Here we take an in-depth look at the regulatory impacts of Brexit. To jump a specific section simply click on one of the below links:
Following the United Kingdom’s decision to leave the European Union in 2016, several deadlines and key dates have passed, as covered by the FundApps Content team in Brexit part 2. We are near the point where the UK and the EU will have parted ways, both formally and practically. After the official leaving date on the 31st January 2020, we are now rapidly approaching the end of the Transition Period (TP) on 31st December 2020 at 23:00:00. Barring an unexpected last-minute change resulting in an extended deadline, the UK's legislative control will become fully separate from the EU.
During the TP, the UK has continued to apply the EU regulation on Shareholding Disclosure. What happens after the transition period ends? How does Brexit impact regulatory compliance requirements for financial services companies? And how will FundApps ensure that the change is as seamless as possible? In this post we’ll discuss FCA’s position on Brexit and the impact of Brexit on the Substantial Shareholding Disclosure regime, the EU Short Selling regulation, takeover panels, sensitive industries and foreign ownership rules.
FCA's position on Brexit
The UK government has pragmatically decided to roll-over most of the current shareholding disclosure regulations and apply them to the UK. In the case of the Transparency Directive and the Transparency Directive Amending Directive, these were originally implemented via updates to the Financial Services and Markets Act 2000 and DTR 5, so the legislation already existed in UK law. The Financial Conduct Authority (FCA) has the responsibility for administering the transition to a stand-alone shareholding disclosure regime. To this effect, they will be responsible for maintaining the processes for disclosure and supplying the data required to complete disclosures accurately. We will look at some of the changes required below and how it affects FundApps clients.
UK regulators had a heavy influence on EU-wide regulation after the 2008 financial crash.1
The FCA has decided to continue using the EEA's supplementary materials and it has emphasised that all parties should interpret FCA guidance to be practically and sensibly in line with EEA rules.
Brexit impact on Substantial Shareholdings
We provide four main rules for the United Kingdom's substantial disclosure regime (plus 6 supplementary rules to calculate the values of the Shares and Financial Instruments as defined by the EU's principle of horizontal aggregation). The AIM rule is a UK specific rule and isn't inherited from the EU regime so it will not be considered at this point.
The remaining three non-AIM rules exist due to the UK’s gold-plating of the EU rules and whose additional conditions will be unaffected after the TP.
Major: United Kingdom - Home - Investment Manager
Thresholds every 1% above 10%
A UK Investment Manager or an equivalent, issuer incorporated in the UK and includes those issuers on a UK prescribed market.
Major: United Kingdom - Home - Non-Investment Manager
Thresholds every 1% starting from 3%
Not a UK Investment Manager nor an equivalent, issuer incorporated in the UK and includes those issuers on a UK prescribed market.
Major: United Kingdom - Foreign
Issuers incorporated outside the UK.
*Covers the Aggregated, Financial Instruments and Shares form of each rule.
The pertinent change that affects the rules is the removal of the issuer being in-scope if its shares are admitted to trading on an EEA-regulated market and it has elected its Home Member State (HMS) to be the UK. The replacement condition for an in-scope issuer is that it must have shares admitted to trading on a UK regulated market. There is no difference in the disclosure thresholds applied, which securities should be aggregated nor the method of calculating the number of votes attached to each such security.
What does this mean practically? If we consider a general issuer who is in-scope for the UK disclosure rules now, it is likely that the conditions for the HMS imply that it is listed on a UK regulated market.
However, there are more complicated cases:
Case 1: A non-EEA issuer who is listed on a UK regulated market only.
The issuer can elect a HMS from any of the EEA countries, though it will usually choose either the country where it has based its offices or the country where its shares are listed. After the TP, it will be in-scope for the UK disclosure rules, but no longer in the EEA. Indeed, while it may maintain a non-UK HMS country, say, on its website, it wouldn't have any listings on an EEA regulated market.
Case 2: An issuer listed on both UK-regulated markets and EEA-regulated markets with Home Member State set to a non-UK EEA country.
Pre-transition, this issuer would only have had an obligation to disclose in the single EEA country that was its stated HMS. Post transition, it will have a dual-listing in the EEA and UK and will need to be disclosed in two countries. In both regimes, the shares listed on the other regulated market are both still included in the aggregated value. This means that the disclosure in the HMS country continues as normal. However, there will now be a ‘new’ disclosure in the UK. ‘New’ is used here to indicate a new disclosure result triggered in the FundApps Shareholding Disclosure Service. Due to the equivalence principle across the EEA, the UK considers the disclosure in the HMS as 'equivalent' to disclosing to the FCA during and prior to the TP. However, the UK rules in the FundApps Platform will only be triggered for the first time and will infer that the result has jumped from 0 to whatever value the client has been holding as the TP ends.
