In December 2018, the Warsaw Stock Exchange (WSE), hosted an event organised by the Polish Investor Relations Society which aimed to discuss potential changes to the current Market Abuse Regulation (MAR) called “MAR Light”. MAR is an EU regulation created by the European Union (EU) in July 2016 with the objective of ensuring market integrity and investor protection. Specifically, introducing disclosure obligations that relate to the disclosure of inside information and dealing by persons discharging managerial responsibilities and closely associated persons.
The European Commission (EC) has started the process of proposing changes to some aspects of MAR, which aim to facilitate access to capital for smaller and medium-sized companies (according to the current EU definition, companies with capitalization up to 200 million Euros that belong to SME Growth Market segments). Poland is involved in shaping the process, providing several proposals that have been reflected in the consultation document submitted to the EU Commission.
In Poland, there is a lot of concern and debate about what should change and what shouldn’t in relation to MAR. It remains to be seen if the EC will make changes to the existing regime for Polish issuers, or whether they will decide things should stay the same.
Poland is currently proposing changes to some aspects of the Market Abuse Regulation to the European Commission.
Transparency Builds Credibility – Western Practices
Implementing MAR in Western markets was not a revolution. Inside information requirements already existed under MAD – the precursor to MAR. For example, in the UK, there is a very clear regime around what constitutes inside information because a regulatory framework has been around for a the last couple of decades. The WSE itself is only 27 years old, in fact for most people it became really relevant 20 years ago. In Western Europe, on the contrary, capital markets have existed for over one hundred years, so this partly explains the difference. While Poland becomes ever more sophisticated, regulations regarding inside information did exist prior to MAR.
As discussed during the “MAR Light” Forum, some of the rules are already being practiced by Polish issuers and therefore will not be that difficult to integrate. For example, the obligation to document everything and the greater burden of assessment as to what constitutes inside information. It is not a question as to whether MAR is bad, complicated or too complex, but whether the current interpretation of MAR helps Polish issuers meet their obligations. The dilemma is whether certain practices that are already in place should be removed, simplified, or if systems should be in place following Western practices.
To remain internationally competitive, Polish companies will have no other choice than to open to Western standards. Foreign investors won't invest if they are worried about a lack of transparency. For this reason, corporate governance and disclosure are as important as the company’s investment case to attract potential investors. Or in the words of the Chairman of a UK quoted company with international operations I met during the ‘MAR Light’ Forum: “MAR is everywhere in the EU27 now. Investors expect the highest standards of behaviour from companies and their boards. Countries which permit issuers to be less than best in class will be shunned. Companies should ensure they obtain the best possible advice to enhance compliance”.
The main idea of the EU regulation MAR is to be universal and to eliminate gaps in areas susceptible to abuse, regardless of the size of the company.
MAR Light: Taking a Look at the Changes Proposed by Poland
It is uncertain whether and to what extent aspects of MAR might change for the SME Growth Market segment after the end of the revision process (probably in July 2019). But here are some of the changes being contemplated by the European Commission:
- Raising the transaction limit of managers to the value of 20,000 Euro. Why is this an issue for SMEs? Currently, the limit has been set at 5,000 Euros, leaving the Member States the freedom to raise up to 20,000 Euros.
- New regulations regarding market research. Why is this an issue for SMEs? The necessity to obtain prior blind consent to provide information on the possibility of selling securities practically makes it impossible to carry out any transactions.
- Precise definition of confidential information (e.g. according to a catalogue developed by ESMA). Why is this an issue for SMEs? The definition of confidential information in MAR is very imprecise. As a result, individual companies interpret this concept in very different ways.
- Adjusting the maximum sanction for errors in reporting so that it is proportional to the company’s size (e.g. 2% of annual revenues). Why is this an issue for SMEs? At present, a relatively larger sanction may be imposed on small cap companies, i.e. EUR 2.5 million vs. "only" 2% of annual revenues in case of large companies.
- Finally, one last item being debated is that there isn’t any obligation to keep a list of insiders but just an obligation to submit a list at the supervisory authority’s request. Why is this an issue for SMEs? Requirements for keeping insider lists are seen as very complicated – data collected by the Polish regulator indicates that there are a lot of irregularities in this area.
In a live poll 50% of the participants at the event in Warsaw said that they wish for an allowance for the creation of an “ex post” insider list i.e. at the request of the supervisory authority. But would that really make things easier and more transparent? If you don’t focus on diligent data recording, how can you accurately report when receiving a request from the regulator?
Based on a number of conversations with Polish CFOs, there is a general opinion in the market that this problem is artificial, keeping a list of insiders does not require a lot of work provided you have a well-designed workflow process or dedicated tool.
Live poll results at the Warsaw MAR ‘Light’ Forum
Not leaving the entire debate up to the panellists, the audience was given the opportunity to weigh in via a live poll:
Is it important for your company to observe how other countries are handling MAR practices?
For 67.8% of the audience it matters to keep an eye on how Western companies are dealing with the Market Abuse Regulation because it may have an impact on future regulation and competitiveness.
What do you expect from the supervisory authority?
91.5% - Q&A publishing which would specify what is allowed and what is not
90.2% - Informing in an anonymized way all the results of supervisory activities, including recommendations of what to do.
Observations of companies listed on the WSE show that in recent years there has been an unquestionable development of investor relations and compliance, which on the one hand is a response to regulatory requirements, and on the other hand a natural process related to the expansion of the stock market locally and internationally.
When it became clear that MAR would become mandatory, Polish issuers were aware that a standard regulation was being applied in very different EU markets, including companies with significantly higher capitalization than in Poland. Within this context, misconceptions arose among domestic entities regarding the applicability of the new requirements. It is worth remembering that the main idea of MAR is to be universal and to eliminate gaps in areas susceptible to abuse, regardless of the size of the company.