FCA publishes consultation paper on approach to implementation of the Market Abuse Regulation

On 5 November 2015, the FCA published CP15/35, setting out its policy proposals and handbook changes related to the implementation of the Market Abuse Regulation (MAR). It may have been Guy Fawkes on the same day, but there were certainly no fireworks contained in the FCA's paper (boom-boom!).

MAR is generally due to come into force on 3 July 2016. The clock is clearly ticking. It had been perhaps hoped that the FCA's first publication on MAR would contain many of the details that firms were waiting on; for example, what would constitute a national identity number for UK citizens for the purposes of compiling insider lists. But the FCA made it clear: MAR is a regulation, meaning that the FCA's discretion is significantly fettered by what is produced in Europe. All that has been left for the FCA to determine is how it will exercise the (little) discretion it had been afforded and what materials need to be amended or removed from the FCA's handbooks to make way for the new regulation.

This briefing summarises the key messages from CP15/35, as well as highlighting where we expect more clarity to be given in future publications. If you would like to know more about the European ESMA papers previously published on MAR, please see our briefings here and here.

Aspects on which MAR gives competent authorities discretion

MAR changes the UK domestic market abuse regime from the implementation of a directive (under the previous Market Abuse Directive (MAD)) to the implementation of a regulation. Under EU law, regulations have direct effect in all Member States without any need for transposition at domestic level (unlike European directives). This means that the FCA's rules will no longer be a primary source of the rules (and the FCA handbook guidance will be somewhat reduced). Going forward, MAR and ESMA's Level 2 guidance and publications will need to be considered in any question concerning the interpretation of MAR. The FCA is therefore extremely limited in what discretion it can exercise under MAR, save in two specific circumstances discussed below.

Public disclosure of inside information (Article 17(4) MAR)

Under MAR, issuers and emission allowance market participants (EAMPs) are required to publicly disclose any inside information which they hold save where certain conditions are met (such as where immediate disclosure is likely to prejudice the interests of the issuer or EAMP or where the issuer or EAMP can ensure the confidentiality of the information). If an issuer or EAMP chooses to exercise its discretion to delay disclosure, MAR gives competent authorities, like the FCA, the choice either to require the issuer or EAMP to provide a written explanation of its reasons for delaying disclosure, either on every occasion it does so or only to require this when the FCA requests such an explanation.

The FCA proposes adopting the latter approach, so issuers will only need to explain their decision to delay if the FCA requests it, not every time such a decision is made. This will be welcomed although issuers will always be required to notify the FCA of the fact of the delay after the event.

Transactions by persons discharging managerial responsibilities (PDMRs) (Article 19)

MAR states that PDMRs within an issuer or EAMP (and those closely associated with them) undertaking transactions in certain financial instruments must notify their issuer/EAMP of such transactions once a threshold has been passed within the calendar year. There is a further obligation on the issuer/EAMP to disclose this information to the public. MAR introduces a de minimis threshold of €5,000 per calendar year below which transactions need not be notified. MAR also allows competent authorities, like the FCA, to increase this threshold to €20,000.

The FCA proposes not to raise the threshold to €20,000 given that there are no specific market conditions which would justify this. The threshold of €5,000 is, however, a less onerous outcome for PDMRs than the current regime, which has no de minimis threshold for reporting requirements.

Proposed changes to the handbook

The FCA handbook is a key element of the UK's market abuse regime and one of the tools used to implement MAD. The FCA is taking the general approach that, from 3 July 2016, the FCA's handbook will provide guidance on matters governed by MAR and will not take the form of binding rules as it currently does. The structure and content of the FCA's handbook will be kept in so far as it does not conflict with MAR.

Where there is an equivalent provision in MAR covering the content of the current handbook, the handbook provision will be removed and replaced with a signpost to the relevant MAR provision. Where there is no equivalent provision in MAR and the FCA handbook remains relevant with consistent terms, it will remain unchanged (where terms are inconsistent, the handbook will be conformed). If a provision in the handbook is not relevant under MAR, it will be removed. Some of the key changes to the handbook are set out below.

Market abuse generally (Code of Market Conduct (COMC) 1.2)

• The main test for whether something is market abuse (set out in COMC 1.2.2 and section 118(1) FSMA) will be removed and replaced with a signpost to Articles 14, 15 and 2 of MAR. Note that the definition has not changed but the prominence of the "reasonable investor" test has increased. It is unclear as to whether this will give a relevant court the ability to re-test the thresholds detailed in Hannam but this does not appear immediately likely.
• Evidential provisions relating to the degree to which behaviour prior to a request for admission to trading could be market abuse (COMC 1.2.5E) will be retained. MAR does not cover these, but there is nothing which states that they are inconsistent with MAR, so the FCA proposes retaining them.
• COMC 1.2.6E provides guidance on omissions in behaviour which may amount to market abuse, which the FCA is keeping on the basis that it feels MAR is deficient in this regard.
• A number of the types of behaviour listed in section 118 as market abuse refer to the "regular user" – MAR does not recognise the concept of a "regular user" and therefore provisions in COMC relating to this test will be repealed.
• COMC 1.2.22, which outlines the offence of "requiring or encouraging" another to engage in market abuse, will be removed. MAR prohibits "recommending or inducing" another to engage in market abuse, but does not extend beyond this.

