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Directors' know how is a monthly article, which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.

Application of the Market Abuse Regulation nears

The EU Market Abuse Regulation (MAR) will come into effect from 3 July 2016, requiring the UK to adapt its market abuse regime to fit the new requirements of the regulation. Whilst the current UK market abuse regime is broadly similar to what is outlined in MAR, there will be changes to the FCA Handbook, the Disclosure and Transparency Rules, the Financial Services and Markets Act (FSMA) and the AIM Rules for Companies.

There are two primary elements of MAR that could impact small and mid-size quoted companies:

  • Obligation to keep insider lists: Firms will be required to keep detailed insider lists from the date of entry into force of MAR. There are exemptions for producing insider lists foreseen in MAR for companies on 'SME Growth Markets'; however, since MAR is introduced before MiFID II (which defines these markets) comes into force, companies on growth markets such as AIM will be required to produce full insider lists. This means that small and mid-size quoted companies on growth markets will have to put in place systems for insider lists and be subject to rules that require the same level of information for larger companies with different resources.
  • Prohibition on dealings: MAR prohibits persons discharging managerial responsibilities (PDMR) from trading during a closed period before the announcement of an interim financial report or a year-end report. Many companies traded on the UK Main Market and AIM routinely issue preliminary announcements of annual results that often contain insider information. MAR rules could be effectively creating two closed periods (one running prior to publication of the prelims and one running prior to the publication of the results), which is likely to restrict the market’s ability to function properly and overburden business.

We have flagged these concerns with the FCA, the European Commission and HM Treasury, as well as highlighted them in our recent responses to the FCA consultation on its Policy proposals and Handbook changes related to the implementation of MAR and to the European Commission consultation on the EU Regulatory Framework for Financial Services. We will continue to emphasise these implementation issues in our upcoming response to the FCA’s consultation on delaying disclosure of inside information by issuers with securities admitted to trading on a regulated market (CP15/38), due on 20 February 2016. We are working to ensure that the transition to this new market abuse regime works well and does not add additional administrative burdens or disproportionate requirements for small and mid-size quoted companies.

At the moment there is still uncertainty regarding the technical aspects of the issues mentioned above since these policy proposals are still subject to the publication of the European Commission's forthcoming delegated Acts and regulations on MAR. We will be sure to brief our members on the key changes they should consider once further detail on the delegated acts and regulations is published.

Why MiFID II matters for small and mid-size quoted companies

The Commission has just announced that the entry into force of the EU Markets in Financial Instruments Directive II (MiFID II) will be delayed by one year to 3 January 2018, due to the complexity of the technical data infrastructure that needs to be established so that MiFID II can operate effectively. This means that competent authorities and market participants will have an additional year to comply with MiFID II. 

MiFID II aims to address the flaws in some of MiFID’s underlying principles by reinforcing and replacing the current European rules on securities markets. Many of the key areas of MiFID II are likely to affect small and mid-size quoted companies, including:

  • SME Growth Markets: MiFID II introduces a new market classification allowing growth markets across the EU (such as AIM) to benefit from more flexible rules. This is a great opportunity for small and mid-size quoted companies to access capital markets and, once quoted, to benefit from a set of more proportionate rules that are more appropriate to their size and resource, thus providing opportunities to grow.
  • Deferred Publication Regime: Delayed trade reporting for abnormally large trades of shares is a feature of trading which mitigates the liquidity risk associated with material investment, particularly for smaller companies. After sustained campaigning by our Secondary Markets Expert Group, MiFID II Level 2 measures will revise the delays available, which could have had an unduly punitive effect on less liquid securities, such as those of small and mid-size quoted companies. We are supporting an extended deferral period of delayed publication for less liquid securities.
  • Investment Research: The rules introduced by MiFID II could impair the ability of small and mid-size quoted companies to have research produced on them, decreasing their visibility and potentially limiting investment, thus consequentially having a negative effect on small and mid-size quoted companies’ ability to raise finance, grow and create jobs. This reduction in investment research could lower demand from fund managers for research on small and mid-size quoted companies, as well as reduce incentives for brokers and analysts to produce it.

