Omnibus 3 - EU proposes centralized approval of certain prospectuses

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1 September 2017 Omnibus 3 - EU proposes centralized approval of certain prospectuses On 20 September, 2017 the European Commission published a package of legislative proposals to further strengthen and integrate EU financial market supervision in order to ensure that the European System of Financial Supervision remains fit for purpose in the Capital Markets. These proposals include changes to a number of EU regulations 1. Broadly, the approach taken involves giving ESMA greater and direct supervisory powers within the EU financial markets with a view to achieving harmonisation and a true single market. An additional purpose behind the proposal is to minimise instances of regulatory arbitrage, particularly as regards third country entities wishing to conduct business in the EU. This note focusses on one aspect of the proposal i.e. amendments to the Prospectus Regulation (EU) 2017/1129 and their likely impact on issuers of debt securities. What changes are proposed to the Prospectus Regulation? Contents What changes are proposed to the Prospectus Regulation?... 1 What powers will ESMA have?... 2 What will be the impact of this change?... 2 What is the timing?... 3 Is there any opportunity for consultation?... 3 What about Brexit?... 4 Who does this impact most?... 4 Key Contacts... 5 Certain prospectuses are proposed to be approved, not by the national competent authority ( NCA ) of the relevant home member state, but instead by ESMA itself. These are prospectuses 2 : > drawn up by EU issuers of non-equity securities, relating to the admission to trading on a regulated market of such non-equity securities, which are to be traded only on a regulated market, or a specific segment thereof, to which only qualified investors can have access for the purposes of trading such securities 3 ; 1 ESMA, EBA and EIOPA Regulations, EuVECA, EuSEF and ELTIF Regulations, MiFIR, Benchmark Regulation, and the Prospectus Regulation. 2 Other than for prospectuses produced for the purpose of admission to trading of non-equity securities on a QI-only market, the current drafting of the proposal does not distinguish between prospectuses produced for the purposes of a non-exempt public offer in the EU or admission to trading on a regulated market in the EU. 3 This QI-only market is a concept introduced by the Prospectus Regulation which entered into force in July of this year. As at the date of this memo, no such markets or segments of markets have yet been established. Omnibus 3 - EU proposes centralized approval of certain prospectuses 1

2 > drawn up by EU issuers of asset-backed securities (including securitisations and repackagings); > issued by EU specialist issuers i.e. property companies; mineral companies; scientific research based companies; and shipping companies; and > drawn up by third country issuers. Interestingly, a leaked draft of the proposal prior to its publication also included within the scope of the proposal prospectuses: > relating to the admission to trading on a regulated market of non-equity securities which have a denomination per unit of at least EUR ; and > drawn up by any legal entity or person established in the EU and relating to collective investment undertakings of the closed-end type. The scope has therefore been narrowed in the final published version. What powers will ESMA have? For relevant prospectuses, the tasks of scrutiny and approval, as well as the processing of passport notifications, and supplements are conferred on ESMA. ESMA is also to have the power to supervise advertisements related to those prospectuses subject to its approval, instead of the competent authorities of host Member States. While the actual exercise by ESMA of a control over the compliance of those advertisements is proposed to be optional, it would become mandatory should a competent authority formally request ESMA to make use of such controlling power when prospectuses approved by ESMA are used for an offer or admission to trading in its jurisdiction. It is difficult to see what mischief is being minimised by these proposals, particularly those in relation to debt securities traded only by qualified investors, who arguably are not in need of the enhanced investor protection that consistent supervision and uniform enforcement of the rules is said to achieve. What will be the impact of this change? This is likely to raise a number of questions for affected issuers: > how will this affect the timeline for approvals of both prospectuses and supplements? > how will derogations previously granted by national competent authorities be treated? > how will this affect fees payable 4? 4 It is proposed that ESMA will be paid a direct fee by issuers for the purposes of scrutiny and approval of the prospectus/supplement. Omnibus 3 - EU proposes centralized approval of certain prospectuses 2

