The Financial Conduct Authority (FCA) is consulting on a Technical Note about listings of cannabis-related businesses. John Binns explains why the Note, though welcome, leaves some vital questions still unanswered.
Businesses that work in the cannabis industry are accustomed to regulatory issues of course, but it is undeniable that the UK’s rules are both stricter than those of other jurisdictions, and more complicated than they need to be. As an increasing number of businesses seek to list in the UK, the FCA’s consultation on a new Technical Note (following an earlier Statement on its approach), covering the issues they will face in their applications, is certainly welcome. But there are four areas in which it might usefully consider going further.
Involvement from other agencies
The first is to involve other agencies in its approach, given the interlocking issues involved in the UK cannabis industry. Strictly speaking, the narrow focus of the Note is how the prohibitions in the Misuse of Drugs Act 1971 (the MDA) against products containing cannabis or tetrahydrocannabinol (THC) impact on the FCA’s decision-making under the Financial Services and Markets Act 2000 (FSMA). Meanwhile, however, overlapping issues are being considered by (among others):
- the Drugs and Firearm Licensing Unit (DFLU) of the Home Office, which licences activities that would otherwise breach the MDA, under the terms of the Misuse of Drugs Regulations 2001 (the MDRs);
- the National Crime Agency (NCA), which receives reports and requests for consent under the Proceeds of Crime Act 2002 (POCA), for activities that deal with the proceeds of conduct that would breach the MDA if they occurred here, and so may be defined as ‘criminal conduct’ under POCA; and
- the Medicines and Healthcare products Regulatory Agency (MHRA), which regulates products defined as medicines under the Human Medicines Regulations 2012 (the HMRs), including (thanks to an amendment to the MDRs in 2018) Cannabis-Based Products for Medicinal use in humans (CBPMs).
While the FCA would rely on the DFLU and the MHRA to deal with the question of UK-based CBPMs, it seems keen to make its own assessment with respect to equivalents overseas, while leaving POCA questions to the NCA. The problem is that its assessment is, essentially, about whether the business would be licensed if it happened in the UK – the same question that the DFLU and MHRA would consider if and when it begun to do so, and (arguably at least) the same question that should be considered under POCA. It is not hard to see why some consistency of approach between UK agencies would be desirable. In the absence (for now) of a single cannabis-regulating agency here, it is surely incumbent on the existing agencies to try to work together.
A margin of appreciation
The central recommendation of the Technical Note is that businesses wishing to list should obtain a legal opinion to cover, among other things, the question of whether their overseas activities would be lawful (and, if necessary, licensed) in the UK. No doubt specialist firms will be only to pleased to be instructed to prepare such opinions, but the question will almost invariably be far from straightforward. Because different jurisdictions have different legal systems and different ways of licensing cannabis-based medicines, the challenge will be in transposing the rules that a product has had to comply with in the relevant jurisdiction with the rules that operate in the UK, and trying to see how far they match up.
The reality, of course, is that the match is unlikely to be perfect. Indeed, the fact that a responsible company will have worked hard to operate within the rules of the jurisdiction in which they are based (and, very often, in more than one jurisdiction) means that the business’ practices, paperwork, and any local legal opinions will be deeply embedded in a system that is not that of the MDA, MDRs, and HMRs (though the last of these, for now at least, will be a closer fit if the jurisdiction/s are in the EU).
What this is likely to mean in practice is that the exercise will often be one of finding approximate equivalence and ‘best fit’, allowing for some leeway in terms of what other jurisdictions allow and require. In other legal contexts this would be called a ‘margin of appreciation’, a recognition that lawmakers in other countries are entitled to do things in their own way to some extent, provided they fit broadly within a minimum set of requirements. In due course we will doubtless find out how the FCA will apply these standards in practice, but in the meantime it will need to be a function of those legal opinions to draw out the points that get to the heart of the matter.
A pragmatic approach to CBD
One specific issue on which UK law is arguably lagging very far behind industry practice, not to mention common sense, is the regulation of cannabidiol (CBD). While not in itself a controlled drug, most products that contains CBD are also likely also to contain THC, in measurable if ‘trace’ amounts. In most jurisdictions the issue is the percentage of THC present – a 0.2% threshold is often used – but this is not the case in the UK. Instead, the CBD industry here has either had to rely on arguments flowing from the licensing of low-THC hemp, or on the concept of ‘exempt products’ in the MDRs. The net result is that sales of CBD products in small containers are either allowed or tolerated (precisely which is maddeningly unclear), while importation, manufacturing, and wholesale of it in large containers is not.
By talking about ‘cannabis oil’ businesses as potential candidates for listing, the FCA’s earlier Statement implied that it might take a pragmatic approach to the CBD industry overseas, and/or in the UK. The Technical Note seems to row back on that, by acknowledging only that ‘pure’ CBD (with literally zero THC) and CBD-based CBPMs would be considered lawful. So, where does that leave the many overseas businesses that deal with importation, manufacture, or wholesale of low-THC (say, below a 0.2% threshold), non-medicinal, CBD?
The default, perhaps, is simply that this large and growing global industry will simply be considered unwelcome in UK listings, because of the absence of any clear percentage threshold in the MDA or the MDRs. But it is hard to see why this should be the only alternative, given the way in which the UK in practice has accepted CBD products in the marketplace, and the ambiguity in the law. A pragmatic approach, perhaps simply adopting the 0.2% threshold commonly understood to be acceptable (and, on any view, ruling out any harmful psychoactive effects) would be both possible and welcome, and point the way for other agencies to follow.
Clarity on the ‘recreational’ market
Finally, as anticipated in the earlier Statement, the Technical Note takes a predictably absolutist approach to the ‘recreational’ market, which we must presume refers to any product that contains cannabis or THC and is neither a CBPM, nor exempt product, nor routinely covered by DFLU licences (such as low-THC hemp).
While few will be surprised by the idea that a business whose sole purpose is to sell cannabis on the recreational market, even under a licensing regime, will not (yet) be admitted by the FCA, it is not quite clear as yet how far this absolutist approach will be taken. What if, for example, an overseas business deals mainly with medicinal cannabis products, but has a product line containing low-THC CBD, or perhaps a wellness product sold only by pharmacists in certain jurisdictions? What if a business that now exclusively sells medicinal products previously held a wellness subsidiary, leaving it with a POCA problem (dealt with, perhaps, by consent following a request to the NCA)? If the answer is that a new applicant for a listing would be turned away for that reason, how can that be squared with existing listed companies who may (with consent) may have done, or plan to do, the same thing?
The Technical Note says that the FCA would ‘not admit the securities of a company with any recreational cannabis business directly, or indirectly, to the Official List’. Unless the definition of ‘recreational cannabis’ imports a THC threshold (as above), and/or the prohibition applies only to business that is current at the time of applying (or listing), there is a risk that this is already too strict. Perhaps the better approach is for the FCA, having made the general point that recreational cannabis is not (for now) to be encouraged, to keep an open mind on where the margins of that concept might be.
Some signs of progress
The list of areas where the Technical Note might not be considered perfect by the industry should not discourage active engagement with it on the detail: even on the cautious basis that seems to be proposed, this represents significant progress for an industry that the UK’s legal and financial establishment has not so far seemed keen to welcome. As the FCA formulates its policy, banks become more open-minded, and professional advisers come on board, this is a sector of UK industry that is heading in the right direction.