And other Brexit-related prospectus issues

As the political turmoil and uncertainty continues in the House of Commons, structured products issuers cannot afford to relax about Brexit. If a delay to Brexit is agreed it might feel like a temporary reprieve from the mountain of Brexit planning undertaken to date, but whilst we wait to hear whether the UK will in fact exit the European Union on 29 March, there is a raft of considerations that issuers need to continue to plan around and act upon in relation to their structured products issuance programmes.

Passporting of prospectuses: The UK has made it clear that in the event of a no-deal Brexit, it will continue to treat an EU-approved prospectus passported into the UK as valid for the remainder of its scheduled 12-month period. The EU has not reciprocated, so having a single prospectus approved in the UK and passported out to enable pan-European offers is not an option on the table. Many issuers may already have taken steps to bring forward annual base prospectus updates in order to make as much use of the UK’s transitional provisions as possible. Others may wish to consider arranging passporting as soon as possible if they have any potential plans to start business in the UK post-Brexit, as passporting now will be the much easier route. Issuers who wish to conduct offers in the UK and don’t have a prospectus which has been passported pre-Brexit, will need to have a prospectus separately approved by the UK’s FCA. Although the EU Prospectus Directive is implemented in UK law, it is important to bear in mind that the UK regulator’s scrutiny and approval process is known for being somewhat stricter than some other member states, particularly in regards to retail prospectuses. Issuers may find themselves subject to heavier requirements for detailed worked examples or information on the underlying assets, which can be particularly onerous for “jumbo” prospectuses. Issuers might therefore prefer to take advantage of the Brexit grandfathering. Whilst it is not too late to arrange a passporting, a supplement to the prospectus would likely be required and needs approval by the relevant competent authority, so there is no time to delay.

Worth noting is the fact that the EU Prospectus Regulation will come fully into force in the EU this summer, and will also apply in the UK. Many issuers have already started planning to grandfather their prospectuses under the old Prospectus Directive regime by having them updated prior to the July deadline. Issuers with UK business lines should note that any prospectus approved after Brexit but prior to the Prospectus Regulation cut-off date cannot be validly passported into the UK, and so issuers could find themselves needing to prepare for the Prospectus Regulation changes much earlier than planned if they subsequently need to get a prospectus approved in the UK where the new rules will apply. Compliance with two different formats for prospectus and issuance documents would be unnecessarily complicated.

Supplements: Issuers may want to have a supplement to their prospectuses waiting in the wings so that it is ready to submit for final approval almost immediately after the ultimate Brexit date, to make consequential amendments to disclosures. Items to consider include correcting references to EU legislation and referencing accurately the relevant onshoring legislation; implementing the latest industry-standard selling restrictions; reflecting any changes to dealers or intermediate entities that have been imposed into the distribution process (including how and to whom fees are paid); and updates to risk factors and bail-in disclosures reflecting the UK’s new status. Having this supplement on stand-by will ensure a base prospectus is up-to-date for EU offerings as soon as possible post-Brexit, limiting the disruption to business.

Approval of prospectuses: For some issuers, it will be necessary to elect a new home member state for the purposes of the Prospectus Directive and approval of their prospectuses. The home member state rules differ depending on the type of securities contemplated, and issuers who are UK entities or whose current home member state election is the UK should give them due consideration. Issuers of debt securities with denominations equivalent to at least EUR 1,000 have a choice of home member state based on where they intend to offer or admit securities to trading. Issuers should also bear in mind that they will need to make a public offer or admission to trading in the EU27 country they elect as their home member state within the 12-month validity of their base prospectus, in accordance with ESMA’s guidance. For low-denomination or equity securities, UK issuers will need to choose between those EU27 countries where they make or continue public offerings or have securities admitted to trading post-Brexit. Issuers may wish to consider this carefully as the countries where they are most active may not be the most practical in terms of prospectus approval – for example, if translations of the prospectus into a language other than English are required.

Listing: Another reason for taking advantage of the grandfathering provisions is to ensure that issuers retain the potential to continue to make offerings in the UK whilst listing on an EU27 regulated market, without the need for two separate prospectuses. Issuers with UK-centric product lines may think that one UK-approved prospectus is an effective solution, but there are additional factors to consider. The UK’s rules for admission to trading on the London Stock Exchange may differ from other markets that an issuer is currently familiar with, or an issuer may not have an established process or ability to list on the London Stock Exchange which will involve extra work to implement. Client preference may also be a factor in maintaining an EU listing venue.  Approval of the prospectus in the EU will maintain much greater flexibility around listing venue.

As issuers continue to push through their restructuring, reorganising, redeploying and repapering exercises for Brexit, the impact on their prospectuses will be just one part of the puzzle. It will pay to be familiar with the rules and restrictions that will apply in case of a hard Brexit and, if there is to be a delay, there might just be time to arrange that last-minute prospectus supplement or passporting after all.

inSPire provides a unique range of tools to support structured products manufacturers through the issuance process, including platform management, legal and regulatory advice, product governance and issuance and lifecycle support.

Please contact us if you would like to find out how we can help you manage your programme and prospectus updates efficiently.

Sarah Natt
Head of Legal & Regulatory