EUROPEAN SAVINGS BANKS GROUP GROUPEMENT EUROPEEN DES CAISSES D EPARGNE EUROPÄISCHE SPARKASSENVEREINIGUNG DOC 1074/03 Brussels, 15 December 2003 JEA European Savings Banks Group (ESBG) Response to the Commission s Working Document on the implementation of Articles 5, 7, 10, 11, 14 and 15 of the Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (Prospectus Directive) Working Document ESC 36/2003 Rue Marie-Thérèse, 11 B-1000 Bruxelles Tél: ( + 32 2 ) 211 11 11 Fax: ( + 32 2 ) 211 11 99 E-mail : first name.surname@savings-banks.com Website : http://www.savings-banks.com
Profile European Savings Banks Group The European Savings Banks Group (ESBG) represents 25 members from 25 countries (EU countries, Norway, Iceland, Bulgaria, Czech Republic, Hungary, Latvia, Malta, Poland, Romania, Slovak Republic) representing over 1000 individual savings banks with around 66,500 branches and nearly 770,000 employees. At the start of 2002, total assets reached almost EUR 4160 billion, non-bank deposits were standing at over EUR 2012 billion and non-bank loans at just under EUR 2095 billion. Its members are retail banks that generally have a significant share in their national domestic banking markets and enjoy a common customer oriented savings banks tradition, acting in a socially responsible manner. Their market focus includes amongst others individuals, households, SMEs and local authorities. Founded in 1963, the ESBG has established a reputation as the advocate of savings banks interests and an active promoter of business cooperation in Europe. Since 1994, the ESBG operates together with the World Savings Banks Institute (WSBI, with 109 member banks from 92 countries) under a common structure in Brussels. 2
A. Introduction The ESBG would like first of all to express its full support for the opportunity afforded by the European Commission to comment on its proposed measures for implementing the prospectus Directive (Working Document ESC 36/2003). The ESBG is of the opinion that consultation at this stage of the Lamfalussy process is fundamental to the whole process of developing secondary legislation. This is furthermore particularly true in the case of the current consultation performed by the Commission, for two main reasons. First, the text published by the Commission, although being very much in line with the advice submitted by CESR, contains several important issues, which leave some room for interpretation and should accordingly be the subject of an open discussion between the Commission and the market participants at an early stage. Second, this consultation permits providing views on some important issues which were not addressed by CESR, such as for example the choice the appropriate instrument to enact the implementing measures, namely a Regulation or a Directive. B. General Comments 1. Keeping competences in order: no political decisions at level 2 The ESBG is of the opinion that, in the context of the Lamfalussy procedure, there must be a clear line drawn between framework principles decided upon at the level 1 of the process and level 2 technical, implementing measures. Regarding the submitted Working Document however, the ESBG is concerned that some of the implementing measures proposed are not of a merely technical nature, but rather of a political one. We would like to illustrate this using two examples: 1.1. Historical financial information: obligation to cover the latest 2 financial years The ESBG shares the view that the requirements contained in the Working Document regarding Historical Financial Information conflict with the existing level 1 legislation. Indeed, in the section of Annex 1 dedicated to the Banks Registration Document (Appendix K), the Commission indicates that the audited historical financial information should cover the latest 2 financial years and be prepared according to the IAS regulation (section 11.1). The ESBG however believes that such a requirement would be in contradiction with the International Accounting Standards, which only require an issuer to restate its consolidated accounts for the financial year prior to its first time application of IASs. 3
The ESBG would therefore fully supports a solution, which does not impose additional requirements over and above those under the IAS Regulation, in particular for issuers of only debt securities. 1.2 No interim financial reporting obligation for non-listed issuers offering publicly nonequity securities The second example illustrating a potential conflict between level 1 and level 2 legislation relates to the requirement for non-listed issuers, which publicly offer debt and/or derivative securities, to disclose interim financial information, even if the offered securities are not admitted to trading on a regulated market (Annex 1, Appendix K, no. 11.5.2). This requirement for interim financial reporting is not mentioned in existing level 1 legislation, being the forthcoming Transparency Directive or the latest version of the proposal of the Commission for a Directive on capital requirements of banks and investment firms 1 (third pillar of the Basel II Accord). As already detailed in its response to the consultation performed by CESR in August 2003 (advice submitted to the Commission on 30 September 2003), the ESBG does not believe that implementing measures are the appropriate place to impose this type of new reporting requirement. If the objective was to introduce this new requirement only with a view to the Prospectus Directive 2, then this should have been done at level 1 of the Lamfalussy process. Since this has not been the case, the ESBG believes that the definition of such an obligation falls outside the scope of the Commission s responsibilities. 2. Choice of a Directive or a Regulation The Working Document indicates that the Commission is considering the adoption of one Regulation for the implementation of the proposed level 2 measures. The Commission justifies this approach by the detailed nature of the implementing rules that need to be adopted and the need for uniform solutions in all EU Member States (page 2 of the Working Document). The ESBG does however not believe that a Regulation will help in achieving the objectives mentioned by the Commission. The ESBG is particularly concerned by the possible confusion, which might arise from the mixture between directly applicable provisions 1 Review of capital requirements for banks and investment firms, Commission services third consultation paper, Working Document, 1 July 2003. 2 Directive 2003/71/EC of the European Parliament and the Council on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market and amending Directive 2001/34/EC. 4
