Equity Capital Markets and Brexit: business as usual?
With the Brexit date fast approaching, it is becoming increasingly interesting to understand how various areas of law will be affected. Equity Capital Markets (ECM) are heavily regulated by EU- based legislation and here we consider how this area could be affected by Brexit.
The main ECM–related legislation in the UK which is based on EU legislation, is the Prospectus Regulation (which replaces the Prospectus Directive from July 2019) the Prospectus Directive, the Market Abuse Regulation and the Transparency Directive.
The EU Takeover Directive is broadly based on the UK Takeover Code and in the short term, this is unlikely to be changed because of Brexit.
Under the European Union (Withdrawal) Act, all directly applicable EU law and EU Regulations will be converted into UK domestic law and UK law implementing EU Directives will be retained. Ministers also have powers to prevent, remedy or mitigate any failure of EU law to operate effectively through statutory instruments. HM Treasury will delegate powers to the FCA and the PRA to amend any of their rulebooks and EU technical standards; which could, for example, enable the FCA to widen the Prospectus Regulation exemptions or modify the requirements under the Market Abuse Regulation. However, the FCA has indicated it plans no imminent changes and has also confirmed that they will still have regard to the ESMA (European Securities and Markets Authority) Q&A on prospectuses and to the Market Abuse Regulation (MAR). This will ensure consistency with EU legislation and requirements even if there is no transitional period.
In his speech at the annual conference of AFME (the Association for Financial Markets in Europe) on 2 October 2018, Charles Randell, Chair of the FCA, pointed out that, as the UK leaves the EU, we may have some choices to make as to exactly how to achieve regulatory outcomes. He emphasised that withdrawal from the EU would not mean a race to the bottom in regulatory standards with the FCA being committed to high standards of regulation and to contribute to high global standards.
However, Mr Randell said the FCA will keep an open mind about existing regulation and be ready to make it better when it does not produce the outcomes they wish.
After Brexit and subject to any transitional arrangements, the UK will no longer be subject to the EU regulatory regime which allows the passporting of prospectuses approved by the regulator in the issuer’s home member state to other EU Member States and so prospectuses may need to be approved in two jurisdictions. This would means that a prospectus approved by the FCA would no longer be able to be passported to another EU country; and vice versa.
If an EU company wishes to offer its shares to the public in its own country, but to be listed on the London Stock Exchange, there will be additional costs. But if the target investors are institutions only and so there is no “offer to the public”, the offering may well fall within an exemption under the Prospectus Directive, in which case it may be possible to avoid the need for approval by the Home State Regulator, which should result in cost savings.
Capital Markets Union
The Capital Markets Union (CMU) is a plan of the European Commission to mobilise and facilitate capital in Europe, which was planned to be completed by 2019. The rationale of the CMU is to create a more diversified financial system complementing bank financing with deep and developed capital markets and the establishment of a genuine single capital market in the EU where investors will be able to invest their funds without worrying about cross-border problems. Additionally, businesses should be able to raise the funds they require, irrespective of their location and from more diversified funding sources, moving away from the traditional bank lending.
If the objective of CMU were to be met, the UK would be unable to benefit directly, although any strengthening of the fund raising environment in the EU is likely to assist the UK indirectly as London remains an important capital markets centre.
Expect no change to UK ECM regulation when Brexit occurs, but pan-European offerings by an issuer looking to have a primary listing on the London Stock Exchange are likely to be more difficult and expensive.
However, it appears, at least in the near future, ECM rules and legislation will not be affected by Brexit and business in the UK and international market should continue as usual. There is some hope that, in focussing on outcomes, the FCA may in time modify some of the more burdensome requirements of EU legislation that affect UK issuers and their advisers.
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The latest edition of our regular Focus Antitrust update.