or traded on both UK and EU trading venues;
- retains the general disclosure requirements for issuers of securities that fall within the scope of MAR that relate to the disclosure of inside information and the preparation of insider lists;
- transfers the powers and functions of ESMA with regard to enforceability of the market abuse regime to the FCA; and
- removes the unilateral obligation on UK supervisors to share information or cooperate with EU authorities.
USE OF BENCHMARKS IN SECURITIES OFFERED OR LISTED IN THE UNITED KINGDOM
HMT has also published the draft "Benchmarks (Amendment) (EU Exit) Regulations 2018"7 . The SI will make amendments to retained EU law related to the EU Benchmarks Regulation (BMR) to ensure that it continues to operate effectively in the United Kingdom once the United Kingdom has left the European Union. The explanatory note details that the SI will:
- ensure that UK-located benchmark administrators seeking authorization or registration will continue to apply to the FCA;
- clarify that the scope of the onshored Regulation (and thus of authorisation or registration by the FCA) is the United Kingdom, and not the whole of the European Union;
- ensure that EU-located administrators are subject to the UK regime, which requires third-country administrators or benchmarks to become approved through recognition or endorsement applications to the FCA to allow use of their benchmarks in the United Kingdom by supervised entities (unless and until an equivalence determination is made); and
- create a UK register for benchmarks, which the FCA will maintain from Brexit.
As a result of the SI, UK supervised entities will only be permitted to use benchmarks that are on the UK register. However, the SI contains an additional transitional provision, which temporarily migrates over to the UK register for a 24-month period any benchmarks or administrators, which appear on the ESMA register as at exit day as a result of a successful application outside of the United Kingdom. These third-country administrators or benchmarks must become approved by the FCA through equivalence, recognition or endorsement to enable their continued use within the United Kingdom beyond this 24-month period.
In recent days, the UK Government has lost a vote on the withdrawal agreement in the UK Parliament. The future of the withdrawal agreement (including the implementation period) and, accordingly, the consequences (and even the timing) of Brexit, remain uncertain. If the withdrawal agreement (whether in its current form or another form that has been agreed between the UK Government and the European Union, provided it retains the implementation period) were to be approved by the UK Government, the European Union and the United Kingdom Parliament, then the need to implement the SIs would be deferred and, to the extent that an international treaty covering financial services could be concluded between the United Kingdom and the European Union during the implementation period, removed in whole or in part.
While hoping for the best outcome, HMT, in planning for the worst, appears to be taking a consistent approach to converting existing EU securities laws, regulations and rules in force as at Brexit into UK law, as well as domesticating other important elements of EU securities law, such as the Prospectus Regulation, so as to ensure, so far as possible, that the United Kingdom retains a level playing field in financial services regulation with the European Union post-Brexit.
Originally published in REVERSEinquiries, Volume 2, Issue 1.
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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.