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Speech by Sally Dewar, Director Wholesale Markets, FSA
FSA Listing Conference
14 January 2008

Good morning. It is a real pleasure for us to host this Conference and to see a really good turn out. As Hector has emphasised, maintaining and developing our relationship with you is absolutely central to our markets work, and this is becoming increasingly important for us as the environment within which we are all working becomes more complex and challenging.

In the next half-hour I want to explain in more detail how we are seeking to do this. There are three initiatives in particular that I want to cover:

• First, how we are taking forward the Market User Survey, that Hector referred to
• Second, our Debt Relationship Management Programme
• Third, our current review of the Sponsor Regime

I also want to bring you up to date in two other current issues, both of which relate to our work on ensuring market integrity but at the same time illustrate how we are working in partnership with the market and other regulatory bodies: where we are in our thematic work on the strength of industry controls over inside information in relation to public takeovers, and how we are engaging with the issues raised for banking sector valuations by current market conditions.

Let me start with the Market User Survey, as this sets the overall scene for our relationship with you and your fellow participants in the market.

First, to recap on the objectives. In March 2006 LAAC – the Listing Authority Advisory Body, that comprises market practitioners out together by the FSA Board to advise the UKLA on primary markets issues (current Chairman Andrew T, chairing today's conference) – commissioned a survey with two main aims. These were to:

• Measure the efficiency/effectiveness of the UKLA and the level of market satisfaction with the service provided to users;
• Seek views on the implementation of the (then new) Listing Rules and Prospectus Directive.

The survey was carried out in the autumn of 2006, and the results were published in our April 2007 edition of List!

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The survey consisted of a series of in-depth face-to-face interviews with 20 market participants, and a written questionnaire which was sent to every issuer which had transacted since the implementation of the PD and the new Listing Rules in July 2005, and substantially all of the advisory community. In total we received 130 responses – 75 from issuers, 55 from advisers.

In summary, as Hector said, the responses to the survey were largely positive. The UKLA achieved an overall satisfaction rating of 6.9 on a 10 point scale. Particularly positive responses were received in relation to the UKLA’s timeliness, accessibility and its education initiatives such as List! and the sponsor seminars.

In addition, 93% of market users thought the UKLA’s implementation of the PD had been efficient and effective, and the sponsor regime, the PSM and the substantive eligibility criteria all received strong endorsement.

But we are not complacent about our performance and we take seriously the lessons of the overall process as well as feedback on specific points where there was a feeling that we could/should be doing things more effectively.

First, and as a general point, carrying out the survey underlined for us the importance of face to face contact as a means of seeking your candid views. Members of the UKLA attended the interviews that formed the first part of the survey. We found this a really valuable, constructive and informative experience, and we will certainly aim to do more of this - indeed we have already, in taking forward the debt relationship management programme that I will cover in a moment.

One area where it clearly emerged that more effective communication needed to take place was in relation to the UKLA help-desk, and we understand your frustration that you weren’t always being given an immediate response to their queries, and your concern over expertise on the help desk.

In fact, even before the results of the survey were published we had taken steps to improve the expertise on the help-desk by establishing separate debt and equity help-desks and by ensuring that the help-desk was manned with our more experienced people. More recently I am glad to say that we have received a good deal of (largely) unsolicited positive feedback on the improvement that has taken place as a result.

We would make a request ourselves here, if we may. Our experience of the recent use of the help-desk suggests that roughly a quarter of calls were from people who had chosen the wrong option or were using the help-desk as a general switch-board. There are also quite a lot (about 20%) that we think could probably be answered in-house because of their routine nature. In the same way that we have made considerable efforts to devote the more senior and experienced of our people to the help-desk, it would be immensely helpful if our clients using it could be as discriminating as possible when deciding whether to call.

It's also the case that there will be some queries that require more careful internal consideration and escalation to ensure that we give an answer that can be relied upon and that is consistent. That's because, quite often, simple knowledge of the rules alone is insufficient, and the application of good judgement is required. To some degree it's an inherent aspect of principles based regulation that the same rule or guidance will not always be applied in exactly the same way. I believe that we should be flexible enough to allow different approaches to different situations- but always aiming at the same outcome. This might sometimes mean you get a reply less quickly than you would like, but I hope you'll appreciate that this in these cases it is for good reason.

The second initiative we're taking to enhance our relationship with you is our Debt Management Relationship Programme. This started last year. Its objectives are to:

• Enhance the international competitiveness of the UK Listed market, and
• Facilitate access to Listed markets by maintaining and strengthening good relationships with market practitioners.

