Standards and regulations are part of everyday life in the financial world. On 3rd July 2016, the Market Abuse Regulation (MAR) came into effect for all financial market participants across the EU. The main purpose of the regulation was to create an equal level of capital market transparency as well as to protect investors in all EU member states.
We took the 2 year anniversary of MAR as an opportunity to interview representatives of the German Investor Relations Association (DIRK), the French Association of Financial Communication Professionals (CLIFF) and the British Governance Institute (ICSA) about the changes that were brought to the market by MAR and to gain insights into how the IR and company secretary community have reacted since then.
1) The general consensus among IR departments/company secretaries when MAR was introduced in 2016 was that it added a lot of administrative burden without offering many benefits. What is the mood today? How has the IR & company secretary community reacted?
Peter Swabey (ICSA): I think the mood is largely unchanged and MAR is still seen as an administrative burden by the company secretary community. The interesting thing is that given the amount of extra work that has been created, I don’t think it has actually improved the market abuse regime. This was an area in which the UK was already quite advanced because the market is very different from that of many other member states. MAR is detailed because it is trying to harmonise the approach across Europe. This is the essential difficulty with a regulation in comparison to a directive. With a directive, which is implemented into local law by the relevant member state, it can be developed to meet the specific needs of the local market, and the UK’s regime would probably have been sufficient. However, a regulation applies directly to all member states and can, therefore, create more issues than it solves, especially in a market as complex as the UK.
What I have seen is that companies are using technology solutions to manage their insider lists and comply with MAR. For many, they have to use technology to reduce their administrative burden as it is simply too time-consuming otherwise. This is due to the amount of information that issuers need to collect and hold on their insiders, the number of insiders that they have and the need to manage the information that they are collating in a secure environment. Complex clerical systems can be less efficient and increase risk.
Kay Bommer (DIRK): As is often the case when new requirements are introduced, the number of complaints was high when MAR was first implemented. Now, I don’t hear many complaints anymore. People have got used to handling the additional requirements, not least because of the support of service companies who provide appropriate services.
Olivier Psaume (CLIFF): MAR requires more restrictive processes for tracking inside information and its disclosure, but the basic rules for defining inside information have remained the same. The biggest challenge for issuers remains identifying the precise time at which information becomes inside information and therefore MAR-related processes need to be applied. IR professionals need to be involved in these decisions along with the relevant dedicated committees that companies have created. These committees tend to include senior finance and legal figures as well as Executive management. The security of information classified as inside information has been reinforced. Standardised procedures and forms have been developed to simplify the work of those responsible for monitoring a delayed disclosure; for example, a press release ready to be sent out in case of an information leak. These additional steps complicate the work of IROs and are very time-consuming.
Finally, the implementation of MAR has led to an increase in awareness of inside information across the company. The IRO is responsible for facilitating inside information internally and for raising awareness among employees (including new charters relating to the use of social networks). Due to employee turnover, awareness raising needs to be continuous. The monitoring process is usually managed by the legal department, but it is the financial communications department that remains the main contact for the AMF (French Financial Markets Authority).
The main purpose of MAR was to create an equal level of capital market transparency as well as to protect investors in all EU member states.
2) A study which we conducted 3 months after the implementation of MAR showed that companies were having trouble assessing whether information should be qualified as insider information. Do you think that companies have gained a better understanding of what need to be declared as insider information? Are you aware of them implementing new processes?
Kay Bommer (DIRK): Regardless of MAR, there was and still is a certain amount of insecurity over whether something should be declared as insider information or not. In my opinion, MAR hasn’t had an impact on this. However, the obligation to publish insider information was expanded to additional issuers, to whom the topic was new.
Olivier Psaume (CLIFF): This remains complicated: information may be inside information at a particular point in time and may no longer be a few days later, or vice versa. However, companies have progressively established criteria to define whether information is likely to be inside information or not. Standard procedures have been put in place which are being continuously enhanced over time, highlighting the key points of the regulation and listing examples of inside information. The concept of precision can also cause considerable debate, especially when it comes to knowing the exact moment the information becomes classified as insider information (timing is crucial in the monitoring process). Similarly, the influence on the company’s share price, and more specifically "significant" influence is often very difficult to evaluate (at what point do you make the decision?). An in-depth understanding of market expectations can be difficult, especially for small cap companies that aren’t well covered by analysts.
Peter Swabey (ICSA): I would say that companies do have a clearer understanding of whether something is inside information, although there are still some grey areas and I am sure that some companies are making announcements ‘just to be on the safe side’. In my view, the main challenge is defining at exactly what point in time information becomes inside information. In some cases, it’s clear whether or not information is, or will be, price-sensitive. However, in others, it’s more difficult to determine whether for example, a director’s resignation will move the market. I have always thought that it must be quite embarrassing for a departing CEO if it doesn’t or, worse, the share price rises! Sometimes the benefit of hindsight suggests that a certain announcement should in fact have been defined as inside information. The risk of the regulator making such an assessment is why, in my view, some companies and their advisers are taking a prudent view.
