UK Financial Conduct Authority Signals Significant Changes to the FCA Handbook arising from EU Market Abuse Regulation

Removal of the Model Code and Disclosure Rules are among the important modifications.

On 5 November 2015, the UK Financial Conduct Authority (FCA) published its consultation paper addressing the changes it proposes to make to the FCA Handbook as a result of the implementation of the new market abuse regime under the EU Market Abuse Regulation (EU MAR). Key changes include the removal of the Model Code and the Disclosure Rules and major changes to the Code of Market Conduct.

Background

The EU MAR was introduced to strengthen and expand the EU market abuse regime. It will repeal and replace the existing Market Abuse Directive and its implementing legislation. As an EU regulation, the EU MAR will have direct effect in the UK. The EU MAR will come into force in the UK on 3 July 2016 (save for the provisions which apply to Organised Trading Facilities and SME Growth Markets, which will apply from 3 January 2017).

The current UK market abuse regime, and related provisions, overlaps with, and extends beyond, the rules set out in EU MAR. As the EU MAR will have direct effect, the UK must ensure that its regulatory regime is compatible with, and does not conflict with, the directly effective provisions of the EU MAR. This will require significant changes to the UK regime, including the provisions of the FCA Handbook. In accordance with its statutory obligations, the FCA has published a consultation paper relating to the changes it is proposing to make to its Handbook.

It should be noted that further changes will be required to be made to the UK regulatory regime as a result of the EU MAR, including to the Financial Services and Markets Act 2000 (FSMA), and further details of the proposed changes are expected shortly. In addition, further guidelines are expected from the European Securities and Markets Authority which may affect the proposed changes to the Handbook. Finally, the FCA also proposes to consult shortly on changes to the existing guidance in the Disclosure and Transparency Rules sourcebook (the DTRs) on delaying disclosure of inside information. That consultation may also impact on the changes being considered under the current consultation.

Proposed Amendments to the Handbook

The general approach adopted by the FCA will be to retain the existing content and structure of the Handbook to the extent that this does not conflict with the EU MAR. However, where a provision in the Handbook covers an area addressed in the EU MAR, the provision in the Handbook will be deleted, and replaced with a signpost to the relevant provision with the EU MAR. However, where there is no EU MAR equivalent to a Handbook provision, this will be retained to the extent not inconsistent with the EU MAR. In a number of cases, provisions which are retained will no longer have binding status but will instead provide guidance on the relevant provisions in the EU MAR. As a result, the Handbook will no longer provide a definitive guide to the market abuse regime which applies in the UK, and reference will also need to be made to the EU MAR and related implementing measures and guidance.

The key provisions of the Handbook which the FCA is proposing be deleted and those provisions which face substantial amendment are outlined below:

Code of Market Conduct (CoMC)

• As a result of the proposed repeal of sections 118 and 122 of FSMA, and in order to make sure domestic legislation is compatible with the EU MAR, the legal status of the CoMC will be downgraded to guidance only.

• In addition, as many of the areas currently covered by the CoMC are also covered by provisions of the EU MAR, a number of the provisions of the CoMC will be deleted, and replaced with a signpost to the related provision in the EU MAR. However, some existing provisions of the CoMC will remain (where necessary amended to avoid inconsistency with the EU MAR) as guidance on the FCA’s views and expectations.

• Key changes including deleting many (or in some cases all) of the following provisions of the CoMC: MAR 1.3 (insider dealing), 1.4 (improper disclosure) and 1.9 (misleading behaviours and distortion). MAR 1 Annexes 1 (Buy-backs and stabilisation) and 2 (accepted markets practices) and MAR 2 (stabilisation).

Disclosure Rules

• As the Treasury plans to repeal the power of the FCA to make the Disclosure Rules (currently found in Chapters 1 to 3 of the DTRs), these will no longer have binding effect. However, the FCA intends to retain certain elements of DTR 1 to 3 (to the extent not overlapping or inconsistent with the provisions of the EU MAR) as guidance on the application of the disclosure obligations under the EU MAR (with the DTR sourcebook being renamed the Disclosure Guidance and Transparency Rules sourcebook). Where the current provisions overlap with provisions of the EU MAR, these will be deleted and replaced with signposts to the relevant EU MAR provisions.

• Sections of DTRs 1 to 3 which are being substantially deleted (and, where applicable, replaced with a signpost to the relevant provisions in the EU MAR) include DTR 2.3 (publication of information on internet site), 2.4 (equivalent information) and 2.8 (insider lists). However, there are substantial changes across DTRs 1 to 3.

Replacing the Model Code

• The Model Code (which is set out in Annex A of Listing Rule [LR 9]) contains provisions regulating dealings by directors, senior managers and certain employees (collectively known as PDMRs) of premium listed companies in their company’s securities. The Model Code’s existing provisions overlap with, and are partly incompatible with, the EU MAR. In light of this overlap, the FCA has stated that the Model Code cannot be retained in its current form. There will also be certain consequential changes to LR 9, including deleting LR 9.2.7 (restriction on dealings by a premium listed company in its own shares) and LR 9.2.10R (dealing in exceptional circumstances).

• However, following feedback from the market on the value attached to the Model Code, the FCA proposes to replace the Model Code with guidance for premium listed companies to use when developing processes to allow PDMRs to apply for clearance before dealing (although the FCA emphasises that companies will still need to consider and comply with the relevant provisions of the EU MAR)

Further Information

The full consultation paper can be found here, and the consultation period closes on 4 February 2016.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Iain Wright
William Yonge