​The Implications of Brexit for Debt Issuance Programmes

On 24 June 2016 the result of the United Kingdom's referendum on remaining in or leaving the European Union was declared with the majority being in favour of leaving. This result has already had major political and economic consequences in the United Kingdom and elsewhere and will continue to do so for the foreseeable future. The purpose of this briefing is to examine the legal and practical implications of this result for common types of debt issuance programmes which are governed by English law and used in the international capital market.

Key points

• The UK's referendum on remaining in or leaving the European Union has produced a vote in favour of leaving. This is a purely political event and there will be no changes in any laws, nor any new laws, until a number of further political actions have been taken.
• The UK remains a member state of the EU and EU legislation – including new EU laws –will continue in effect in the UK unless and until the exit mechanism in Article 50 of the Treaty on European Union is invoked by notice from the UK and either a new arrangement is agreed between the UK and the remaining member states or a period of two years elapses from the date of the UK's notice.
• Assuming a new and effective UK government emerges which is committed to implementing the referendum result there may still be a period of many months if not years before any changes in applicable law or practice are proposed let alone implemented.
• There are good reasons for supposing that such changes in applicable law or practice as may ultimately transpire as a consequence of the UK referendum result are unlikely to be significant or fundamental in the context of debt issuance programmes which are governed by English law and used in the international capital market.
• Many issuers under debt issuance programmes choose the UK as their home member state for Prospectus Directive and Transparency Directive purposes and provide for their securities to be admitted to trading on the London Stock Exchange. Until the UK government puts forward proposals for how it intends to exit the EU there seems to be little reason to revisit these choices purely as a result of the UK's referendum.
• For any issuer under a debt issuance programme, it is important to consider in the light of that issuer's circumstances whether it is necessary to make some additional disclosure to actual or potential investors in its debt securities concerning the referendum result and its implications for the business of the issuer or its group.

What has changed?

The first point to note is that no laws have changed as a consequence of the referendum nor is there any certainty over whether or how any laws will change or if indeed any laws will change at all as a consequence of the referendum. The sole purpose of the referendum was to answer a political question and there will be no changes in any laws, nor any new laws, until a number of further political actions have been taken.

The exit process

Assuming the result of the referendum is to be given effect, Article 50 of the Treaty on European Union (TEU) provides a mechanism for the UK (or any other member state) to exit the European Union by giving notice to European Council of its intention. This is considered to be the only legal way for a member state to withdraw from the EU. However the UK has not yet given any such notice and it seems clear that the only way Article 50 can be invoked is by the UK giving an appropriate notice. There are a number of legal and practical reasons why such a notice may not be given for many months following the referendum result and indeed serious commentators have questioned whether any such notice will ever be given notwithstanding the referendum result.

One of the reasons for the uncertainty over the giving of an Article 50 notice is that once given it starts a period of two years running. During this two year period the TEU envisages the UK negotiating with the remaining member states (through the European Commission) and the European Parliament the terms of its withdrawal. Furthermore Article 50 provides that if at the end of this two year period no agreement has been reached the EU Treaties will simply cease to apply to the exiting member state. Therefore, once the two year period starts the balance of power in the negotiations is likely to shift away from the exiting member state.

EU legislation continues in effect in the UK

It is important to note that until either:

1. an agreement has been reached on the terms of withdrawal; or
2. the two year period has expired,

EU legislation – including new EU laws – will continue in effect in the UK notwithstanding an Article 50 notice. It is also important to note that the two year period can be extended with the unanimous agreement of the remaining member states and the UK. Therefore it appears to be extremely unlikely that there will be any change in any relevant laws as a result of the referendum for some considerable time.

After exit what will need to change?

To leave the EU, UK legislation will need to be changed, in particular by repealing the European Communities Act 1972. EU legislation takes the form of Directives, which have to be transposed into UK law, and Regulations, which apply directly in UK law without transposition:

• Although EU Directives have been transposed into UK law, the UK Government will need to take decisions about whether to keep, modify or discard them.
• As EU Regulations apply directly in the UK, they will cease to apply once the European Communities Act 1972 has been repealed. The question will then arise whether to replace them, and if so on what basis.
• These issues relate not only to EU legislation at Level 1, but to Regulatory and Implementing Technical Standards at Level 2 under the auspices of the European Supervisory Authorities (ESAs).

Equivalence as a basis for access to the EU Single Market

There will be a better chance of gaining favourable terms of access to the EU Single Market after the UK leaves, if existing EU legislation is “grandfathered”: i.e. Directives already transposed into UK law are left unchanged; and Regulations which will no longer apply directly in the UK once the European Communities Act 1972 is repealed are replicated under English (and Scottish) law . This would make it easier for the UK to argue that, when it withdraws from the EU, UK legislation is equivalent to the EU at the outset, so that the UK can obtain favourable access to the EU Single Market as a result. This assumes that the UK would be willing to grant cross-border access to the EU on a reciprocal basis. Some EU legislation provides that the EU can deem third country regimes to be equivalent in exchange for reciprocity, though that does not apply in all cases. The EU would also likely insist that, as a condition for future access to the EU Single Market on favourable terms, UK law should be kept up to date in future in conformity with EU law as applied by the Court of Justice of the European Union.

Change, what change?

It is by no means clear that leaving the EU will lead to any significant changes in the English legal environment for debt issuance programmes, for three main reasons:

• Global level: While the detailed regulations affecting capital markets in the UK are set at EU level, the overall framework for capital markets regulation is set at global level by the G20, working through the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO). The UK participates in the G20, and is likely to continue to meet these global standards, even though it may leave the EU.
• EU level: The UK will need to continue to comply with the terms of EU legislation, if it wants to obtain favourable terms of access to the EU Single Market after leaving the EU. In the case of capital markets regulation, that will include the Prospectus Directive/ Prospectus Regulation, the Market Abuse Regulation and the Transparency Directive, among others.
• National level: The national regulators in the UK are traditionally among the most prominent national regulators in promoting financial services regulation.

Listing and Passporting

Many issuers under debt issuance programmes choose the UK as their home member state for Prospectus Directive and Transparency Directive purposes and provide for their securities to be admitted to trading on the London Stock Exchange. Until the UK government puts forward proposals for how it intends to exit the EU there seems to be little reason to revisit these choices purely as a result of the UK's referendum. Furthermore it is quite possible that whatever new arrangements ultimately emerge between the UK and the remaining member states, the so-called passporting rights under the Prospectus Directive and Transparency Directive regimes may in one way or another be effectively preserved – for example, Norway is not a member of the EU but it currently benefits from the passporting regime in this area.

Brexit risk factor

For any issuer under a debt issuance programme, it is important to consider in the light of that issuer's circumstances whether it is necessary to make some additional disclosure to actual or potential investors in its debt securities concerning the referendum result and its implications for the business of the issuer or its group. In this context we are already seeing some competent authorities asking for, and some issuers including, a specific risk factor in their disclosure documents discussing the UK referendum result and its implications for them.

Conclusion

We are in the midst of an uncertain political situation as a consequence of the UK referendum result. Until the political situation resolves itself and the UK has a government with a policy of how to deal with the referendum result, the referendum result is unlikely to have any impact on the law and practice applicable to common types of debt issuance programmes which are governed by English law and used in the international capital market. Assuming a new and effective UK government emerges which is committed to implementing the referendum result there may still be a period of many months if not years before any changes in applicable law or practice are proposed let alone implemented. Finally, such changes in applicable law or practice as may ultimately transpire as a consequence of the UK referendum result are unlikely to be significant or fundamental in this context.