On 3 July 2016, the Market Abuse Regulation (Regulation (EU) No 596/2014) (MAR) will take effect in the UK and across Europe, repealing and replacing the existing Market Abuse Directive (Directive 2003/6/EC) (MAD). MAR will broaden, and to an extent strengthen, the current EU market abuse regime; it aims to bring the regime up to date and was developed in parallel with the revised Markets in Financial Instruments legislative package, MiFID II, to ensure consistency in the scope of EU markets legislation.
Because MAR takes the form of a regulation rather than a directive, Member States have very limited discretion as to how they implement MAR domestically; one specific aim of the reform is to create a more harmonised market abuse regime across the EU. Although this means that extensive UK implementing measures are not required, MAR will result in substantive changes to UK legislation, and regulatory rules and guidance, to ensure that nothing in the UK regime is inconsistent with MAR. The practical impact is that market participants need to be prepared for changes to the location of the rules, as well as their content.
What are the key changes?
MAR aims to address some key problems identified since the implementation of MAD (which was implemented in the UK in July 2005). In particular, MAR will:
To the extent that provisions in MAR refer to certain new terms which are defined under MiFID II (organised trading facilities, small and medium-sized enterprise growth markets, and emission allowances or auctioned products based thereon), the application of those provisions to these new concepts will be tied to the implementation date for MiFID II (which is being postponed to 3 January 2018).
What is happening in the UK?
FCA and UK government approach
As mentioned above, it has been necessary for the UK authorities to consult upon extensive changes to UK legislation, and regulatory rules and guidance, to ensure that nothing is retained which is inconsistent with MAR. In November 2015, the FCA launched two consultations on changes to its Handbook as a consequence of MAR (CP15/35 and CP15/38), and HM Treasury made available for comment a draft statutory instrument containing proposed changes to UK legislation. In April 2016, the FCA launched a further consultation on changes to its Decision Procedure and Penalties Manual and the Enforcement Guide (CP16/13) and published its Policy Statement providing feedback and final rules in relation to the matters consulted on in November 2015 (PS16/13).
Most notably, the proposed amendments to legislation include deleting most of the market abuse provisions in Part 8 of the Financial Services and Markets Act 2000 (including the removal of the FCA’s power under section 119 to make a code giving guidance on whether or not behaviour amounts to market abuse, currently the Code of Market Conduct), adding in new provisions to Part 8 relating to the FCA’s supervisory and enforcement powers, and removing the FCA’s powers in Part 6 to make the Disclosure Rules.
There are two main areas under MAR where the FCA does have discretion:
Key changes to the FCA Handbook
There will be substantial changes to the FCA Handbook to ensure compatibility with MAR, resulting in the loss of most of the FCA’s rules and large amounts of guidance. Key changes include:
The FCA has decided not to “copy out” sections of MAR into the Handbook, but rather to include “signposts” to relevant provisions (which unfortunately will not link directly to those provisions). There will not be signposts to the relevant MAR recitals as these are not legally binding. As a result, market participants will need to familiarise themselves with MAR and the related EU subordinate legislation and guidelines. As of 3 July 2016, this will be the primary authority on the civil market abuse regime in the UK, supplemented in part only by FCA guidance and UK legislation. Market participants need to be prepared for this significant change and ensure they are aware of where to look for source material post 3 July.
The FCA’s second Policy Statement is due in June and the changes to the Handbook will take effect from 3 July 2016. As many of the implementing measures at an EU level have not yet been finalised, the FCA will need to add cross-references into its Handbook material in due course, and may also need to reassess some of its Handbook provisions in light of the final EU measures, which may require further consultation. The FCA has also indicated that it may in future consult on new guidance to address queries on the interpretation of certain aspects of MAR raised during the consultation process (listed in Chapter 4 of PS16/13), if it considers this appropriate.
One area where the FCA has sought to provide clarity for market participants is in relation to suspicious order and transaction reporting. As the relevant Level 2 measures are not yet finalised, the FCA has indicated on its website what its supervisory approach will be, and what it will expect of market participants from 3 July 2016, in light of the fact that it may not be possible for market participants to have fully effective surveillance in place to meet the eventual requirements from this date.
MAR will apply to AIM companies, with its main impact being on the rules governing announcing information to the market and dealings by directors and senior management. Key changes that the London Stock Exchange is proposing to make to the AIM Rules for Companies include:
The changes that MAR makes to the UK civil market abuse regime will not affect the separate UK criminal offences of insider dealing and disclosure of inside information under the Criminal Justice Act 1993, or offences relating to the publication of misleading statements and benchmarks under the Financial Services Act 2012. For the time being, the UK has elected not to opt into the EU Directive on criminal sanctions for market abuse (Directive 2014/57/EU), which other EU Member States must implement by 3 July 2016 – this requires that serious cases of market abuse, such as insider dealing, market manipulation or unlawful disclosure of inside information committed with intent, constitute criminal offences.
There are separate plans to review the sanctions that apply under the UK criminal regimes, and changes also may be made to penalties in light of the Bank of England’s Fair and Effective Markets Review Final Report (published in June 2015), which recommended that the maximum sentence in the UK for both insider dealing and market manipulation should be extended from seven to 10 years, in line with other fraud and bribery offences. The Final Report also recommended that a new statutory civil and criminal market abuse regime should be created in the UK for spot foreign exchange, which could allow for the possible extension to other over the counter fixed income and commodities markets outside the scope of MAR.
It is expected that the Fair and Effective Markets Review progress report, due in July 2016, will indicate whether and how the above recommendations will be taken forward.
What should I be doing prior to implementation?
Market participants should be preparing as far as possible for the 3 July 2016 implementation date, while remaining mindful of the fact that certain elements of the regime are still to be finalised.
Companies already within scope of the market abuse regime, and those currently subject to equivalent regimes such as AIM companies, should review and update their policies and procedures (including record-keeping arrangements) to ensure compliance with MAR. This should include, in particular, those which address:
Companies will also need to provide training to directors, other PDMRs, insiders and other relevant employees on their obligations under MAR and the consequent changes to internal policies and procedures. Compliance officers and in-house lawyers will need to be able to advise comfortably on the regime using the new source material and, in many cases, in the absence of the FCA guidance that they may have been using to support their analyses for many years.