With regard to new processes, some companies have established Disclosure Committees to manage the process of deciding whether information is insider information. Julia Hoggett, Director of Market Oversight at the FCA, commented in November 2017 that “at its most effective, compliance with MAR is a state of mind.” She is right. Decisions around inside information are risk and value-based assessments. Ultimately, you need to be able to prove the process that you went through in making a decision. One key challenge for companies when the MAR regime first came into force was that the FCA withdrew the Model Code for share dealing. ICSA worked with Slaughter and May, the GC100, the Quoted Companies Alliance and a number of other organisations to develop a single, industry-led dealing code rather than a variety of, no doubt broadly similar, codes which would potentially create confusion in the market.
3) Within the scope of MAR, regulatory authorities threatened market participants with tighter sanctions. In what capacity have regulatory authorities actually applied these tighter sanctions, or was the mere prospect of penalties enough to encourage compliance with MAR (or a consistent introduction of MAR)?
Olivier Psaume (CLIFF): Since the implementation of MAR, the AMF has had more of a monitoring approach than one of applying sanctions. As far as we know, apart from contacting companies requesting further explanation or information, no sanctions relating to MAR have been imposed. Some recent sanctions for breaches of inside information disclosure rules do refer to MAR but the events occurred prior to MAR coming into effect (for examples, see sanctions from 13th April or 7th May 2018).
Peter Swabey (ICSA): In the UK there is generally a principles-based approach so as far as I’m aware compliance has been quite advanced. I think this would have happened whether or not tighter sanctions had been in place.
4) Have the requirements of MAR kept companies from listing on stock exchanges? This was an expected consequence prior to implementation.
Kay Bommer (DIRK): Particularly for small- and mid-cap companies, the general increase in capital market regulations is a potential reason for not going public. In this context, MAR is just one piece of the puzzle.
Olivier Psaume (CLIFF): It is too early to draw conclusions.
Peter Swabey (ICSA): I don’t believe that MAR specifically has stopped companies from listing. I am aware of anecdotal reports that companies have delisted because of regulatory and reporting requirements but as to what degree this is down specifically to MAR? It’s probably very small. I’ve heard more complaints about the requirement to report executive pay. On a related note, there was an FT article in March in which James Dyson was talking about the penalties for being even a private company. He felt that the reporting requirements are too onerous and even anti-competitive, saying that “our competitors in foreign countries can see exactly what we’re doing and we have no sight of what they’re doing”. I don’t agree – I think that public reporting is a small price to pay for the enormous privilege of limited liability, but I do understand the sensitivity of some companies to the burgeoning requirements for reporting.
5) Do you believe that trust in financial markets has been strengthened due to MAR?
Olivier Psaume (CLIFF): It’s not for issuers to answer this question.
Peter Swabey (ICSA): In the UK market, no. The regime was already very advanced and, in my opinion, worked well. In some other member state markets, trust probably has been strengthened.
Kay Bommer (DIRK – German Investor Relations Association)
Kay Bommer is the Managing Director of the German Investor Relations Association (DIRK) and owner of the Hamburg-based law firm Bommer, which specialises in capital market and corporate law. DIRK is the biggest European professional association which connects companies and capital markets. The association represents around 90% of the listed capital in Germany. As an independent authority, DIRK optimises the dialogue between issuers, capital providers, and the relevant intermediary institutions, and promotes professional quality standards. Members benefit from professional support, practical knowledge and access to a network of IR professionals. DIRK also supports professional groups in the Investor Relations field.
Learn more: https://www.dirk.org
Olivier Psaume (CLIFF Investor Relations)
Olivier Psaume is the Chairperson of the CLIFF, the French Association of Financial Communication Professionals, and Head of IR at Sopra Steria. Created in 1987, the CLIFF now has around 240 members comprising listed companies representing more than 90% of the Paris market's capitalisation, and also consultants and specialists in fields related to financial communication. As such, the Association is a recognised voice for the profession in France. With an active programme encouraging the sharing of experiences, expertise and new evolving topics, a successful training programme in partnership with a renowned French University (Paris-Dauphine) and its contribution to the annual publication "Financial Communications: Framework and Practices", the CLIFF helps to promote the status of Investor Relations professionals.
Learn more: https://cliff.asso.fr/en
Peter Swabey (ICSA: The Governance Institute)
Peter Swabey is the Policy & Research Director at ICSA. He has 30 years' experience of the share registration industry, gained at Lloyds TSB Registrars and subsequently Equiniti and Equiniti David Venus amongst others. ICSA: The Governance Institute is the professional body for governance. With over 125 years' experience, they work with regulators and policy makers to champion high standards of governance and provide qualifications, training and guidance.
Learn more: https://www.icsa.org.uk/home