Finance Committee of the Corporation of London
8 October 2003
John Tiner
Chief Executive, Financial Services Authority

The last two years have, at times, been intensely challenging. Much of this was caused by the very high level of volatility of the FTSE 100 falling to a low of around 3270 earlier this year. I am looking for calmer waters ahead and knowing my commitments in the future, I think I shall adopt the Henry Kissinger mantra, who when having consulted his diary said to one of his aides “there cannot be a crisis next week. My diary is already full”. When I spoke at the Lord Mayor’s City Banquet at the Mansion House two weeks ago, I said I aim to reduce unnecessary process – or to put it another way to be rid of bureaucracy. I now discover there is an International Association of Professional Bureaucrats, whose Chairman is one James H. Boren – his law of bureaucracy I rather like “when in doubt, mumble. When in trouble, delegate. When in charge, ponder”. Indeed the embodiment of bureaucracy can be observed in the number of committees. I think I have the answer to this by requiring that every committee be made up of an odd number of people, where three is too many.

One of the other objectives I spoke about at the Mansion House was getting firms to communicate in a clear, fair and not misleading way, and I do hope this is not going to be an exercise in pushing water up hill – here is an extract from a firms’ literature about it’s retirement benefit plan “if you are absent from work owing to illness or injury on the date on which you join the plan (or, if this is a non working day), then on the next preceding working day, you will not be entitled to the death benefit until you return to work”.

When I was appointed Chief Executive in July, I said to my colleagues at the FSA, that I would be looking at the organisational structure in light of the split Chairman/CEO role and our strategic priorities for the future. My thoughts here are beginning to crystallise and I will be discussing them with my Board shortly. In the meantime there is an organisational change I will be making ahead of any wider changes. It is, I think, important for the City and I am pleased to be able to tell you about it tonight. We are combining our Markets and Exchanges Division with the UK Listing Authority to create one division, The Markets Division, responsible for both the primary and secondary markets with effect from the 17th November. I am pleased to announce that Gay Huey Evans will take on responsibility for managing this division. Gay has been with the FSA for 5 years running the Markets and Exchanges Division and has brought tremendous market expertise to our work. She has extensive first hand market experience and is very well known among market professionals. I think there is a convincing strategic rationale for running these two areas within one division and I am sure Gay will make a great success of it. Ken Rushton, who joined the FSA just over two years ago as Director responsible for the UK Listing Authority, will move to working part time from the beginning of next year but we won’t be letting him off that lightly as he will continue to lead our work on the Listing Review, which will be a major piece of work for the FSA for the next couple of years. Ken has brought a sure and calm touch to the UKLA and his experience and judgement have been of great benefit to our work in discharging our responsibilities in respect of listed companies.

To show that we continue to be active, you will all have seen that today we have published our Consultation Paper on the review of the Listing Rules. In my view, these proposals will enhance the UK’s current regime by introducing a principle based approach – which chimes with the FSA’s approach in other areas – the main benefit of the reforms will be to simplify the regime, making it more accessible to market participants. We have taken the opportunity of the need to update the rules to accommodate new European and UK legislation to undertake this long promised reform.

We know from research we commissioned, that there is no widespread appetite for any significant relaxation of the rules. This is a good vote of confidence in our approach to Listing, and we want to retain a regime which supports the competitiveness of London's capital markets.

We mustn’t be complacent however and this is why we have been working closely with issuers, practitioners and investors to identify improvements. The CP we have published today is the result of a collective effort, and I would like to thank those of you who have been involved so far.

Let me tell you now about some of the enhancements that we have in mind.

Our first improvement will be to introduce a regime based around principles. This will ensure that firms will be clear about the standards they are expected to achieve. Our first two principles will require companies to take all reasonable steps to ensure their Directors understand their obligations under the Listing Rules and for companies to have the systems in place to comply with them – I don’t think anyone could argue with this approach, which is entirely consistent with our emphasis on senior management responsibilities elsewhere in our work. We expect the Principles to help us (and you) interpret the rules in new situations, to enable us to communicate clearly the standards and behaviour that we expect, and to help to ensure that the detailed rules are applied and interpreted on a consistent basis. One effect that this will have of course, is that Directors will no longer be able to claim that they were unaware of obligations to release price sensitive information, or blame it on the company’s computer system.