Key Point: If an issuer was previously disclosable in a non-UK EEA country and now is additionally required to be disclosed in the UK, then a disclosure to the FCA must be made. Special attention should be used when the gold-plated UK disclosure thresholds are different to the EEA thresholds and further guidance should be sought.
Example: a 4% holding in an issuer with HMS of Poland but also listed on a UK-regulated market may be in-scope for the UK rules post-TP where a 3% minimum threshold is in place. Guidance should be sought to see if a new disclosure must be made. The FundApps Platform will trigger a disclosure for this result that can be either accepted or rejected as required.
Case 3: An issuer listed on both UK-regulated markets and EEA-regulated markets with Home Member State set to the UK.
The issuer will be required to select a new HMS within the remaining EEA countries - and if it doesn't, the default is the EEA country of listing. This situation also includes the possibility of there being multiple EEA countries for each country the issuer is listed in. This needs to be reflected in the input data for the FundApps service to be able to get accurate results, but note that the FundApps Platform doesn’t cover the possibility of multiple HMSs. Where external data is used to infer a HMS, be careful that the data has been updated correctly. For example, a proxy for the HMS can be the Relevant Competent Authority (RCA) of the issuer which is supplied by the FIRDS database. FundApps hosts this data on behalf of our clients, but cannot guarantee its accuracy. Any error needs to be resolved by the FIRDS team at ESMA.
Like in case 2, there will be a dual-disclosure required: one in the UK, one in the new HMS in the EEA. There is an 'inherited' disclosure in the EEA country which has the new rule result generated by the FundApps Platform. That country's regulator may require a new disclosure, an updated disclosure or no action to be taken at all. Extra care must be taken as to what action to take. Note that not all countries aggregate their values the same way nor have the same thresholds. Our legal information provider, aosphere, has provided a list of countries who have provided some guidance in their Brexit FAQs. The UK disclosure will remain the same.
Key point: Check every issuer with the UK as HMS has a new HMS for post-TP. Any input data for HMS that uses GB may cause the uploaded file to fail as the HMS is required to be an EEA country. Check files and overrides and remember that it is possible to set an expiry date on any data overrides.
Key point: FundApps can't guarantee that any specific issuer will have ensured their HMS or other supplementary data has been properly updated. Take extra care when considering whether a rule result or disclosure is eligible. Especially if an issuer has defaulted to multiple HMS values as this will not be reflected in our Shareholding Disclosure service.
Case 4: An issuer listed on only non-UK EEA-regulated markets with Home Member State set to UK.
This will no longer be disclosed in the UK after the transition and the issuer will need to select a new HMS (or if not, the default HMS countries will be used). There is no dual-listing and any further disclosure will be in the new HMS country only. Again, the requirement to initially disclose, indicated by a new result on the new HMS’ rules in the FundApps service, will be determined by the regulator of that country.
Further edge cases are not considered here. Most issuers will have been preparing in advance and should have selected their correct HMS. Additionally, some regulators have stated that they anticipate that these changes will only affect a small amount of issuers.
Note: There may be some other gold-plated requirements for an issuer to disclose in another EEA country. This will not be covered here.
Brexit impact on SSR Equity
Each EEA country has two rules for the EU Short Selling regulation which differ only by the aggregation tree (management or non-management) they run on and the exemption of portfolios with net long holdings from within the aggregated holdings (management).
After the transition, the rules remain substantially the same for the UK. In practical terms, this has required the separation of UK disclosable issuers from non-UK EEA disclosable issuers which has been reflected in the new rule code versions. The primary source for which country’s regulator an issuer should be disclosed to is the RCA of the issuer as provided by the FIRDS database (looked up via the ISINs of its securities). FundApps hosts this database for the benefit of our clients and the properties CountryOfRCARegulatedMarkets and CountryOfRCAMTFs will be used to obtain this information if not supplied directly by the client.
Post-TP there will be two separate FIRDS databases, the current ESMA FIRDS database (FIRDS) and the FCA FIRDS database (FCA-FIRDS). FCA-FIRDS has been created by the FCA and reflects the structure of the FIRDS database. It has been available for several months and FundApps will also host this data for the benefit of our clients.
So, what effect has this had?
Firstly, for an issuer that has been on the FIRDS database with an RCA value of GB, this issuer will have an updated RCA value which is not GB, but some other EEA country. Otherwise, this issuer's shares will be dropped from the FIRDS database around the end of the TP. Some of these changes have already happened as issuers prepare for this transition. Those issuers with a GB RCA will then be added to FCA-FIRDS to represent the fact that they are traded on UK regulated markets and MTFs.
