The corporate finance regulatory framework is experiencing seismic shifts as the UK government looks to implement change necessitated or facilitated by Brexit and to maintain and enhance the UK’s position in the global financial marketplace. As we approach the year end, we recap on the status of some of the key changes and developments in the UK’s corporate sector over the past 12 months.
UK Financial Services - Edinburgh Reforms
In December the UK government issued a policy statement announcing a package of more than 30 regulatory reforms (aka the “Edinburgh Reforms”) which together with the Financial Services and Markets Bill (FSM Bill) (see below) are intended to drive growth and competitiveness across the financial services sector and the wider UK economy.
These proposals set out the government's approach to repealing financial services retained EU law (retained EU FSM law) and delivering a new financial services model which will change fundamentally the regulatory landscape for the UK’s financial services sector.
In broad terms, the reforms outlined in the proposals are designed to:
maintain and build a competitive marketplace (new objectives for regulators with increased focus on growth and international competitiveness)
implement a “smarter” financial services regulatory framework (the FSM Bill will repeal retained EU FSM law and establish the legal framework for implementing the UK’s new regulatory regime)
promote more effective use of capital (via, amongst other things, reform of the UK banking “ring-fencing” regime introduced in 2011 - in response to the global financial crisis - to insulate retail banking services from non-retail activities such as investment banking)
support the UK’s role in sustainable finance (a new updated strategy will be published in early 2023; alignment of the financial services sector with Net Zero; unlocking private financing)
support innovation and leadership in emerging areas of finance (the FSM Bill will provide the necessary powers to bring stablecoins used as payment, as well as a broader range of investment-related cryptoasset activities, into UK regulation)
The government plans a phased approach to implementation falling into 2 tranches:
the review, reform and repeal of retained EU FSM law including delivering the outcomes of the reviews of the regimes for listing, prospectuses, capital markets, securitisation and Solvency II
improvements to UK economic growth (which will involve further reform of the MiFID framework and implementing the outcomes of the reviews of the wholesale markets and Solvency II).
Work is underway on the first tranche and the government expects to make significant progress on both tranches by the end of 2023.
Other proposals include:
delivering the outcomes of the Secondary Capital Raising Review (see below)
reforms to the Consumer Credit Act 1974
amendments to the tax rules for REITs
Brexit – Retained EU Law
Background
On 31 January 2020 (exit day) the UK left the EU when the European Union (Withdrawal) Act 2018 (EUWA) came into force. The EUWA repealed the European Communities Act 1972 (ECA) which had previously enabled EU law to apply to the UK. The EUWA also saved much of the effect of the ECA for the duration of the transition period which ended on 31 December 2020. During that period the UK-EU relationship was governed by the transition terms in the EUWA and the UK was treated for most purposes as if it were still an EU member state.
Retained EU Law
In September, the Retained EU Law (Revocation and Reform) Bill (aka “Brexit Freedoms Bill”) was introduced to Parliament. The body of EU law in force at the end of the transition period (“retained EU law”) was imported into UK law to avoid leaving significant gaps in the UK legal system when the UK withdrew from the EU.
Amongst other things the Bill:
Provides for the expiry of the majority of retained EU law on 31 December 2023 (“sunset date”) unless specifically preserved and incorporated into domestic law. This means that before the sunset date the UK Government will need to identify the retained EU laws that need to be preserved. Cognisant that this aspect of “taking back control” may prove complex, the government has included in the Bill a sunset extension mechanism until 2026 if required
Provides that any retained EU law remaining in force after the sunset date will become 'assimilated law' and no longer interpreted in accordance with EU legal principles
Removes the supremacy of retained EU law
Gives the UK courts greater discretion to depart from the body of retained EU case law
Capital Markets
Financial Services and Markets Bill 2022-23
In July then Chancellor Nadhim Zahawi announced the introduction of the Financial Services and Markets Bill (FSM Bill) describing it as enabling the government to seize the opportunities created by Brexit. The FSM Bill - which is the second element of the government’s post-Brexit financial services legislation following the Financial Services Act 2021 - is intended to deliver on the government's vision for the financial services sector and to enhance the UK’s position as a global leader in that sector.
