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FSA/PN/106/2006
27 October 2006

The Financial Services Authority (FSA) has today published a policy statement PS06/11 Implementation of the Transparency Directive – Feedback on CP06/4 setting out the near-final rules for the implementation of the Transparency Directive, and outlining plans for further work on the disclosure of contracts for difference (CFD) positions.

The feedback statement on the Investment Entities Listing Review will be published in December together with a further short consultation on revisions to the detail of some of the original proposals, and other measures aimed at enhancing the international character of the UK's markets.

Hector Sants, FSA Managing Director of Wholesale Business, said:

"The market has supported our proposed approach to implementing the Transparency Directive. We note that it has also opted to retain certain features of the existing UK regime that go beyond the directive requirements, notably in the area of major shareholding notifications.

"There was no consensus on whether introducing rules requiring disclosure of CFDs would bring benefits, so we will undertake further analysis before reaching any final decision.

"We plan to implement a more principles-based approach to the listing rules for investment entities following the welcome by the industry for our proposals. However, in the light of feedback and recent market developments, we will be revising a number of aspects including the prohibition on investment companies taking controlling stakes in the companies in which they invest and keeping our directive minimum listing regime open to overseas investment companies – a route which we think might be attractive for private equity funds.

"We hope these measures will help London to maintain its position as the prime centre for raising capital in Europe."

Transparency Directive Implementation

Under the new Directive rules the FSA will make the following changes:

• Periodic Financial Reporting - implement the Directive requirements on annual and half-yearly financial reports; provide further informal guidance on what it believes does not have to be disclosed in interim management statements and retain the existing Listing Rule requirement for wholesale debt issuers to produce annual reports, as well as a number of other detailed rules on financial reporting which it had been suggested be removed e.g. requiring annual accounts to contain statements of directors' interests.
• Major Shareholding Notification - retain the current notification threshold of a 3% holding, and every 1% thereafter, and continue to apply the regime to a wider range of issuers than the Directive requires i.e. issuers on all regulated and prescribed markets - including AIM and PLUS Markets (formerly OFEX).

Contracts for Difference

CP06/4 asked for views on the desirability of introducing a CFD disclosure regime. There was no consensus from respondents on the need for disclosure but there was a desire for further work to be done on the issue.

Three potential market failures which may arise from the non-disclosure of economic interests have been identified:

• inefficient pricing in the equity market as a result of information asymmetries;
• the risk of stealth takeovers by predatory investors using CFDs to bypass the major shareholder notification requirements; and
• weakened market confidence due to the lack of transparency about the identity of investors with undisclosed economic interests.

Therefore the FSA intends to undertake further analysis of the case for CFD disclosure, exploring the nature and scale of any market failure that may exist and the potential costs and benefits of the three principal policy options for addressing these failures.

The three principal policy options are:

• maintaining the regime as it currently stands;
• strengthening the current major shareholder notification regime, addressing instances where CFD holders effectively have 'constructive options' over shares held in hedge or where banks vote stock in accordance with CFD holders’ wishes; and
• introducing a regime similar to the Takeover Panel regime, requiring notification of 'economic interests' in shares held via instruments such as CFDs.

The FSA will continue to liaise with the Takeover Panel in examining this issue and will publish its conclusions in Summer 2007.

Investment Entities Listing Rules Review
Following feedback from the industry the paper to be published in December will propose removing the prohibition in the Listing Rules on primary listed investment entities controlling companies in which they invest. This will allow a wider range of investment strategies including private equity strategies. The new rules will be implemented in Q3 2007.

The FSA will also abolish the existing rules which apply to property-focused investment entities in Q3 2007 but will consider requests from new UK-REITs applying for a primary listing under the investment entities rules, from 1 January 2007, to waive those rules.

Notes to editors

1. The Policy Statement 06/11 'Implementation of the Transparency Directive – Feedback on CP06/4' has been published today.
2. The rules on TD implementation have status as 'near' final. We have been unable to make final rules at this stage because the TD Level 2 measures issued by the European Commission have not yet been finalised and the Companies Bill from which we are getting our statutory powers to make the new rules has not yet received Royal Assent. Once the Level 2 measures are finalised and Royal Assent is given we will aim to finalise the rules and make necessary changes, as quickly as possible, in light of the 20 January 2007 implementation deadline.
3. The TD rules will take effect from 20 January 2007. As a transitional measure, issuers will need to publish no later than 31 December 2006 the total number of voting rights in respect of shares admitted to trading on an encompassed market. This will enable shareholders to work out their relative holdings in preparation for the 20 January 2007 when the new major shareholding notification regime takes effect. The periodic financial reporting requirements will apply to accounting periods starting on or after that date, so e.g. an issuer whose accounting year starts on 1 January 2007 will not be covered by the new accounting rules until 2008.
4. The term 'investment entities' comprises investment trusts, venture capital trusts and other domestic and overseas investment companies, including property investment companies. Unlike authorised unit trusts and open-ended investment companies, such entities are not authorised products under the FSA's regime for authorised collective investment schemes. Rather, they are companies which, if listed, are subject to the listing regime.
5. The term directive minimum or secondary listing means the issuer is not subject to the full super-equivalent obligations that apply to an issuer with a primary listing. Secondary listings are available to overseas companies and impose only the minimum obligations required by the Consolidated Admissions and Reporting Directive. Typically a secondary listed issuer's UK listing will be its second or third listing and secondary listing has been attractive to these issuers because they do not have to comply with the full UK primary (ie super-equivalent) listing requirements as well as those of its home jurisdiction. However, it is not a condition of secondary listing that an issuer has a listing in another jurisdiction.
6. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
7. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.