We have and will continue to raise our concerns on the key areas above with HM Treasury, the FCA, the European Commission and ESMA, and have suggested practical solutions in our response to the European Commission’s consultation Call for Evidence: EU Regulatory Framework for Financial Services.

An extension of the MiFID II application date will impact of other legislation, in particular MAR and the CSDR. Regarding MAR, the Commission says that the existing concepts and rules will continue to be used until the new MiFID II application date, and that definitions such as SME Growth Markets will not apply until the new MiFID II application date. As for CSDR, MTFs meeting the criteria for an SME Growth Market under MiFID II will be allowed to apply a longer extension period for the settlement of transactions whilst their registration as an SME Growth Market under MiFID II is ongoing.

The extension of the MiFID II application date should not have an impact on the adoption of delegated acts and technical standards under MiFIR and the MiFID II Directive. We will continue to campaign for proportionate rules to be developed for small and mid-size quoted companies and we will keep our members informed to enable them to establish and adjust internal systems to ensure compliance with new requirements on the new MiFID II application date.

FRC publishes discussion paper on ‘UK Board Succession Planning’

The FRC has published a discussion paper on board succession planning for companies to which the UK Corporate Governance Code applies. This paper seeks suggestions for good practice regarding board succession for both executives and non-executives that supports a suitably talented, diverse ‘pipeline’ of directors ready to serve on the boards of UK listed companies.

The paper states that the absence of a succession plan can undermine a company's effectiveness and its sustainability. It can also be a sign that the company is not sufficiently clear about its purpose and the culture and behaviours it wishes to promote in order to deliver its strategy. However, while board evaluations have highlighted that improvements in succession planning are important, more clarity is needed on what best practice is and how boards can be better prepared.

Subsequently, it pinpoints the following qualities of good succession planning:

  • Ensuring a continuous supply of suitable people (or a process to identify them), who are ready to take over when directors, senior staff and other key employees leave the company in a range of situations;
  • Achieving continuity to deliver strategic plans, by aligning the company’s human resources and business planning; and
  • Demonstrating a commitment to developing careers for employees, which will enable the company to recruit, retain and promote high-performing staff.

In our response to the FRC, we welcomed the focus given to the different important issues connected to succession planning, but emphasised that succession planning is often more challenging for smaller companies than for larger ones because they are unlikely to have a broad range of internal candidates to draw from. We highlighted that many of our members are not obliged to follow the UK Corporate Governance Code on a mandatory comply or explain basis, and that some elect to follow the Quoted Companies Alliance Corporate Governance Code for Small and Mid-Size Quoted Companies (the QCA Code).

FRC Culture Project

The FRC has launched a market-led initiative to gather insight into corporate culture and the role of boards; to understand how boards can shape, embed and assess culture; and to identify and promote good practice. 

Through a series of events, the FRC will explore some of the questions surrounding the role of the board and the culture in an organisation, focusing on:

  • Delivering Sustainable Success: the role of an effective board;
  • People issues: delivering alignment between culture, values, human resource practices and performance reward systems;
  • Stakeholder issues: relationships between culture and business models, with shareholders, customers and suppliers, and the impact on the wider community and environment; and
  • Embedding and assurance: measuring and monitoring culture, the role of internal audit, risk management and public reporting of cultural indicators.

The FRC has issued a public invitation to participate in the project and will publish a report identifying good practice examples and including resources to help boards across a range of sectors take action on culture in June 2016. This will then lead to a review of the FRC’s Guidance on Board Effectiveness.

We are delighted to be participating in a joint QCA/FRC roundtable event focusing on corporate culture on 1 March 2016. There are still some places available – if you would like to participate and help influence the FRC’s report please email Lydia Uthayakumar ( This event is only open to members who are directors of quoted companies. 

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