3 Practically, this will require significant change within ESMA. It is estimated that ESMA would approve 1,600 prospectuses out of the 3,500 prospectuses approved by all the NCAs across the EU, i.e. 45% of all EU prospectuses. If this estimate is correct, it will entail a significant increase in ESMA staff to deal with the approval of prospectuses, and likely a consequent decrease in staff in various NCAs. NCAs have developed their approaches to disclosure over many years of application of the rules. It may be a concern for some affected issuers that ESMA might revisit these established practices. What is the timing? It is a clear priority of the Juncker Commission to put in place all of the building blocks for a Capital Markets Union by 2019 (the end of the mandate of the current Commission). At this early stage there is no timetable yet, but the legislative procedure (from legislative proposal to publication in the Official Journal of the EU) usually takes around 18 months. Negotiations on this proposal are expected to be influenced by the outcome of those on other initiatives, such as the proposal for recovery and resolution of CCPs, proposals for EMIR Review, and Brexit negotiations. In any case, the institutions will try to adopt the final text by March 2019, when the current legislative term in the EU institutions ends. Once the proposed Regulation is adopted and published in the Official Journal, it will come into force twenty days thereafter. There are transitional provisions in the proposed Regulation, such that the changes to the Prospectus Regulation will be applicable from the date 24 months after the entry into force. To complicate matters further, under the current proposals, prospectuses will be impacted from a date which is 36 months after the date that the proposed Regulation comes into force i.e. in 2022 (the changeover date ). Affected prospectuses which have been submitted to a competent authority for approval prior to the changeover date shall continue to be supervised by that competent authority, including where applicable as regards any supplements and final terms thereto, until the end of their validity. Any relevant prospectuses being submitted for approval from the changeover date shall be submitted for approval to ESMA. Is there any opportunity for consultation? There is an 8-week period during which the Commission will accept feedback on the proposals. After this, the Commission will present a summary of the feedback received to the European Parliament and Council. This ex post consultation is part of a new policy of the European Commission to foster transparency and facilitate citizens participation in the legislative procedure, but its real impact on the procedure remains unclear. It may be that it is advisable to also share market participants views with the European Parliament and the Council of the EU directly, who hold the pen during the rest of the law-making procedure. Feedback can be given here. Omnibus 3 - EU proposes centralized approval of certain prospectuses 3

4 What about Brexit? Subject to any agreement on transitional arrangements, if we are to assume that the UK will leave the EU in March 2019, then these changes to the Prospectus Regulation will not form part of English law. This is because the current form of the EU Withdrawal Bill only incorporates into English law, EU legislation that is already in force and applicable on the date of exit. These changes, however, would still be very relevant to UK issuers who wish to offer securities on a non-exempt basis within the EU or admit securities to trading on an EU regulated market. Such issuers would constitute third country issuers and therefore, unless an equivalence determination in favour of the UK has been made, prospectuses for a non-exempt offering or admission to trading on a regulated market in the EU would need to be approved by ESMA. To the extent that any post-march 2019 arrangement involves the UK adopting new EU financial legislation, these changes may, as a consequence be relevant to certain issuers who wish to offer securities on a non-exempt basis within the UK. Who does this impact most? The real impact of these proposals will be on issuers of asset-backed securities and third country and specialist company issuers who offer or list within the EU. As there are currently no QI-only markets established in the EU, it is difficult to predict how it will impact wholesale debt issuers. If the QI-only markets attract a significant number of debt issuers, the prospectuses relating to the admission to trading of their debt securities will need to be approved by ESMA. UK issuers which currently offer in the EU on an exempt basis (e.g. wholesale offerings) and which don t have a listing on any (non-uk) EU regulated market will not need to be concerned about these proposals, as they are currently drafted. Omnibus 3 - EU proposes centralized approval of certain prospectuses 4

5 Key Contacts For further information, please contact: Neil Dixon Tel: (+44) Ben Dulieu Tel: (+44) Elaine Keats Tel: (+44) Richard Levy Tel: (+44) Richard O'Callaghan Tel: (+44) Keith Thomson Tel: (+44) Carson Welsh Tel: (+44) Mairéad Duncan-Jones Counsel PSL Tel: (+44) Catherine Wade Senior PSL Tel: (+44) Kym Bavcevich-Ikeda Managing PSL Tel: (+44) Author: Mairéad Duncan-Jones This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2017 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to for important information on Linklaters LLP s regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. Linklaters LLP One Silk Street London EC2Y 8HQ Telephone (+44) Facsimile (+44) Linklaters.com Omnibus 3 - EU proposes centralized approval of certain prospectuses 5 A