contained in the level 2 Regulation and provisions of the Prospectus Directive, which have to come into force in the Member States by way of implementation acts. This confusion might seriously hinder the achievement of the objective of uniform solutions in the Member States. The ESBG is in fact of the opinion that uniform solutions might be better achieved by having the level 2 implementing measures enacted in a Directive, transposed in national legislation through implementation acts. In a further stage, the competent authorities within the EU could agree on consistent supervisory standards at the levels 3 and 4 of the Lamfalussy procedure. We would like to use two examples to illustrate this general introductory statement. 2.1 Example 1: Issuer considering launching an offering programme in a Host Member State An issuer with a registered office in a Member State is considering the opportunity of launching an offering programme in another Member State. The issuer would like to know accordingly whether it is allowed to make use of a base prospectus in the Host Member State. The Draft Regulation submitted by the Commission contains detailed provisions on the format of the base prospectus, including, for example, the relation between the base prospectus and its related final terms (Article 8 of the Working Document). The Working Document however does not say anything about the conditions which an issuer must fulfil to be allowed to make use of a base prospectus. The question is rather exclusively dealt with in Article 5 (4) of the Prospectus Directive. Since the Directive has to be transposed in each Member State by means of a national implementation act, this act will have to determine, inter alias, which conditions have to be fulfilled to have an offering programme in the meaning of Article 2 (1) (k) of the Prospectus Directive. In practice, this means that in the aforementioned example, the issuer has to check carefully the implementing act of the Host Member State relating to Article 5 (5) and make sure that its programme meets the described requirements. As such, the Working Document with the specific provisions on the details of the base prospectus regime becomes applicable only once this issuer has the confirmation that its programme meets the specified requirements. Along the same line, an issuer would have to refer to the national implementation acts in order to know in which cases it has to publish a supplement to the prospectus, since, in contrast to Articles 14 and 15, Article 16 of the Prospectus Directive (Supplements to the prospectus) does not contain any provision regarding the adoption of implementing measures. This does not prevent the Draft Regulation from addressing the issue of the supplements several times, such as in Article 4 (5) and (6), in Article 7 (5), in Article 8 (7) and in Article 10 (2). A crucial question will therefore be to ensure that the national acts for implementing 5
the Prospectus Directive and the level 2 Regulation are adequately harmonized in each individual Member State. This example illustrates well the confusion that might arise from the coexistence of national implementation acts, of a level 2 Regulation and of the interpretation of the level 2 Regulation by the national authorities. 2.2 Example 2: Definition of the legal terms The ESBG also believes that the choice of a Regulation would create several problems for domestic issuers, which could be avoided in the case of a national implementing act in conformity with a level 2 Directive. This statement particularly applies to the Appendices in Annex 1, which contain legal terms which might in a best-case scenario have an equivalence in European Law, but which have in any case to be integrated into the national legal framework of the individual Member States. As an illustration, the term control, which is used in each Registration Document in the section concerning Major Shareholders, is defined in Directive 83/349/EC, but is specified by means of national implementing acts in the Members States. As such, determining whether a shareholder is a major shareholder in the meaning of the aforementioned appendices requires taking the national legislation of the relevant Member State into consideration. Consequently, in order to ensure legal certainty regarding the definition of a term such as control, its definition should be dealt with by a parliamentary legal act in the Member State, rather than being subject to the supervisory standards of the competent authorities. The same remark applies even more in the case of legal terms used in the appendices and for which no definition exists under the existing European law, such as in the case of the terms administrative, management and supervisory bodies or material contracts to be disclosed. The ESBG does not share the view that the appendices can be applied directly in practice for the sole reason that they are enacted in a Regulation. It is of fundamental importance to guarantee reliable rules of interpretation, which should fall under the responsibility of the national legislator instead of the competent authorities, in particular in the case of the solely domestic business. 2.3 Conclusion As a conclusion, the ESBG does not believe that regarding the submitted Working Document, the adoption of a Regulation for the implementation of the level 2 measures shall facilitate, expedite or harmonize the practice of cross-border issues across the European Union. As far as the domestic business is concerned, a Regulation would also not be applicable without 6