Key point: there can be two RCA countries for the same issuer - one for the UK (GB) and one for a non-UK EEA country so that a second disclosure can be made in the EEA. CountryOfRCARegulatedMarkets and CountryOfRCAMTFs are used for determining the RCA of securities in the EEA and should not be used to provide GB as the RCA. Instead, the parallel input properties IsGBCountryOfRCARegulatedMarkets and IsGBCountryOfRCAMTFs can be used so that dual disclosure can occur. In both cases, we recommend that the calculated value is used which uses the corresponding FIRDS and FCA-FIRDS databases to infer the correct RCAs. Only if it has been determined that the data provided in the FIRDS databases is incorrect should a different input value be provided (e.g. via an override).
Further criteria inherited by the UK rules post-TP are that the securities must be listed on a UK regulated market or UK MTF. Beforehand, a listing on any EEA regulated market or MTF was sufficient.
Key point: The FCA provides a list of markets on its market register but does not give an explicit list of MICs. However, we have assumed that the immediate list of MICs can be inherited from the EEAMarkets list provided by ESMA after the transition date passes. We will engage with the FCA to see if they will provide a more definitive list, or else we will maintain this list with as much reasonable and transparent logic as possible.
Certain securities are exempted from disclosing under the EU short selling regime and these are listed on the EUShortSellingExempt list provided by ESMA. These securities are excluded based on the condition that they are primarily traded on non-EEA markets. The UK rules will inherit a snapshot of this list on 1st January 2021 which will be used for two years by the FCA. The ESMA list may be updated over this period, but the FCA version will maintain the snapshot and the two lists will diverge. Indeed, it would be expected that securities that are primarily traded on UK markets will eventually be added to the ESMA version of the list.
Key point: The UK will inherit the EUShortSellingExemptShares from the 1st January. We have already populated this list with an earlier snapshot for the benefit of clients to view an example (ShortSellingGBExemptSharesNonEU), but this will be updated further on 1st January 2021 to get the exact list.
Further, the FCA will provide a list of EEA securities that will also be exempted. There is a placeholder list (ShortSellingGBExemptSharesEU) already incorporated into the new UK rule versions that can be populated as soon as a source is provided by the FCA.
It has been confirmed by the FCA that these lists will be available at the end of the TP and will be published on 1st January 2021. Our team will be on hand ready to import these values into the FundApps Platform ready for processing files with a NAVDate from 1st January onwards. Initially, these lists will be monitored for changes daily. Once the data source is better understood, FundApps will use its Regulatory Data service to automatically import the data periodically for use in the rules.
Post-TP, expect that some issuers will either:
1. continue to be disclosed via the UK SSR rules only;
2. no longer be disclosed via the UK SSR rules, but via another country in the EEA;
3. continue to be disclosed via the UK SSR rules AND an initial disclosure via another country in the EEA; or
4. have an initial disclosure via the UK SSR rules and potentially a continuing disclosure in an EEA country.
Key point: When an existing disclosure in one country has been established and post-transition period another country requires a disclosure, then consideration should be made as to whether the country in question requires an initial disclosure, updated disclosure or none at all. The FundApps service will infer that there has been change in value from 0 when a new country's rules have been triggered allowing for a disclosure to be made or rejected as required.
FundApps would like to make clear that we host external datasets for the benefit of clients but we are aware that sometimes these datasets contain errors. Often this is due to regulators or issuers not updating the database correctly. We have some mechanisms built into the service to assist when an error has been identified (e.g. temporary overrides), please consult our team at firstname.lastname@example.org if assistance is required. Given the large amount of changes being implemented from the 1st January, we encourage all clients to take extra care when analysing their results.
Brexit impact on SSR Bonds
These rules have not been updated as of yet. Operationally, the only change will be where we source the value for the United Kingdom's debt and its thresholds. We are expecting the FCA to provide a source for this and update it every 3 months. Until that point, we will assume that the current values used will remain.
Brexit impact on Takeovers and Sensitive Industries
Takeover panels, sensitive industries and foreign ownership rules are functionally independent of the EEA and the effects of the Brexit transition period ending. No updates have been made.
Brexit impact on Gibraltar
It is currently unclear what effect the transition period ending has on Gibraltar. Our legal information provider aosphere have communicated that they are working with a local counsel to investigate this. If we do not receive any guidance, the current rules will continue and clients should determine what action to take with the results provided.
This has been prepared under the assumption that the transition period will end as expected on 31st December 2020. Should this not happen, FundApps are fully prepared to quickly adjust our approach as required.
1 A number of these directives were strongly influenced by British thinking — indeed, in many key respects, the United Kingdom sought to conform the regulations in other Member States to pre-existing British directives — and significantly liberalised previous legal guidelines in many Member States. EU Financial Regulation - A report for Business for Britain (17th June 2014)