02 October 2017 by Herbert Smith Freehills
An exclusive extract from ICSA’s new book, A Practical Guide to the UK Listing Regime, 4th edition, by Herbert Smith Freehills.
It is important to appreciate how much of the current UK regulatory environment is (and has been over recent years) driven by European goals for a single market in financial services. Historically, the EU’s various financial markets remained relatively segmented, with business and retail consumers being deprived of direct access to crossborder financial institutions.
This was largely due to the ambiguities and inflexibilities caused by the range of different European regulatory structures, legal systems, trade barriers, taxation and cultural approaches.
While steps had been taken to create a single market for financial services, in practice these tended to set ‘minimum standards’ so a wide variety of practices developed in different member states with little or no consistency across the EU.
Increasingly, however, the EU is changing its approach by implementing legislation which is based on ‘maximum harmonisation’, including directly applicable Regulations, to create more consistency across the EU.
“While steps had been taken to create a single market for financial services, in practice a wide variety of practices developed”
With the introduction of the Euro, and the increase in the financial products available to the enhanced numbers of participants entering the European money markets, there was a renewed impetus to create a single market for financial services and to ensure a more level playing field for all market participants.
The Financial Services Action Plan (FSAP) was a set of proposals put forward by the European Commission in May 1999, at the request of the Council of Ministers.
The FSAP set out key objectives in creating a single market for financial services, which included the creation of a single EU wholesale market, open and secure retail markets and state-of-the-art prudential rules and supervision.
The Commission set out in the FSAP a programme for rapid progress towards a single financial services market. The FSAP contained strategic objectives and the actions that the Commission believed needed to be taken to achieve those objectives.
The Commission identified three key strategic objectives:
There is a four-level approach to financial services legislation. The European Commission, Parliament and Council are responsible for ‘Level 1’ legislative acts (i.e. a directive or regulation). Directives then have to be implemented by individual member states, whereas regulations are directly applicable in member states.
The European Securities and Markets Authority (ESMA) is then asked to produce detailed implementing measures and technical standards, covering aspects of the Level 1 legislation where more detail is required.
The European Commission then adopts these ‘Level 2’ measures, usually in the form of regulations.
ESMA is also responsible for publishing ‘Level 3’ guidance on the legislation (such as the ESMA Guidelines on Delay). While not directly legally binding, issuers are required to make every effort to comply with ESMA guidelines. ESMA also produces guidance in the form of Q&As on each of the regimes.
ESMA is also responsible for facilitating the exchange of information and agreement between national supervisory authorities, and where necessary, settling any disagreements, to ensure that securities regulators at a national level take a more coordinated approach.
Details of ESMA’s role, powers, decision-making process and standing committees are available on its website.
MAD (Directive 2003/6/EC) covered both market manipulation and insider dealing and, prior to 3 July 2016, applied to all financial instruments admitted to trading on a regulated market in the EU.
MAD required each member state to designate a single administrative regulatory and supervisory authority to ensure its provisions were applied, with the aim of harmonising each member state’s approach to tackling insider trading and market manipulation using a common set of minimum responsibilities.
MAD required price-sensitive information to be disseminated as soon as possible and prescribed the circumstances in which selective disclosure of such information could be made.
In 2009, the European Commission launched a full review of MAD and, in 2014, published a new regulation on insider dealing and market manipulation (the EU Market Abuse Regulation (596/2014) (MAR)) to completely replace MAD and also a new directive on criminal sanctions for insider dealing and market manipulation, the Criminal Sanctions for Market Abuse Directive (2014/57/EU) (CSMAD).
“MAD aimed to harmonise each member state’s approach to tackling insider trading and market manipulation”
The provisions of MAR and the detailed implementing and delegated regulations under it came into force on 3 July 2016 and have direct effect in member states so did not need to be implemented through the enactment of domestic legislation.
However, member states did need to amend and repeal the provisions in their national legislation which applied the previous market abuse regime under the MAD.
In the UK, the Disclosure Rules for listed companies were repealed in this area and the provisions of MAR have, in effect, taken their place.
The Disclosure Rules have become the ‘Disclosure Guidance’ with signposts to some (but not all) MAR provisions and some of the guidance previously contained in the rules has been retained. Since the UK already has a separate criminal regime for insider dealing and misstatements, which goes beyond that in CSMAD, it has opted out of CSMAD.
The provisions in MAR include an extension of the market abuse regime to a wider range of trading platforms and financial instruments, express prohibition of the manipulation of benchmarks,
such as LIBOR, greater harmonisation of sanctions and significant new procedural requirements in a number of areas.