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Coronavirus - Further FCA updates for listed companies - UK

  • United Kingdom
  • Coronavirus - Regulatory issues
  • Corporate

29-05-2020

Further updates from the FCA in response to the COVID-19 pandemic

On 27 May 2020, the FCA published Primary Market Bulletin 28 (PMB 28) and Market Watch 63.

In PMB 28, the FCA:

  • provides an additional month for the publication of half yearly financial reports;
  • reports on ‘going concern’ assessments; and
  • provides the FCA’s view on issuers’ engagement with shareholders and their role in delivering ‘soft pre-emption’ in placings.

Market Watch 63 focusses on the FCA’s expectations of market conduct in the light of an increase in capital raisings by listed companies and home working arrangements which are required as a result of the COVID-19 pandemic. Listed companies and others are reminded of their obligations under the Market Abuse Regulation (MAR).

Primary Market Bulletin 28

  • Temporary relief for half yearly financial reports

The EU Transparency Directive, implemented in the UK by DTR 4.2.2R, requires companies listed on a regulated market, including the main market of London Stock Exchange, to publish their half yearly financial report (or interims) no later than three months from the end of the period to which the report relates.

In PMB 28, the FCA confirms that companies that need extra time to complete their half yearly reporting will have an additional period of one month in which to publish their half yearly financial report. In late March 2020, listed companies were granted an additional period of two months to make public their annual financial report - see our earlier briefing here for details.

As with the FCA’s earlier relaxations, this policy will be implemented by the FCA exercising forbearance. Ordinarily, a listed company that is unable to meet the deadline would be expected to request a suspension of their listed securities, or it would be open to the FCA to impose a unilateral suspension where the smooth operation of the market may be jeopardised or it is necessary to protect investors. Provided that a company publishes their half yearly financial report within four months of the end of the relevant financial period, the FCA confirms it will not take any enforcement action.

The FCA notes that it remains for companies to decide whether their interim reports should be reviewed by their auditors. In accordance with DTR 4.2.9R, an audit or review must be reproduced in full, otherwise a statement that the report has not been audited or reviewed must be included.

The FCA have stated that their forbearance is intended to be temporary for the duration of the pandemic and its aftermath. They intend to keep the policy under review, and will announce how to bring it to an end in a fair, orderly and transparent way when the disruption subsides.

The FCA have also updated their Q&A with regards to financial reporting.

  • Statement on market practice on going concern assessments

The FCA notes that some listed companies also have concerns about how to address coronavirus-related uncertainties in the ‘going concern’ assessment they perform whenever they produce financial statements. Where the auditor’s review of the assessment leads to remarks being included in the auditor’s opinion, the FCA recognises issuers may be concerned that these additional remarks will be viewed unduly negatively by investors and intermediaries.

The FCA continues to urge listed companies and their auditors to be clear and transparent about the impact of the pandemic on their financial statements and has reiterated the joint statement it made with the FRC and PRA on 26 March 2020 as well as reminding investors and intermediaries of the FRC guidance published on 26 March 2020 explaining what the various additional disclosures auditors may include in their reports mean. The FCA has further emphasised that it is equally important that investors, lenders and other users of financial statements acknowledge the unique set of circumstances arising from the pandemic which might result in uncertainty in companies’ financial positions when assessing their response to such disclosures and therefore not to draw unduly adverse inferences from them.

  • Conflict of interest and shareholder engagement

On shareholder engagement, the FCA notes that shareholders are likely to find it helpful if issuers are as open as possible about the implications of coronavirus on their business. In addition to formal channels such as financial reports and trading updates, companies could consider other ways of engaging with shareholders. The FCA reiterate their support for virtual general meetings. Assuming that the Corporate Insolvency and Governance Bill 2019-21 is enacted in the way that the UK Government intends (discussed in our briefing here), this should remove legal obstacles for companies that want to hold their AGM or other general meetings virtually during the pandemic.

As addressed in their statement of 8 April 2020, the FCA encourages listed companies to contribute to delivering ‘soft pre-emption’ as envisaged in the Pre-emption Rights Group’s statement when undertaking a placing by exercising their right to be consulted on, and to direct, allocation policies. This is further discussed in our briefing here. In PMB 28, the FCA explicitly states that companies with a large number of smaller shareholders should consider if there are routes to allow those shareholders to participate in a capital raising, although recognising that this will not be possible in all cases.