Introducing these new principles, allows us to reduce the number of rules overall, which since you can have too much of a good thing is probably welcome news to you all. There will be clear sections on Equity, Debt and Financial Products and the end result, we hope, will be a simplified, shorter rulebook that is easier to use, and takes into account the latest regulatory and market developments.

I referred earlier as well to changes in Europe that will impact on the listing regime. The Financial Services Action Plan includes a group of directives: the Prospectus Directive, the Transparency Directive and the Market Abuse Directive that will affect how companies go about raising capital and communicating information to investors. For example, one of the issues in our Review is whether the eligibility requirements that apply when companies are admitted to the Official List should be simply those laid down in the Prospectus Directive, or whether we should continue to apply some of the higher standards that we have in the Listing Rules (like a three year track record or continuing obligations such as Class 1 transactions) – this is known in the trade as "super-equivalence". There is a difficult balance here because, on the one hand we do not want to set the hurdle so high as to deter new issuers coming to the London market while on the other hand, many of you have told us that high standards are part of the attraction of the London market. This is one area where we will be listening especially closely to the market's views.

Another area which has attracted a lot of attention recently, is that of shareholders rights, in particular with regard to delisting. We propose ending the right of companies to delist without obtaining shareholders’ explicit permission through a vote. The current practice means that shareholders could be either forced to sell or retain unlisted securities. We don’t think that this is acceptable.

And now, turning now to a field where we are proposing to remove some rules – financial information. Our aim is to provide a framework in which issuers are encouraged to publish accurate and timely information. We think the market itself is an effective regulator in this area: issuers are swiftly punished by movements in their share price for poorly presented or ill-considered disclosures of financial information. So we are proposing a more flexible and less prescriptive approach to the presentation of financial information by issuers.

Our proposals also include opening up the sponsor regime so that we can give companies the choice of who to use as advisors when they bring an issue to the market or on other major transactions. This would make the London regime more consistent with other international centres. We recognise however that the sponsor rules have historically been seen as enhancing the UK’s regime, which is why we propose to give companies the option to engage one if they want to.

London is an attractive market for overseas issuers who have either a primary or secondary listings here. We think that it is worthwhile our continuing to offer these differentiated regimes. We will reform the current regime however to bring overseas primary issuers more into line with UK listed issuers. The changes won’t be significant for them, but it will allow investors to compare like with like.

In summary then, our proposals reform the regime from a position of strength. Strength both in terms of the regime we have now and the strength of the deep and liquid markets offered in London. Our new approach will mean a more efficient and enforceable Listing Regime, simplified where appropriate, and adapted for the needs of the London market.

I hope I’ve given you a good flavour of the proposals that we have issued. So what next?

Our programme of extensive consultation will continue, and we are planning to hold some roundtable meetings on key issues in the Review in the next two months, so that we can gauge early reaction to our proposals (but the good news is that we are giving you until 31 January to respond). We plan to publish the draft new Listing Rules and guidance towards the end of next Summer, and the final rules in Spring 2005, in time for implementation in Summer 2005 on the current directive timetable.

Before closing, I would like to touch on one less positive development. In our view, the vote taken by EU Finance Ministers yesterday on the Investment Services Directive is damaging to the wholesale and institutional equity market, without producing any material benefit for investors, in particular on the key decision to oblige firms to quote prices in shares before they are allowed to trade with any client. It would be interesting to see if this decision would pass any sensible Cost Benefit Analysis. We of course support the move to allow Multilateral Trading Facilities to compete with recognised exchanges, after all that is something the UK market has accommodated for many years. But our experience shows that the new measures will not contribute to the operation of fair, orderly and clean markets, when the investors using these facilities are experienced and seasoned investment professionals. On execution-only the result is a mixed one. We have secured a carve-out from full suitability obligations but the carve-out depends on several criteria being met, most notably that services are provided at the initiative of the client. We will be working hard to ensure that this is not interpreted as a restriction on normal marketing activity and direct offer promotions. However, there is one more positive point to note. We are confident a filter approach, as set out in Option 2 of the Sandler proposals, can be reconciled with the ISD text.

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