Insider dealing (COMC MAR 1.3)

• COMC 1.3.2 states that dealing on the basis of inside information which is not trading information is market abuse. The FCA has deleted this and the definition of trading information, which is a key concept in the current UK regime, as it believes such a concept is outside the scope of MAR.
• COMC 1.3.5, which states that the FCA will not view something as "dealing on the basis of inside information" for the purposes of the insider dealing offence if there is a Chinese wall in place, has been removed on the basis it is not compatible with MAR because MAR does not provide for this safe harbour. Note – this does not mean an end of such arrangements!
• COMC 1.3.7 states that market makers and persons lawfully dealing on their own account and pursuing their legitimate business of such dealing will not itself amount to market abuse. This has been removed (along with related guidance on this in COMC 1.3.8G) on the basis it that it is not compatible with MAR as it narrows the scope. Again, this does not mean practices will change.
• COMC 1.3.9 states that the FCA will not view behaviour as "in pursuit of legitimate business" if inside information is not limited to trading information. This has been removed on the basis set out above.

Improper disclosure (COMC 1.4)

Under MAR, improper disclosure is now referred to as "unlawful disclosure".

• COMC 1.4.5E sets out factors to be taken into account when deciding if something amounts to improper disclosure. Aspects of this are not compatible and so have been removed.
• COMC 1.4.7G, which gives example of encouraging another to engage in improper disclosure, has been removed. This practice is, in the FCA's view, no longer relevant under MAR.

Manipulating transactions, dissemination, misleading behaviours/market distortion and exemptions (COMC 1.6, COMC 1.8, COMC 1.9 and COMC 1.10)

A number of provisions in these parts of the FCA handbook overlap with MAR, but the FCA proposes retaining them on the basis they provide useful guidance and are not incompatible. More detail is expected in the EU Commission's delegated acts in relation to the indicators of market manipulation contained in Annex 1 of MAR. The Commission's publication may require further amendments to the FCA handbook provisions depending on its content.

The following changes are also proposed:

• COMC 1.6.15E, which sets out examples of behaviour that may amount to manipulating transactions, has been deleted in favour of those examples provided at Article 12(5) (Annex 1) of MAR so as to avoid confusion between two sets of indicators. We note that some of these factors are less than helpful.
• Handbook provisions relating to behaviours relating to dissemination of information which amount to market abuse have evidential status only. The FCA considers that these provisions are no longer compatible with MAR and proposes to reissue them as guidance.
• A number of the provisions detailing what will amount to misleading behaviour or market distortion are being deleted (COMC 1.9.2E, COMC 1.9.4E, COMC 1.9.5E) as the FCA considers they are incompatible with MAR.
• Behaviours which do not amount to market abuse are set out in COMC 1.10. The FCA acknowledges an overlap between this and Article 5 of MAR and states that Commission regulatory technical standards under Article 5(6) of MAR will provide more detail. Further amendments to the FCA handbook provisions may be necessary once the Commission's technical standards have been published.

Research recommendations (FCA handbook COBS 12.4)

A number of the requirements set out in FCA handbook COBS 12.4 relating to the production and dissemination of investment recommendations will be removed and replaced with a signpost to the relevant MAR provision. For example, COBS 12.4.3G states that the obligations to disclose information do not require those producing research recommendations to breach effective information barriers. The FCA considers this is incompatible with MAR as MAR does not include this concession. Further information regarding changes to COBS is likely to be required once the Commission publishes the technical standards.

Next steps

The FCA notes that it may consult again to the extent that there are any material changes to the core documents (MAR draft implementing measures, such as the delegated acts or technical standards to be published by the European Commission and the Treasury's draft statutory instrument to amend FSMA, for example). The draft statutory instrument has not yet been published by the Treasury.

The FCA will also consult in the next couple of months on modifications to current guidance in the Disclosure and Transparency Rules for delaying disclosure of inside information. This may impact on aspects of the current consultation.

Finally, it is proposed that the Model Code (set out in the Listing Rules) will be replaced with alternative guidance on the basis that the current Code is incompatible in some respects with MAR. We will shortly be issuing a separate briefing on the proposed changes in relation to the Model Code.

For the moment, this CP15/35 leaves firms none the wiser, particularly on issues where clarity was sorely needed. Details about the UK regulator's view of the new market soundings regime, the scope of the research regime, or the information needed to start building IT systems to support the new requirements for insider lists remain outstanding.