What has the Programme involved in practice? Overall we've held meeting with about 25 firms in the course of 2007. For each we have established a principal point of contact within the debt teams. This enables flexible two way communication which is used to discuss recent developments, new products and to provide feedback. We have provided 'bespoke' training for firms, ranging from basic introductory training provided to new trainee lawyers to specific training on CESR updates or product specific training on GDRs. This has, I am glad to say, proved very popular with firms.

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The meetings we've held with firms have covered some technical issues, particularly on “Retail cascade” and “Final Terms”. These have been really helpful in giving us a clear understanding of the problems faced by market participants, and this has proved extremely valuable in our efforts to achieve a pan-European solution to these issues via CESR.

At a very practical level we have just (last week) set up a dedicated 'debt' section of the UKLA website. This includes links to all relevant checklists and forms for issuing various debt products as well as an FAQ section. It is designed to be as user-friendly as possible: please let us know if it isn't!

In addition, the debt teams now offer a Same Day Supplement service for the fast-track approval of Supplementary Prospectuses/Supplementary Listing Particulars. This is for Supplements that either incorporate by reference or physically attach information such as interim accounts, SEC filings. Given the massive increase in the number of Supplements we now approve following the PD regime we hope that this will be a valuable facility for issuers and their legal advisers.

Finally, following the initial meetings with the firms on the Relationship Management Programme and feedback received we have removed the requirement for MTN Programme updates to be annotated for compliance with the Prospectus Rules.

The Relationship Management initiative has been unanimously welcomed by firms. So we intend to maintain and develop it further through continuing with regular meetings with firms. In addition we plan to add a further 12-15 firms to the Programme. We will also continue with our training programme.

We'll also consider what other documents could benefit from an accelerated review process. And we will develop our proposal, that firms have welcomed, to introduce specific rulebooks for the various different debt products. I hope this will improve the 'user-friendliness' of the current rule-books.

For us this has been an extremely valuable initiative: I am very grateful to our colleagues in the market for the enthusiasm and constructive engagement that you have shown and look forward to seeing this develop further in 2008.

The third initiative we have taken to enhance our relationship with you has been the Sponsor Review.

The background to this is that when we clarified and strengthened a sponsor’s obligations back in 2004 we undertook to review the regime two years on to assess whether it was functioning as intended.

Following discussions with the market in 2006, it was apparent that there was no need, nor a desire, to undertake another fundamental review of the regime. Instead we proposed to undertake a regular review of the sponsor regime, making changes where necessary to ensure the regime is fit for purpose and provides sufficient clarity on the high standards expected of sponsor firms.

In conjunction with the sponsor community we have now identified some areas that require amendment. We are therefore intending to publish a consultation paper later this quarter on the following areas:

• Clarifying when the Principles in Chapter 8 bite. There are differing interpretations as to when a sponsor is subject to the Principles , so we will make it clear that the application of the principles is limited to situations where the company/applicant must appoint a sponsor.
• Sponsor competence. We will propose the removal of the individual-focussed Suitably Experienced Employee regime, which has had some unintended consequences, and instead place greater emphasis on appropriate and adequate staffing of transactions, staff training requirements and line management responsibilities for sponsor services.
• Sponsor Independence. We are proposing to remove the existing detailed rules and guidance, including the thresholds, and to replace them with a high level principle and guidance.
• Two final proposals: first, we are also proposing to delete current provisions relating to the marketing of new applicants. This is largely a historical rule. Second, we are looking to enhance record keeping requirements, specifically in the area of sponsor independence and in relation to sponsor competence.

I am confident that these three initiatives will together further enhance our relationship with all of you in the market. You will no doubt tell us through the next LAAC survey whether this is the case!

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The second main set of issues that I want to cover this morning relate to our continuing drive for market integrity. In particular, I would like to update you on our thematic work assessing firms controls for handling inside information, and second, to cover some of the accounting/valuation issues arising from current market conditions.

Market integrity remains a high priority for us. But we cannot achieve our goals on our own. We need the help of market participants – these are your markets. We are therefore looking to promote a partnership approach in this area.

In practical terms this means:

• agreeing the priority areas to focus on,
• firms taking action to strengthen their systems and controls, so as to mitigate the risk that market manipulation and abuse can take place;
• all market participants proactively reporting wrongdoing to us (eg through suspicious transaction reports);
• the FSA taking tough action to pursue and penalise those who breach the rules.

