Keynote address - Listing Conference
Speech by Hector Sants, Chief Executive, FSA
FSA Listing Conference
14 January 2008
I am delighted to be here this morning at this, the fifth FSA Listing Conference and the first since I became Chief Executive of the FSA. This conference is an important forum, providing us with an opportunity to share our views and discuss a wide range of current issues. Today, I intend to provide you with an overview of our philosophy towards regulating UK capital markets. I will also talk about the changes to the global economic environment, which is posing new challenges for both the FSA and the industry, and tell you how we are intending to respond.
Regulatory philosophy
Turning first to our regulatory philosophy. In its role as the UK Listing Authority, the FSA has specific primary market responsibilities for maintaining the integrity and competitiveness of the UK market and providing an appropriate level of protection for investors. The balance between these objectives is key to our regime. We seek to achieve the necessary balance by operating with a principles-based and disclosure philosophy designed to facilitate choice and enable all market participants to make informed decisions. The regime also includes important investor protections, such as eligibility requirements for primary listings. However, critically, we do not seek to assess the suitability of an investment as this, we believe quite rightly, should be a decision for investors, based on their own risk appetite. A further element of the regime which underpins the focus on transparency is the importance of sponsors and the critical judgements they make. It is important to note, however, that while the FSA is responsible for the clarity of the risk disclosure process, the underlying integrity of both sponsors and companies is key to the regime.
I believe that the degree and pace of change in both UK and global markets in recent years, has increased the need to focus on those underlying principles. We remain committed to implementing a regime that concentrates on the right outcomes, while retaining an appropriate degree of flexibility, enabling us to consider and respond to developments in the markets.
There are three broad areas where we have seen significant change: first in the volumes and patterns of capital markets activity; second in the consolidation of market infrastructure, particularly exchanges; and third, in the European regulatory environment. The collective result is a more integrated and competitive global market.
For the UK to retain its current position as a successful international market it needs to be attractive as a place where global capital is exchanged. A significant part of the attraction of the UK is the wide choice of capital raising mechanisms that are available.
Global market developments
Since our last Listings conference in March 2006, London, and Europe as a whole, has seen continuing and rapid growth in market activity, which has been driven to a large degree by emerging market growth. In particular, the number of companies from countries such as China, India and Russia, but also from Africa, seeking to raise capital in the UK has grown significantly, demonstrated by the sharp rise in GDR issuers listed in London. However, the global decline in the number of companies from developed countries with multiple listings has continued, with many finding their home market providing sufficient access for global investors.
The process of consolidation amongst exchanges across the world has also continued, partly in response to the challenges posed by new and innovative electronic trading systems, which reduce transaction costs and facilitate cross border trading. April 2007 saw the merger of Euronext and New York Stock Exchange and more recently we have seen the London Stock Exchange merge with Borsa Italiana. In parallel, there are also new entrants to the market, for example in the UK, Plus has become a Recognised Investment Exchange offering an additional market for listed securities alongside the LSE.
There have also been further significant changes in the regulatory framework across Europe. The implementation of MiFID has the potential to further increase competition between exchanges in the UK and on a wider European basis, including through new multilateral trading facilities. The Directives relating to securities admitted to trading on a regulated market in the Financial Services Action Plan will create a new EU baseline of minimum regulation, separate from our regime. This has some implications for the positioning of the UK listing regime, which I will touch on shortly. Both of these will enable issuers and investors to access markets on a cross-border basis more easily.
These developments show a trend of increasing globalisation and international competition, both in terms of capital raising and secondary trading. This has resulted in issuers, investors, and thus liquidity, ceasing to have national bases but migrating to, and using, the markets that best meet their needs. This poses a significant challenge for all of us – but particularly for us as regulators.
We are conscious that greater competition means that even relatively small differences in regulatory regimes can lead to shifts in the location of activity. Greater integration of markets increases the scope for market participants to circumvent more rigorous regulatory requirements seen as too costly relative to the benefits they may bring. As regulators we need to carefully consider the consequences of our actions and any new developments in the markets. We also need to work increasingly in partnership with our counterparts overseas to facilitate mutual recognition and to agree appropriate minimum standards.