specifying rules of interpretation. Defining such rules should primarily be the responsibility of the national legislators and only - as a second step - be fine-tuned by the supervisory authorities in conformity with the needs of flexibility and investor protection. Against this background, the ESBG would recommend adopting a Directive rather than a Regulation for the implementation of the level 2 measures for the Prospectus Directive. Only afterwards should CESR Members ensure consistent supervisory standards at the levels 3 and 4 of the Lamfalussy procedure, especially in order to provide for the necessary legal certainty for the cross-border business. C. Specific Comments on Provisions of the Working Document In this section, the ESBG would like to comment in more detail on some specific provisions of the submitted Working Document. 1. Historical financial information (Annex 1, Appendix K, section 11.1) As explained in a former section, the ESBG does not believe that it is a mere technical decision to determine the number of years for which audited financial information has to be provided. This being said, the ESBG strongly believes that offering comparable figures for the previous financial year provides a sufficient basis for comparison, in particular for issuers of debt securities, since investors in debt securities do not need as detailed information as investors in equity securities. The ESBG therefore supports a solution which, in line with the IAS, would require an issuer to restate its consolidated accounts for the financial year prior to its first time application of IAS. Along the same line, the ESBG strongly regrets that the Commission has apparently not waited for the results of CESR s final round of consultation on the issue of historical financial information, which is one of the key issues for which CESR has to provide advice by 31 December 2003. Instead, in each of the Registration Document (RD) schedules, the Commission requires a two years retroactive effect, whereas for the rest of CESR s outstanding advice, the Working Document leaves blank spaces. This gives the impression that the Commission already made up its mind regarding this issue, irrespective of the outcome of CESR s final advice. 7
2. Interim financial information (Annex 1, Appendix K, section 11.5.2) In section B.1.2, we explained why the ESBG does not believe that implementing measures are the place to impose additional interim financial information requirements, apart from the already existing ones. Apart from this comment linked to the Lamfalussy process as a whole, the ESBG would like to restate that it does not believe that mandatory interim financial reporting requirements for non-listed credit institutions issuing non-listed securities is appropriate. In particular, small and medium-sized credit institutions which frequently issue non-equity securities would be faced with the obligation to publish each year half-yearly financial reporting if they publish a Registration Document or a base prospectus in the 4 th or 1 st quarter of their business year (since in such a situation their latest financial statements would be older than 9 months). The ESBG is of the opinion that the costs incurred for complying with such a far-reaching obligation are disproportionate to the actual benefit for the investor. This is particularly true when an investor lends money to a credit institution in the form of a deposit and does not require information concerning the issuer at all, but rather relies on the ongoing prudential supervision of the credit institution 3. 3. Entry into force of the Regulation The ESBG believes that the measures to implement the Prospectus Directive should be enacted in a Directive, as opposed to a Regulation. This view was detailed in section B.2 of this paper. Nevertheless, should the Commission decide, in spite of the arguments given, to adopt a Regulation to implement the level 2 measures, then it should be made clear that the level 2 Regulation should not enter into force prior to the end of the transposition period set out in Article 29 of the Prospectus Directive. The ESBG regrets that no explicit provision regarding this issue is included in the submitted Working Document. 4. Possibility for the competent authority to require further information (Article 4 (2)) The ESBG is opposed to the provision mentioned in Article 4 (2), second sentence, of the Working Document, which allows the competent authority to require that the information included in each of these information items be amended and completed on a case by case basis. The ESBG indeed believes that granting such a far-reaching power to the competent authorities fully contradicts the harmonization approach followed not only in the framework of the Prospectus Directive but also in the Lamfalussy procedure as a whole. 3 Additional information on this issue is provided in the ESBG response sent to CESR in August 2003. 8
Especially with a view to the need for legal certainty, the information items set out in the appendices (Annex 1) should be definite and exclusive. The competent authorities should - if at all be entitled to require such amendments only in exceptional cases. 5. The RD for Debt and Derivative Securities with a denomination per unit of less than EUR 50 000 should also be eligible if the denomination per unit is more than EUR 50 000 (Article 4 and Annex 2) The table of combinations of schedules and building blocks of Annex 2 does not indicate the possibility for an issuer of debt and derivative securities with a denomination of at least EUR 50 000 to use the RD for retail non-equity securities (Annex 1, Appendix D) instead of the one for wholesale non-equity securities (Annex 1, Appendix I). The ESBG believes that this is in contradiction with Article 3 (3) of the Working Document, which indicates that the most comprehensive and stringent registration document schedule ( ) may always be used to issue securities for which a less comprehensive and stringent registration document is provided for. Considering that it is a relatively common market practice to issue wholesale bonds under the umbrella of a retail prospectus, the ESBG believes that Annex 2 should provide for more flexibility in this respect. 