The UK’s departure from the EU’s debt capital markets regime began with the European Union (Withdrawal) Act 2018 (EUWA), which repealed the European Communities Act 1972. This effectively set the mechanics of implementing Brexit into motion. The EUWA also set out a transitional period until 31 December 2020. This was done to bridge the time gap between the date on which the UK left the EU, and the date on which any future relationship agreement came into force. The EUWA was amended by the European Union (Withdrawal Agreement) Act 2020 to ensure that directly applicable EU law as it stood at the end of the transition period, was converted into UK law, through secondary legislation and various instruments made by the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Bank of England (BoE) (Retained Law). The UK left the EU on 31 January 2020 and the transition period ended on 31 December 2020, marking its completion (Completion Day). On this day, EU law ceased to apply to the UK.

Retained Law

The TCA came into force immediately after Completion Day but does not include a mutual equivalence regime for financial services. The memorandum of understanding (MoU), agreed between the UK and EU in March 2021, lays the foundations for a joint UK-EU regulatory forum to co-operate in setting out rules for financial services. The MoU is not legally binding and does not actually constitute an EU decision on equivalence in relation to any area of financial services law. Further work will need to be done between the UK and EU, to arrive at any equivalence decision. The EU has indicated that it will make these decisions slowly and on a case-by-case basis. From Completion Day, EEA debt capital markets continue to be governed by EU law, while UK debt capital markets are governed by applicable Retained Law as well as UK law which is not derived from EU law. This includes the common law of trusts, contracts and UK specific initiatives such as the financial promotions regime.

The key elements of EU debt capital markets legislation which have been ‘on-shored’ in the UK as Retained Law include the Prospectus Regulation, the Market Abuse Regulation, the PRIIPS Regulation, the Benchmarks Regulation, the Credit Rating Agencies Regulation, the Capital Requirements Regulation, the Short Selling Regulation and the Central Securities Regulation. Although EU non-legislative guidance such as ESMA’s Q&A, however, does not form part of Retained Law, the FCA expects market participants to continue to apply them to the extent they remain relevant until replaced or superseded by UK guidance.

Prospectus passporting

The UK has made an equivalence decision in respect of the EU’s prospectus regime. However, the FCA has confirmed that it will not currently approve an EU prospectus for regulatory use in the UK. An EEA issuer will be required to secure approval of its prospectus from the FCA, even if the prospectus has already been approved by its national regulator. A valid prospectus passported into the UK before Completion Day will continue to be valid for use in the UK up to the end of its normal period of validity, i.e., 12 months from the date it was originally approved. Any supplement to such prospectus will need to be approved by the FCA after Completion Day.

There has been no corresponding equivalence decision by the EU of the UK’s prospectus regime. A prospectus approved by the FCA after Completion Day can no longer be passported for offering securities or admission to trading to regulated markets in the EU. Any prospectus approved by the FCA before Completion Day will no longer be valid for offers of securities or admission to trading in the EEA. An independent prospectus approval by another EEA competent authority is now required.

As a result, issuers operating in the UK and the EEA face complying with two parallel, yet distinct, prospectus regimes. This is unlikely to affect issuers of wholesale securities, who can avoid prospectus requirements entirely by listing on a UK or EEA MTF, such London’s ISM or Dublin’s Euronext GEM, and/or by issuing securities with a minimum denomination of EUR 100,000. It will definitely impact offers targeting retail investors in the EEA and the UK, who would need to comply with both the EU Prospectus Regulation and the UK Prospectus Regulation and might need to publish two prospectuses as a result.

Prospectus rules divergence

The current UK prospectus regime is broadly parallel to that of the EU. It was the policy intent of the EUWA that the same rules and laws should apply the day after the end of the transition period, as applied the day before. However, this was most likely driven by the need to ease the transition in the short term. It should not be interpreted as a sign of the UK’s medium to long term policy intent. There are some signs of divergence, the most immediate of which relate to the UK’s listing and prospectus rules.

From 1 January 2021, the FCA expanded the categories of issuers and issuances to which the UK Prospectus Regulation does not apply so that any sovereign, local or regional authority or central bank issuer, as well as any issuer of securities guaranteed by any government or local or regional authority, is exempt from the requirement to publish a prospectus. This is a minor but deliberate divergence from the EU regime. It has the effect to facilitate access to UK capital markets for sovereigns, local and regional authorities and sovereign guaranteed issuers by significantly reducing their costs and time to market.

In addition, Lord Hill published a review of the UK Listing regime, with the aim of strengthening London’s capital markets. The review acknowledges criticism of the Prospectus Regulation received in response to its call for evidence. It was noted that the drive towards disclosure and transparency, coupled with the liability profile attached to prospectuses, has led to a ballooning in the size of these documents and a reduction in their usefulness. The review suggests that the UK government should carry out a ‘complete rethink as to the whole purpose of the prospectus’, going back to ‘first principles’. It recommends returning to a system closer to the one the UK had before the Prospectus Directive and Regulation. While the review is focussed more on share rather than debt listings, it is likely to have an impact on capital markets as a whole.

In February 2021, the European Council adopted targeted amendments to the Prospectus Regulation as part of the Capital Markets Recovery Package agreed between the Council and European Parliament at the end of last year. The amendments establish a new ‘EU recovery prospectus’. This is a shorter prospectus to make it easier for companies to raise capital to meet their funding needs, while ensuring adequate information is provided to investors. It will be available for capital increases of up to 150% of outstanding capital within a period of 12 months. The new regime will apply until the end of 2022. As these measures were adopted after Completion Day, they are not part of Retained Law.

Conclusion

As of the date of the ratification of the TCA, there has not been any significant divergence between the UK and EU prospectus regimes. Wholesale offers are largely unaffected other than in terms of adapting their disclosures and selling restrictions language to reflect the new regime. While offers to retail investors in the UK and the EU face the prospect of publishing two prospectuses, their contents would be broadly similar.

The UK and EU face similar challenges to their prospectus regimes, namely, how to make them fit for purpose to facilitate access to the capital markets while maintaining investor protection. The output from their respective think-tanks is revealing some underlying philosophical differences. The EU favours targeted adjustments while the UK is considering overhauling the whole system entirely. Yet, the mutual economic advantages of achieving some form of equivalence may moderate some of the more radical impulses to diverge on the UK side, and encourage the EU to adopt a more flexible approach.

For more information on this development, contact a member of our Debt Capital Markets & Listing team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.