The changing global landscape requires us to continually revisit how we are applying our regulatory philosophy and how we strike the balance between maintaining the competitiveness of the UK market while protecting investors.
Stakeholder engagement
I would now like to emphasise the importance, in this changing environment, of ensuring that we work in partnership with our market stakeholders. We are keen to get your feedback and will listen carefully to your views. I am grateful to those of you who have contributed to the debates so far and would like to encourage you to continue as we move forward.
At the core of our relationship with market participants is the Listing Rules. These are very much a product of the partnership that exists between the FSA and stakeholders, as the standards and practices our rules set out have been collectively agreed by issuers, advisers and investors.
We take our role in maintaining the integrity of the Listing Rules seriously, and welcome views of how we carry out that role. At the end of 2006, the Listing Authority Advisory Committee surveyed everyone who had been involved in a transaction with the UKLA since July 2005 to measure the efficiency and effectiveness of the function and the level of market satisfaction. It also sought views on the implementation of the new Listing Rules and the Prospectus Directive. Overall, the feedback was positive, but we received some important messages on improving our performance which we continue to address. Sally Dewar will provide more detail on this later.
We expect the Committee to commission a follow up survey in due course, which we welcome. I would be particularly keen to receive feedback on how our overall philosophy and drive towards more principles-based regulation is being received by you and your colleagues in your dealings with the UKLA.
I would now like to turn to three policy areas where the changing environment has raised further challenges and important issues for us to tackle: our review of the structure of the listing regime, the Investment Entities Listing Review, and our work on disclosure of contracts for difference.
Wider review of the structure of the listings regime
While we have reviewed the details of the listing regime thoroughly in recent years, the continuing evolution of global markets and the greater choices available has led us to conclude that now is a good time to consider the structure of the regime as a whole. We are publishing a Discussion Paper today which we hope will provide focus and take further the debate. I would just like to make a few high-level points here to set the overall context.
This is not another fundamental review about the detail of the Listing Rules. It is, in fact, primarily driven by a recognition of the significant changes in the structure and dynamic of UK and international capital markets in recent years. These changes have led to a number of market participants voicing concern regarding the lack of clarity and the potential for confusion arising from the present multiple segmentation of the regime, and particularly the confusion between primary listings, secondary listings and GDRs. Above all, I would like to emphasise that this review is driven by our commitment to ensuring the Listing Regime continues to make a full contribution to the success of the UK market, while keeping pace with changes in global markets and meeting the needs of all users.
An international capital market has an inevitable tension between a drive to attract external listings where, not unnaturally, companies will be governed by their own local circumstances, and the domestic desire to ensure the listings platform delivers a standard or endorsement they feel is appropriate for the local market place. This inevitably creates debate about segmentation. The issue, therefore, is not that we have segmentation already, but whether it is clear and delivers what we need to achieve the right balance between investor protection and maintaining the competitiveness of the UK capital market. I believe this can be achieved by helping all market participants to understand clearly what the regime represents and how it relates to other market offerings while also being sufficiently robust to accommodate further increases in competition and choice.
To do this, we need to ask some important questions, not least about our own role. In some other jurisdictions in Europe, the competent authority for listing is an exchange based function. However, our residual function following the implementation of European directives has been the setting of super-equivalent standards for a Primary Listing. I continue to believe this badge of quality is critical to ensuring London remains a pre-eminent global venue, but it does raise the question of who should set those super-equivalent standards. This role could, for instance, be carried out by the market, or as part of the FRC's Combined Code.
We believe that the market will have a strong preference for us to continue to set these standards, partly because this enables us to meet our objectives as the UKLA and partly because it helps us to maintain a strong brand that could otherwise be devalued. However, we do welcome views on this issue.
As part of a wider debate on the structure of the market, we are also keen to explore the issue of who can operate a market for listed securities. Historically the Official List has long been associated with the LSE's main market. However, the increase in the number of alternative trading platforms raises the question of whether there is sufficient flexibility in the Listing Rules and whether equity securities should be admitted to the Official List, even if they were only admitted to trading on an MTF operated by other Recognised Investment Exchanges.