Market Watch 63

Market Watch 63 reminds listed companies and others of their duties and obligations when dealing with inside information, including complying with their obligations under MAR. It also contains practical guidance, for example, on what might constitute inside information in the context of the COVID-19 pandemic, and steps that listed companies could consider taking when dealing with inside information to comply with MAR.

The FCA’s key message is that they expect all market participants, including issuers, advisors and anyone handling inside information, to act in a manner that supports the integrity and orderly functioning of financial markets.

For listed companies and their advisors, the FCA encourages a particular focus on, amongst other things:

  • ensuring that inside information continues to be appropriately identified and handled by all persons having access to it so that it is not misused for insider dealing or for commercial advantage; and
  • ensuring inside information is appropriately disclosed by issuers so that investors are not misled.

The FCA notes that the coronavirus pandemic has had a significant effect on issuers, resulting in many needing to raise additional finance through debt and equity, potentially giving rise to increased amounts of inside information, changes to information which may be material to a business’ prospects and also raising new and additional risks and challenges around identifying and handling inside information, for example, as a consequence of remote working arrangements.

As a result, market participants are encouraged to continue to assess whether their procedures, systems and controls  to enable them to comply with their obligations under MAR for identifying and handling information remain adequate to mitigate any new risks, including in the light of new working arrangements. Issuers are also encouraged to assess their arrangements for meeting their disclosure obligations under MAR.

The FCA also:

  • reminds companies that the pandemic may alter the nature of information that is material to a company’s prospects. They will need to judge what information a reasonable investor would now be likely to use as part of their investment decisions in the context of coronavirus (and note that information that could have a significant effect on share price could include detail on future financial performance, such as access to funding, including through government schemes; significant changes in cashflow patterns; force majeure or termination rights in material contracts or financial arrangements and changes to dividends or buy-back schemes as well as their ability to continue or resume business and plans associated with that);
  • notes that companies need to carefully monitor whether any new information is materially different from previous forecasts, guidance or signals which they have announced publicly and which could now be misleading to investors;
  • reminds issuers of their obligations in relation to insider lists under MAR (including their responsibility to ensure maintenance of such lists by their advisers), particularly in light of the different risks that arise from working from home. They are encouraged to ensure that persons on insider lists are aware of when they have access to inside information and their legal and regulatory duties in relation to insider dealing and the unlawful disclosure of that information;
  • notes that save where disclosure of inside information can lawfully be delayed, companies should comply with their obligations under MAR to disclose inside information as soon as possible. The FCA emphasises the importance of contemporaneous record-keeping regarding decisions as to, and the exercise of judgment and discretion in respect of, the disclosure of inside information;
  • reminds issuers of the circumstances in which disclosure of inside information can be legitimately delayed and that this will be the case only when all of the conditions for doing so set out in MAR Article 17(4) (or, where applicable, Article 17(5)) are satisfied. In view of market uncertainties and changed working arrangements, issuers should be particularly vigilant about the possibility of leaks and rumours, and identify whether there has been a breach of confidentiality. Companies should prepare holding announcements in advance to be used if there is an actual or likely breach, and disclose the information as soon as possible once the conditions for delay are no longer met;
  • reminds companies and others that disclosure of inside information should only be made where necessary in the normal exercise of employment, a profession, or duties, and should not be made on a selective basis; and
  • notes the market soundings regime under MAR in the light of capital raising transactions in the current environment.

The FCA also reiterates, as set out in their Dear CEO letter of 28 April 2020, that they will take action against banks that exert pressure on corporate clients to secure roles on equity mandates that the issuer would not otherwise appoint them to.

What does this mean for companies?

Given the continued difficulties in reporting that listed companies may be experiencing as a result of the coronavirus pandemic, they may welcome the additional one month period for publishing their half year financial report.

Throughout the pandemic, the FCA has consistently emphasised the importance of the market abuse regime. Companies should review their existing policies and procedures with regards to inside information and the prevention of market abuse to ensure that they are robust and fit for purpose in the current environment, particularly where many of their employees may be working from home, and also to ensure that they adequately address the other additional issues and risks which the COVID-19 pandemic raises. As the FCA notes, where financial reporting deadlines have been extended, it will be extremely important that listed companies remain alive to their obligation under MAR to disclose inside information as soon as possible and that their systems and processes allow them to do this.

Useful links

Primary Market Bulletin Issue No. 28

FCA Q&A - Delaying annual company accounts and half yearly financial reports for listed companies during the coronavirus crisis

Market Watch 63

If you would like more information on the above or further advice, please get in touch with the contacts below.