6. Categorisation of the base prospectuses (Article 4 (4)) Pursuant to Article 4 (4), there shall be four categories of base prospectuses, which exclusively cover specific categories of securities (asset backed securities, covered warrants, mortgage bonds and other non-equity securities). In practical terms, this means for example that an issuer who drew up a base prospectus when issuing mortgage bonds as defined under Art. 5 (4) (b) of the Prospectus Directive is not allowed to issue covered bonds under the umbrella of such base prospectus. Instead, the issuer would have to draw up a separate base prospectus. The ESBG is of the opinion that such a provision does not meet the needs of market practice. It is, for example, common practice in several Member States to issue both mortgage bonds and uncovered bonds under the same offering programme. As such, it does not appear reasonable to require the drafting of separate base prospectuses for each case, as long as the investor is provided with a whole set of information concerning the issuer and the issued securities within one base prospectus. In practice, it might in fact be possible to make use of the option provided for in Art. 8 (4) of the Working Document, consisting of incorporating by reference a Registration Document in a base prospectus, in order to avoid the heavy workload represented by the preparation of a full base prospectus for both mortgage bonds and uncovered bonds. The ESBG nevertheless does not believe that the technique of incorporation by reference is suitable and reasonable in 9
situations where the issuer knows at the moment it issues mortgage bonds that it will also issue uncovered bonds (for example) at a further point in time. Against this background, the ESBG would recommend merging at least the third and fourth indents of Article 4 (4) (mortgage bonds and other non-equity securities) into one single category. The ESBG would nevertheless rather support a global solution allowing a consolidation of the four indents into one single category. 7. Partial incorporation by reference of a base prospectus should be possible (Art. 8 (4)) The ESBG welcomes the possibility provided for in Article 4 to incorporate by reference a separately drawn-up Registration Document into a base prospectus. This seems indeed to be a sufficient practical substitute for the inadmissible three-partition of the base prospectus into a Registration Document, Securities Notes and a Summary. Article 8 (4) contains a possibility to incorporate by reference in a base prospectus information contained in a filed and approved Registration Document. In line with the comments made in the first paragraph, the ESBG would recommend extending the scope of application of Article 8 (4) in a way that a partial reference to the relevant section of a base prospectus, which corresponds to the content of a Registration Document, be also possible. In many cases indeed, the issuer will draw up a complete base prospectus (including a Registration Document) for the purpose of the issue of one category of securities and then - at a later point in time will be willing to include other categories of securities into the base prospectus. In such cases, it should be possible to incorporate by reference the initial base prospectus as far as it covers the information items, which have to be contained in a Registration Document. We would therefore recommend amending Article 8 (4) as follows: In case the issuer, the offerer or the person asking for admission to trading on a regulated market has previously filed a registration document or a complete based prospectus for a particular type of security and, at the latest stage, chooses to draw up a bases prospectus in conformity with the conditions provided for an Art. 5 a) and b), the based prospectus shall contain: - The information contained in the previously or simultaneously filed and approved registration document or the respective part of the based prospectus which shall be incorporated by reference, following the conditions provided for in Art. 10 of this regulation; and 10
- the information which would otherwise be contained in the relevant securities note less the final terms where the final terms are not included in the based prospectus. 8. The period for the publication of the information provided for in Article 10 (1) of the Prospectus Directive should be 30 working days (Article 9 (2)) Article 9 (2) of the Working Document requires issuers to make public the document provided for in Article 10 (1) of the Prospectus Directive at the latest 15 working days after the publication of the annual financial statements. The ESBG is of the opinion that this period of 15 working days is too short, especially with a view to the requirement set out in Article 9 (3), which states that the document shall include a statement indicating that some information may be out-of-date, if such is the case. This requirement might be quite cumbersome for issuers and not always feasible within 15 working days. Against this background, the ESBG would recommend extending the period for the publication of the abovementioned document to 30 working days. 9. Further editorial remarks Article 7 (2) Risk factors The ESBG is of the opinion that Article 7 (2) should be clarified in a way that the risk factors linked to the issuer do not have to be disclosed in the Securities Note. The second indent of Article 7 (2) should accordingly be amended as follows: - as the case may be, the risk factors linked to the issuer and the type of security covered by the issue, Article 7 (1) and Article 8 (1) The ESBG believes that the terminology at the end of the fourth indent of Articles 7 (1) and 8 (1) should be consistent. A solution would be to make reference in each case to Article 3, as provided for in Article 7 (1) ( is drawn up as defined in Article 3 ). Article 10 (1) Article 10 (1), fifth indent, should be clarified in a way that incorporation by reference of a base prospectus is also possible, and accordingly be amended as follows: - Earlier approved and published prospectuses and/or base prospectuses; 11