In summary, our Discussion Paper should be seen as both part of ongoing responsibilities to maintain and develop the UK listing proposition and as a key opportunity for users to express views on the recent questions, primarily raised by increased globalisation. There is potentially a tension between an international capital market centre and domestic investor protection considerations. London has traditionally managed this issue successfully and we believe our DP can play an important role in ensuring we continue to do so.
Investment Entities
A second key example of how the changing environment raises new challenges for us has been the Investment Entities Listing Review. This is another example of the application of our principles-based approach in action. We believe that the outcome we have reached as a result of the Review, incorporating significant deregulation, delivers the balance between securing appropriate protection for investors while maintaining the competitive position of the UK. This will be fully implemented through the unitary regime. I believe that, although the process has taken longer than expected, this was necessary to achieve the desired outcome. We need to recognise that the landscape can change while policy is being formulated and therefore need to be flexible enough to respond. The Review has again highlighted the key role that our stakeholders play in providing feedback, particularly over such a keenly debated issue and I am grateful for your positive engagement with us.
Contracts for Difference
I referred earlier to the importance I place on being alert to the consequences of new markets and instruments. To highlight this, I will now draw out some of the key principles of another area of policy challenge for us in 2008 - the resolution of the debate over disclosure of Contracts for Difference and other derivative instruments.
First, we have worked hard to produce evidence-based proposals in an area that has been largely characterised by perception and anecdote. Second, we have sought to offer proportionate policy measures in response to the market failures we have identified. These principles underpin our overall approach to policy-making.
We believe that CfDs are used in specific instances on an undisclosed basis in ways that the disclosure rules were designed to prevent, but this does not appear to us to occur on a systematic basis. So the key issue for us, and for the market, is how to balance transparency and market efficiency.
We are proposing two options to achieve greater disclosure. The first seeks to strengthen the current regime through measures such as requiring disclosure of CfDs, over a 3% threshold, unless they meet stringent safe harbour provisions which prevent the exercise of voting rights and the sale of underlying stock. The second would be to move to a general disclosure regime over a 5% threshold.
We recognise imposing too tight a disclosure burden may have negative effects but also recognise the importance that some attach to as full a degree of disclosure as possible. Our goal remains the same: to provide an effective and proportionate disclosure regime that sustains market confidence and efficiency. In reaching that goal, I would like to stress again that we will listen carefully to the views and feedback of all market users and participants.
International engagement
Contracts for Difference is one specific issue that has been highlighted by our implementation of the Transparency Directive. I would now like to say a little more about the impact of the Directives on our regulatory approach.
First, it is sometimes asserted that our move towards more principles-based regulation is constrained by EU Directives. Although it is true that European legislation is not always written with this in mind, we believe the implementation of EU law is compatible, as we are working together to achieve the right outcomes. Directives are binding in this respect, but typically leave national authorities to choose the form and method of implementation.
I believe strongly that the Lamfalussy approach has made a significant and positive contribution to the regulation of the EU's financial markets. The Level 3 Committees, and CESR particularly, have delivered extensive advice and guidance, and have done much to develop cross-sectoral approaches to issues of common regulatory concern. We continue to work closely with all the committees.
But we need to recognise that financial markets are highly dynamic and so, in conjunction with the Treasury, we have recently made some suggestions for further enhancement of the existing arrangements. We believe, for example, that more robust market failure analysis and impact assessments would help deliver better regulation, and that there is more we can do in defining convergence more precisely to avoid over-prescription and to encourage more consistent implementation. I hope that you support these objectives.
We have also been working closely with our colleagues at CESR on the important area of international accounting equivalence. The US has already agreed that EU issuers with listings in the US do not need to reconcile their accounts to US GAAP, and our focus is now on working to ensure that US issuers listed in Europe would not need to use IFRS. I am confident that this process is on track and that equivalence will be achieved within the timetable. In the next six months, CESR and the Commission will be concentrating on making decisions on individual third country GAAPs and I look forward to their successful conclusion.
I hope this has given you a useful overview of the regulatory philosophy for our markets work and helped you to understand our key challenges against a backdrop of significant and rapid change in global markets. We will continue to seek feed back from you to assist us in responding effectively to changing markets and I am committed to ensuring we maintain our close partnership both with market participants and our fellow regulators.