17 November 2004
Speech by Hector Sants

  1. You will hear today an enormous amount about different aspects of the Listing Review and the domestic implementation of various FSAP directives – namely the Market Abuse Directive, the Transparency Directive and, most relevant, the Prospectus Directive. Before the conference moves onto more detailed discussions, I would like to take this opportunity to step back and consider the philosophy underpinning the regime. This will highlight the issues we think most significant, the considerations that have shaped the current consultation document and provide the context for the rest of the day.

Aims and objectives

  1. The Listing Review has been a major undertaking for the FSA since it was first begun in 2001, although we have been reviewing this area in stages since we took on responsibility for the UKLA in May 2000.

  2. It has been, in part, a response to the EU's financial services action plan – and the Prospectus Directive in particular. I shall refer to some of these changes later. But the aims and objectives of the Review have been wider than just an attempt to incorporate our directive obligations. Indeed, when the Review commenced it was to address domestic rather than directive matters.

  3. We have used this opportunity to focus on how the rules that we inherited in May 2000 can be simplified and modernised. We have also listened to industry concerns regarding the size of the FSA Handbook and the desire for the UK not to 'gold plate' directives. The draft rules and guidance are 40% shorter than the existing rules and guidance.

  4. This has been set against the backdrop that London is a successful global market and the LSE is the largest European exchange by market capitalisation. We are committed to maintaining the attractiveness of London as a capital market, which in turn contributes to making Europe an attractive capital market. Throughout the life of the Review we have never lost sight of the vital need to balance several often competing interests. On the one hand, we have to make sure that we provide the right amount of investor protection facilitating access to markets and innovation while on the other hand retaining appropriate flexibility and transparency. A successful Listing regime is a vital component of a healthy market place and thus the review is a key deliverable of the Wholesale business unit of the FSA.

Outcome

  1. So, what have we done and how well have we met our objectives for the Review? I will turn to some specific high profile areas in a moment, but I would like to sum up the outcome of the review. Over 100 stakeholders from different areas, particularly issuers and investors, helped us with our extensive pre-consultation, including a number of theme teams and committees. We could not have achieved the pragmatic balance we have without the significant contribution of stakeholders and the market. Thank you to everybody who was involved. As you will realise we received a strong message that much of the UK capital raising and continuing obligations regime was highly regarded and had stood the test of time. We have made important changes where there has been a compelling case for it, but I do not believe that this constitutes a radical reform; there is much continuity and much will be familiar to those who know the existing rules.

Structure and guidance

  1. Simplifying and modernising the Listing Regime extends not only to the content and effect of the rules, but also the structure and format of the material, in part to accommodate the directives. It is our intention to integrate the Listing sourcebook into the rest of the FSA Handbook. FSA Handbook style is different to Listing Rules style but we believe that it provides greater clarity. There will be some teething issues as everyone gets used to this, but it will be worth it! This will involve:

    1. placing guidance next to the related rules and splitting material on Specific Issuers (such as mineral or biotech companies) into the other relevant chapters with main Listing rules; and

    2. locating some material into other relevant areas of the FSA Handbook, such as the Enforcement Manual.
      This will make them both shorter and more accessible.

  2. As well as being the most visible changes to come out of the Review, I appreciate some feel this will unnecessarily complicate things for users of the Regime. I am confident this will not be the case. If these changes were made in isolation that could be true. But they need to be seen in context. We will continue to provide a stand-alone publication that brings together Listing material from across the FSA Handbook. And the FSA is undertaking work to simplify the Handbook overall, using IT solutions that we hope will allow users to tailor the Handbook to their own needs and preferences. The other advantage of the new rules is clear and separate identification of rules derived from the directives and the ability for issuers of different securities types identify the rules that apply to them.

Super-equivalence

  1. As I have already mentioned, 'gold plating' or super-equivalence is an important issue for FSA. As you may be aware, the FSA has built into its internal processes a presumption that we will not implement measures beyond EU requirements. We will only adopt super-equivalent provisions where there is clear market value and it can be justified in cost benefit terms.

  2. The consultation responses we received to both DP14 and CP203 showed that a clear majority of market participants valued certain Listing provisions which impose higher standards than the underlying EU directive for primary listed share issuers. There was a strong feeling that these provisions contributed to the quality and integrity of the London market – and, in turn, its competitiveness. We have taken on board many of these comments. I will briefly turn to two areas – eligibility and continuing obligations.