The FSM Bill proposes far-reaching changes to the UK's financial services regulatory framework including:
Revocation of retained financial services EU law - establishing the legislative framework for the revocation of all EU retained law relating to financial services and a transition to a new financial services regime
Capital Markets - reforming the legislative framework governing the UK’s capital markets
Financial promotion - amending the financial promotion approval regime
Cryptoassets - bringing activities facilitating the use of certain stablecoins, where used as a means of payment, into the UK regulatory regime
Prospectus and Market Abuse Regimes - revoking the current EU Retained Law Prospectus Regulation and Market Abuse Regulations
Cash - establishing a framework for the protection of easy access to cash
On 7 December the FSM Bill completed its report stage and third reading in the House of Commons and had its first reading in the House of Lords on 8 December with its second scheduled for 10 January 2023. There is no set timescale by which the FSM Bill will complete its passage through both Houses (the Financial Services Act 2021 took over 6 months to receive Royal Assent).
As explained earlier (see “UK Financial Services – Edinburgh Reforms”), the government’s proposals for reform of the financial services sector, will require fundamental changes to the legislative framework to be enacted via the FSM Bill. This will entail a significant programme of secondary legislation and regulatory rule-setting over several years.
Listing regime
In March 2021 the government published the UK Listing Review setting out the recommendations of Lord Hill. Lord Hill’s review was driven in part by the UK’s departure from the EU with an objective to propose reforms to attract innovative and successful firms, as well as help companies access the finance they need to grow.
Certain of those recommendations have already been implemented by the FCA including:
Reducing the free float requirement from 25% to 10%
Increasing the minimum market cap for listing to £30m
Allowing a dual class share structure within the premium listing segment
Reform of rules applicable to SPACs
In May 2022, the FCA published a discussion paper (DP/22) on the wider listing regime reform. In September the response of a joint working party established by the Law Society and the City of London Law Society was published. The CLLS represents over two thirds of the solicitors practising in the City of London and the JWP’s responses give a good indication of the direction of travel for the regulations. The responses included support for the following proposals:
Single merged segment regime but without an opt-in to supplementary obligations
Replacement - by disclosure - of revenue track record, historical financial information and the requirement for a ‘clean’ working capital statement
10% free float
Premium listing principles to be extended to apply to all single segment companies
Significant increase in threshold for Class 1 transactions
The FCA will issue its response in due course and issue either a further discussion paper or a consultation paper.
UK Secondary Capital Raising Review
The UK Secondary Capital Raising Review was launched in 2021 by the government as part of its response to one of the recommendations of the Hill review, namely that more should be done to empower retail investors and improve secondary capital raising processes for UK listed companies.
In July the Review published its final report. The key recommendations included:
An enhanced role for the Pre-Emption Group placing it on a more formal footing
Improving the ability of companies to raise smaller amounts quickly and cheaply including making permanent the pandemic related increase from 10% to 20% with provisos:
up to 10% available for any purpose
further 10% to fund an acquisition or a specified capital investment
report to be published by the issuer on the conduct of the placing
Flexibility for “capital hungry” companies in the form of support for non-pre-emptive raisings in excess of 20% of issued share capital where the case is made by the issuer
Involving retail investors in capital raisings with the default assumption that retail investors should be included in any fundraising regardless of structure and the use of a separate retail offer following a placing (“follow-on offer”)
Reducing regulatory involvement in larger capital raisings e.g., a prospectus only to be required where the offer is at least 75% of the existing share capital (up from the existing 20%)
Improving cost and efficiency of existing pre-emptive fundraisings including the alignment of statutory pre-emption periods with modern practice
Forward looking statements - liability only incurred when those involved are reckless (allowing directors of companies to publish and stand behind more useful forward-looking financial information)
PEG Response
The Pre-Emption Group was formed in 2005 by members representing listed companies, investors and intermediaries, with a mandate to produce a statement of principles to be taken into account by companies when considering the case for disapplying pre-emption rights. In November it published a revised statement of principles for the disapplication of pre-emption rights in light of the Secondary Capital Raising Review. The Statement of Principles was revised with immediate effect. The principles include provision for:
Disapplications of statutory pre-emption rights: Investors will support a special resolution on the proposed “10 + 10” basis i.e., 10% of the company's issued share capital to be issued on an unrestricted basis and an additional 10% to be used for either an acquisition or specified capital investment, as defined in the guidance. The principles set out the conditions for use of the 20% disapplication authority
Larger capital raisings: Companies needing to raise larger amounts more frequently may seek additional disapplication authority for a longer period if this is highlighted with the disapplication request or disclosed in any applicable prospectus
Retail and existing investors: Where a company issues shares non-pre-emptively for cash, it should give due consideration to enabling retail and other existing shareholders who are not allocated shares in that placing to participate. Use of a retail investor platform and/or a “follow-on offer” to be considered
“Follow-on offer”: Should be made to all existing shareholders, other than those involved in the placing; entitle shareholders to subscribe for shares up to a cap of not more than £30,000 each, at the same or a lower price than the placing; be open for a period that is sufficient to allow shareholders to become aware of the offer and reach an investment decision
Given the range of stakeholders it is likely that some of the reforms will take time to be implemented. The FCA proposes to take this process forward as part of the listing review agenda.
Prospectus Regime
Currently the Prospectus Regulation requires a company to produce a prospectus where there is an offer of to the public and/ or the admission of shares to trading on a UK regulated market. The Prospectus Regulation is the retained version of the EU Prospectus Regulation which applies in the UK pursuant to the EU Withdrawal Act.
In conjunction with the wider review of the UK’s financial regulatory framework, the government is proceeding with a radical reform of the UK prospectus regime. In July last year the government published an initial consultation on reform and subsequently confirmed that it intends to proceed with the proposed reforms. The principal changes include:
Requirement for a prospectus: Separation of the regulation of admission of securities to trading on a UK regulated market from the regulation of public offers of securities
Secondary Issues: Definition of a “public offer” to exempt a pre-emptive offer to existing shareholders; prospectus required for an issue of 75% or more of the existing share capital (currently a prospectus is required where new shares represent 20% or more of the existing share capital)
Public offers: General rule to be that securities must not be offered to the public in the UK unless an exemption applies; new exemption for offer directed at existing shareholders provided that the offer is made on a pre-emptive basis
Forward looking statements: threshold for civil liability to be framed with recklessness standard to encourage more meaningful disclosure
Crowdfunding: New regulated activity to be to be created covering operation of electronic platforms for the public offer of securities
In December the government published - alongside the Edinburgh Reforms policy statement - illustrative statutory instruments as practical examples of its approach and to facilitate parliamentary scrutiny of the FSM Bill. One example is the Draft FSMA 2000 (Public Offers and Admissions to Trading) Regulations, which would replace the existing EU-derived framework with a new public offers and admissions to trading regime. The example statutory instruments are not to be seen as final policy or a draft for formal consultation.
The government will legislate to make the reforms when parliamentary time allows. The FCA will also need to consult on and implement new rules.
AQSE: Changes to admission rules
In September, Aquis Stock Exchange (AQSE) published its response to a consultation on proposed changes to the rules governing admission to both the Access and Apex segments of the AQSE Growth Market and revised versions of its Access Rulebook and Apex Rulebook. The principal changes concern:
Simplification of the admission document
Disclosure of major shareholders - the disclosure threshold will include persons who have shareholdings representing 3% or more of capital or total voting rights
Changes to share capital - a requirement that new issues of share capital, options and warrants to major shareholders and directors should be disclosed for a period of 12 months prior to admission.
Apex segment growth prospectus requirement – Removal of the requirement to publish a growth prospectus on admission to the Apex segment. Any issuers admitted to the Access segment that meet the relevant eligibility criteria will be able to transfer to the Apex segment.
Revised eligibility criteria for the Access segment
Adoption of a corporate governance code - encourage the adoption of a governance code by Access issuers through guidance rather than through regulation.
Minimum market capitalisation - £2 million for new issuers at admission.
The amended rules became effective from 3 October 2022.
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