The UK Prime Minister, Boris Johnson has stated that the UK will be leaving with, or without, a deal on 31 October 2019 (Brexit day). If the UK leaves the EU on Halloween without a deal, there will be immediate implications for passporting rights for debt securities.

Choice of new home member state

An issuer whose home member state, or ‘home state’, is the UK and is admitted to trading on one or more regulated markets in the remaining twenty-seven EU member states and the three EEA EFTA states (EU27/EEA) will need to determine and disclose its new home state in accordance with the Transparency Directive. The new home state should also be disclosed to the competent authorities of:

• The member state where it has its registered office, where applicable
• The home state
• All host member states

If disclosure is not made within three months of Brexit day, then the EU27/EEA state where the issuer’s securities are admitted to trading would be considered its home state. If this is occurring on multiple regulated markets, then all would be considered home states until a choice is made and disclosed by the issuer.

Passporting of prospectuses

Under the Prospectus Regulation, a prospectus approved in an EU27/EEA home state can be “passported” into another EU27/EEA host state. This means that it can be used to offer securities to the public or to be admitted to trading on the regulated market of the host state without further approval. In a no-deal Brexit, the UK will no longer operate under this regime.

On Brexit day, the Prospectus Regulation will be converted into UK domestic law with some amendments. In a no-deal Brexit, the UK would default to treating EU27/EEA states as third countries. EU27/EEA issuers would need to have their prospectuses approved under the post-Brexit UK regime. However, under transitional provisions, a prospectus approved in an EU27/EEA state and passported into the UK before Brexit day would be treated as if it had been approved by the FCA, as long as:

• It was approved before Brexit day by the competent authority of an EU27/EEA home state other than the UK which is the issuer’s home state for the purpose of the Prospectus Regulation

• The home state competent authority must have provided the FCA with a certificate of approval, a copy of the approved prospectus and a translation of the summary, and

• The prospectus was approved under section 85 of FSMA before Brexit day

An issuer can, with the FCA's approval, supplement its prospectus as necessary during its validity.

In the event of No-deal Brexit, the EU would default to treating the UK as a third country, and the UK would incur the loss of automatic passporting rights. This means that:

• Prospectuses and supplements approved by the FCA before Brexit day can no longer be passported in the EU27/EEA

• Prospectuses approved by the FCA and passported into the EU27/EEA before Brexit day can no longer be supplemented

• Since these prospectuses can no longer be supplemented, they can no longer be used to offer securities to the public or admit securities to trading on a regulated market in the EU27/EEA

ESMA has set out four scenarios describing how an FCA approved prospectus which has already been passported into the EU27/EEA would be treated after Brexit day in a no-Deal Brexit.

• Continuing an offer to the public in the EU27/EEA: this would require a prospectus approved in a new EU27/EEA home state for the part of the offer which will take place after exit day. Given the timelines involved, it is unlikely that the offer would be able to continue.

• Making a new offer to the public in the EU27/EEA with a base prospectus: the issuer would need to have the prospectus approved in its new EU27/EEA home Member State before it can make the public offer.

• Seeking a new admission to trading in a regulated market in the EU27/EEA: the issuer would need to have the prospectus approved in its new EU27/EEA home Member State before it can be admitted to trading.

• Maintaining an admission to trading on a regulated market in the EU27/EEA: this is the only scenario where an approval from a new EU27/EEA home state is not required.

Where an approval is required in a new EU27/EEA state, the issuer is not obliged to draw up an entirely new prospectus: it can submit the prospectus already approved by the FCA.

Equivalence

In a no-deal Brexit, it may be more likely that the UK diverges from EU regulation long-term. This would make it less likely the UK would be granted ‘equivalent’ status, or indeed retain the status if granted under after a no-deal Brexit.

The EU demonstrated its desire for regulatory convergence with third countries recently by withdrawing Switzerland’s equivalence status due to an impasse in agreeing a new framework. Coincidentally, the London Stock Exchange has confirmed that it will reinstate on-exchange trading for Swiss stocks in a no-deal Brexit.

Comment

The loss of passporting rights in a no-deal Brexit has the potential to be disruptive. However, debt securities issues which do not fall under the EU prospectus regime are not likely to be affected by the loss of prospectus passporting rights. In the short term, EU27/EEA issuers operating in the UK can draw some comfort from the ‘onshoring’ of EU prospectus rules and the transitional provisions. UK issuers operating in the EU27/EEA need to identify a new home state as soon as possible as there are no comparable transitional provisions. The longer term effects of Brexit are unknown, but firms may be able to mitigate potential problems with proper contingency planning.

For more information on the impact of a no-deal Brexit on the capital markets and your organisation’s related activities, contact a member of our Debt Capital Markets team.

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