  3. In response to overwhelming support for these requirements, we have decided to retain the requirement for a new applicant to have a three-year revenue earning track record and unqualified accounts. It is clear that the market values the disclosure of a three-year revenue earning track record and the quality assurance this implies. The listed market is not generally the place for start-ups and we have acted to maintain this standard. But that is not to say that we do not recognise the special circumstances of some types of company, particularly where there is an appropriate proxy for the track record such as an experts report. As a result, we have maintained the existing eligibility criteria for mineral companies, scientific research based companies, investment companies and venture capital trusts (although, as I referred to above, we have moved the material into the chapter on eligibility rather than having separate chapters) but removed the provisions for 'innovative' and 'high growth' companies. We have also set out the general criteria by which we will judge whether it is appropriate to allow an issuer to list without a three year revenue earning track record.

  4. We have also maintained the requirement for a 'clean' working capital statement for new applicants. It is clear that this is valued by market participants as a standard for prospective issuers to reach and important because of the sponsor's due diligence underpinning it. The link with the sponsor is important and I shall come onto that later.

  5. Some elements of the eligibility requirements have been removed. This has been the case particularly where we believe we can rely on prospectus disclosure requirements, such as the expertise and experience of directors and independence from a controlling shareholder.

  6. We also believe – supported by the market – that the Class test and the related party regime represent an important part of the current regulatory framework and so we intend to maintain these. In this case the requirements seek to maintain the advantages of this discipline but incorporate an appropriate degree of flexibility.

The Listing Principles

  1. The FSA is a principles based regulator and those of you who are supervised by the FSA will appreciate the importance of the FSA principles for business. The Listing Principals are an extension of this concept and will provide a cornerstone for the Listing Regime. Some sections of the market have expressed concern at the proposal for listing principles. Two sets of concerns I would like to address have revolved around enforcement in particular. Firstly, that Principles are too nebulous and subjective to be enforceable – at least in comparison to a normal rule. And secondly that where a specific rule breach cannot be identified they will be the 'easy' enforcement option.

  2. I would like to assure you now that the Listing Principles are a positive improvement for the Listing Regime and that they will protect investors. Only that small minority who seek to avoid the rules and undermine a fair and orderly market need be concerned. In particular we want to encourage issuers to announce information to the market in a timely and accurate manner.

  3. Principles of this sort have applied to regulated financial firms under the FSA and its predecessors and have demonstrated themselves to be a valuable and proportionate tool. We expect Enforcement cases to continue to be based on breaches of specific rules, but we must recognise that we cannot write rules to deal with every conceivable situation. Markets innovate in ways that rules cannot keep pace with, and those set on acting contrary to the interests of investors and our regulatory objectives can be similarly innovative. The Principles do not give us a blank cheque for enforcement action. The FSA must still make a case to the Regulatory Decisions Committee – a separate FSA committee – that the issuer has been at fault.

Debt and specialist securities

  1. As a result of consultation responses and industry roundtables we have made some major amendments to our proposals for the debt and Specialist Securities market set out in CP 203. We are looking to remove barriers to a retail debt market by significantly reducing the amount of regulation on these issuers. In addition we have stripped back the non equity requirements to the Directive standards – so no gold plating here.

  2. We have also made an innovative and balanced proposal to create a listed and exchange-regulated market for specialist securities. We understand and share stakeholders' concerns that the Listing regime should not undermine London's position in the global debt market. The LSE has agreed to establish a platform for Specialist Securities that is not a regulated market (as this is defined in the Investment Services Directive), which the FSA will regulate as a listed market under the listing rules. Issuers of the securities admitting to this market will be required to produce a set of listing particulars which contains the same information as the wholesale debt requirements under the PD. This means that third country issuers will not be required to report in IAS. The listing particulars will be of a high standard and prepared to PD standards and we believe this should allow the UK and Europe to remain an attractive destination to non EU issuers while providing appropriate level of investor protection to this specialist market for those knowledgeable enough to understand the risks.

Sponsors

  1. The sponsor regime is and will remain an important part of the UK market place by ensuring that issuers meet the relevant standards for admission to listing and major transactions. In line with our approach elsewhere, we have given guidance on the criteria by which we will judge sponsor's eligibility, rather than having a tick box approach focussed on employees.

  2. In recognition of the importance of sponsors, we have taken the opportunity to strengthen the sponsor regime to make sure that it is really working and adding the value to the London market that we – and others – think it does. We have set out, for instance, the work we expect to be undertaken for the sponsor to satisfy itself of the issuer's compliance and certain specific confirmations the FSA requires (such as for the working capital position, as I mentioned). Further, we have clarified sponsors' responsibilities, introduced systems & controls requirements and adopted other provisions on sponsor practice.

