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Brexit update: implications for the UK capital markets regime

  • United Kingdom
  • Brexit
  • Corporate

17-01-2020

The UK Government’s firm intention is that the UK will leave the European Union at 11 pm on 31 January 2020.

As part of the withdrawal agreement setting out the terms of the UK’s exit (Withdrawal Agreement), the EU and the UK have agreed a transition period (or implementation period), which will end at 11 pm on the 31 December 2020.

Given that much of the UK equity capital markets regulatory regime is derived from EU law, companies will be keen to understand the changes that may lie ahead for them.

During the transition period

During the transition period, existing EU laws continue to apply to the UK. In addition, new directly applicable EU law (ie EU Regulations) adopted by the EU during transition will continue to apply automatically in the UK, and other new EU measures adopted during this period will need to be implemented domestically to comply with the Withdrawal Agreement.

This means that the current legal and regulatory obligations which are derived from EU law, for example under the Prospectus Regulation and the Market Abuse Regulation and UK legislation implementing the Transparency Directive, will continue during a transition period in the same way as currently, so there should be no practical change for companies during this time.

At the end of the transition period

The UK and the EU have 11 months to negotiate a new trading relationship if they are to avoid a hard Brexit at the end of 2020.

Directly applicable and operative EU laws (including those outlined above that are relevant in an ECM context) as they stand at the end of the transition period will be incorporated into UK law at the end of the transition period.

Our guide No-deal Brexit: Implications for traded companies commented on the implications of a no-deal Brexit for the UK capital markets regime. These changes may now be relevant at the end of 2020 if these matters are not addressed as part of the future relationship between the UK and the EU. For example, the current passporting arrangements for prospectuses prepared in the UK for use elsewhere in the EU and vice versa would have to be addressed in a future trade agreement to allow mutual recognition of prospectuses.

From the end of the transition period, it is possible that over time, there may be divergence between the post-Brexit listing, prospectus and transparency regimes in the UK and the EU. However, it is likely that UK regulators will look to maintain standards that are equivalent to requirements under the Prospectus Regulation, the Transparency Directive and the Market Abuse Regulation, in order to preserve the level of regulation and disclosure required to maintain the reputation of the London Stock Exchange as a listing venue.

It is worth noting that EU Regulations which have entered into force but have a delayed implementation date outside the transition period are considered to be in force and apply immediately before the end of the transition period for the purpose of being domesticated into UK law. For example the changes to the Market Abuse Regulation (implemented by Regulation (EU) 2019/2115 as regards the promotion of the use of SME growth markets) which entered into force from December 2019 but which apply in relation to market abuse from 1 January 2021, will take effect in the UK in accordance with the timetable in the EU Regulation, unless Parliament were to legislate to the contrary.

What else should companies consider?

Companies should by now be familiar with these obligations, but as a reminder:

• Companies that have publicly traded securities should consider any impact under the Market Abuse Regulation - ie do any Brexit preparations constitute inside information, leading to an announcement obligation? In many cases, the information about Brexit will be in the public domain, but traded companies may need to be careful as regards changes in financial performance or prospects which are not in line with market expectations, and assess in the usual way whether an announcement is necessary.

• In terms of periodic financial reporting, as a reminder the Financial Reporting Council expects companies to keep the potential impact of Brexit on the business under review, see for example the FRC’s letter to Audit Committee Chairs and Finance Directors from September 2019.

• Any company that issues a prospectus or an AIM Admission Document will need to address Brexit disclosures and risk factors as appropriate.

Given the relatively short timescale for the agreement of the future UK/EU relationship, companies should still be considering the implications of a no-deal scenario in critical areas of their business, given that a deal is unlikely to cover all their legal and regulatory obligations.

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