  3. The rules do not stand alone. We have toughened up the supervision of sponsors, initially with a team of seven people. They will have a much closer relationship with sponsors than we currently have, including pursuing enforcement action where necessary. We will be contacting sponsors to set out in detail the new approach. One of the team's first tasks will be to assess the current eligibility of sponsors, ahead of the new rules being introduced in July 2005. In order to secure for the markets the benefits of a sponsor regime we will not be introducing any grandfathering provisions for the new rules.

  4. I would also note at this point that some respondents to CP203 argued in favour of an industry Code. We have made as Rules or Guidance most of the material we suggested in CP203 could go into a Code for Sponsors. If, though, there is sufficient market pressure leading to the market developing its own industry code then we would, of course, discuss that possibility with relevant trade associations.

The Prospectus Directive

  1. Implementation of the PD is a joint effort between the FSA and HMT and we have developed our rules in close consultation with them to reflect the expected legislative changes. Their legislative proposals are the subject of a parallel consultation and you will hear more about that shortly. I know that people will be suffering from consultation fatigue, but I would urge you to respond to their consultation as well as our own. The PD is what is called a maximum harmonisation directive, meaning that we have little discretion when implementing it. Having said that, the actual contents requirements for prospectuses do not represent a significant change from the current requirements. The requirement to produce a summary setting out the "essential characteristics and risks associated with the issuer and the securities" in only 2,500 words will be a challenge for City lawyers – but one I am sure they will relish! This will have the effect of making prospectuses more accessible to investors generally, which must be a good thing.

  2. But perhaps of more significance are the potential benefits that this directive will bring for issuers wanting to 'passport' their prospectuses across Europe. Aiding cross-border capital raising in this way was a key plank of the EU's Financial Services Action Plan – of which the PD is a part. Clearly, though, time will tell as to its effectiveness at this.

  3. Amongst the linkages between the Listing Review and the Prospectus Directive, it is important to note that the PD work has influenced the outturn of the Listing rules. The new structure of the rules, including a standalone set of prospectus rules, reflects the nature of the Prospectus Directive requirements. Class 1 and related party circular requirements will now be based on the PD disclosure requirements.

  4. The FSA will, for the first time, vet prospectuses from non-listed issuers who make public offers in the UK. We do expect AIM and other issuers who issue shares as a consideration for a takeover or undertake rights issues or open offers will be making public offers and would need to come to us to have their documents approved.

  5. There are other FSAP directives that we have also tried to take account of. As part of the implementation of the Market Abuse Directive, we have proposed changes to the rules governing announcements of price sensitive information to the market. These rules will come into force early next year. We have sought to reduce the impact of these provisions on issuers, but issuers will have to consider making changes to their procedures and thought processes when deciding what should be announced and when. We have also been conscious of the effect of the Transparency Directive on the Listing Rules going forward. Rules relating to periodic financial information for example have been adjusted to Handbook style, but their content will be changed when that directive is being implemented. Rulebooks, like the market, cannot stay still in the constantly changing world of international finance.

Listening to stakeholders

  1. The Listing Review has been a model of how the regulator can consult with the industry and the beneficial results of such an approach. Although the Review predates the creation of the Wholesale business unit by some time, it is indicative of the partnership approach that we seek to adopt where possible with wholesale market players. We received over 70 responses to CP203 from across the spectrum of interested parties – and through the 16 trade associations, contributions from many more. We have used roundtables and meetings to engage and consult with as many people as possible, meaning that we have been able to take into account all the available views. The quality of input has been very high.

  2. And we have been genuinely responsive to these views. In response to CP203 we have reconsidered our position on a wide range of important issues:

    1. Maintaining super-equivalence in a number of key areas;

    2. Removing super-equivalence in debt and secondary listing markets (on which we are consulting further);

    3. Not dividing the new sourcebook into sections on Equity, Debt and Financial Products;

    4. Retaining a compulsory sponsor regime;

    5. Retaining the three-year track record eligibility requirement;

    6. Retaining the Class Test.

  3. But we are not going to stop talking to you now. We are turning our attention to helping prepare the market. In the final quarter of this year, for instance, we will be making in excess of 30 presentations. And we want that spirit of engagement to continue, so I strongly urge you to make the most of today's discussions. I would also encourage you to consider responding to the latest consultation paper, the closing date for which is 14 January.

  4. Please do get responses in on time as we are working hard to get the final rules out as soon as possible so the market can see the new rules and have time to prepare documents ahead of the 1 July implementation date. To do this we will have about two months to recast rules as a result of consultation and prepare a policy statement.

  5. Thank you for listening and I hope you enjoy the day.

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