A very good example of this partnership is the work that the Market Conduct team published in Marketwatch last summer following our review of the strength of industry controls over inside information in relation to public takeovers. I believe that this is a big step in the right direction to help the FSA and all those who handle inside information to work together, in partnership, to take robust action to tighten controls, raise awareness and reduce the incidence of leakage. If you haven't, I'd enourage all of you to look at it – it is very relevant to everyone here.

The project aimed to increase our understanding of information flows in a typical deal and the processes by which firms decide who to make insiders, and to identify good practices and areas of weakness and publish these so that firms can benchmark themselves against the findings with a view to strengthening their own controls.

While there were many examples of good practice, there are a number of areas where we think that improvements could be made. These are the key ones.

• All of the firms we spoke to were confident that leaks of information relating to public takeovers did not originate from within their firm. Everyone blamed everyone else!! But there is no room for complacency here - all firms need to be constantly on guard.
• Only a few firms that we met with had a formal policy on conducting internal reviews. We think firms should consider what their approach to leaks should be - for example more frequent formal internal reviews may act as a deterrent to staff leaking information.
• The number of insiders at many firms was significant and we felt that firms could apply more rigour in deciding who needed to know about a deal.
• In many firms the IT controls could be improved. Sensitive files were sometimes stored on relatively open access IT. And with a huge volume of papers being circulated electronically there is greater risk of errors or just unnecessarily wide circulation.
• Some firms, particularly non regulated firms, had limited training on market abuse and insider dealing, for example only covering professional staff and not support staff.
• When engaging a third party, a high reliance was often placed on confidentiality letters without any assurance that a firm to whom information was passed had the necessary controls to keep the information confidential.
• Some firms emphasised their reliance on the use of code words as keeping information confidential. Whilst accepting the possible benefits, we note that the use of code words in isolation could be largely ineffective as most parties agreed that code words could easily be cracked!

So what are the key action points?

First, all Issuers, if not already, should review their controls against the good practice points. This is the real value of the partnership approach.

Second, issuers should emphasis to their staff that 'strategic' links are not acceptable. Think about what an appropriate response from your company would be to a leak on a deal where you were one of the insiders. What would you expect from your advisors and those you had made insiders? Is there more that you can do to emphasise that strategic leaks of information, even if they appear to be in the interest of your company, will not be tolerated?

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Third, we encourage all firms to be proactive in reviewing your systems and controls, especially following leaks.

Fourth, please continue and enhance your training efforts, making sure that this covers all relevant staff.

Finally, in the spirit and practice of partnership, we have been working with a wide range of stakeholders – CBI, LIBA, also legal, PR and printing firms - to draft a Voluntary, industry led, statement of good practice. We anticipate publication of the statement this quarter. The CBI has been of great assistance to us and, if you are interested to learn more, you can let me know and I will put you in contact with our market conduct team or you can contact the CBI directly. The statement itself is not owned by the FSA – it's an industry statement – and is likely to reside on the websites of various stakeholders. It will however be published in our Marketwatch publication.

Finally, I would like to offer some comments on some valuation issues in the banking sector that have arisen from current market conditions. For us, this is an important part of our work to ensure market integrity.

Recent months have seen of course dramatic changes in financial conditions, and in the liquidity of a number of financial instruments and markets. In these conditions, many financial products have become increasingly difficult to value, as firms can no longer look to the market for indications of prices, and may have to look to rely on model-based valuations instead.

Financial reporting issues are now coming to the fore because a substantial number of UK listed companies have financial years ending in December. There has been some concern around the validity of the financial information that will appear in the annual reports.

From a regulatory perspective, these issues are governed by the application of the relevant accounting standards. The Financial Reporting Council (FRC) – the responsible regulatory body – has already publicly noted that recent credit conditions will increase risks to corporate reporting and governance, and that additional diligence on the part of preparers of accounts, members of audit committees and auditors will be required this year. But the FRC has also said that existing accounting standards, if applied with appropriate professional judgement, continue to be fit-for-purpose. The need for judgement also applies to the Business review which must be a fair review of the business and include a description of the principal risks and uncertainties facing the company.

A number of actions are already being undertaken by the FRC to mitigate these risks in particular through the activities of the FRRP, the Auditing Practices Board and the Professional Oversight Board. The FSA very much supports these initiatives. We believe that they will help maintain market confidence - one of our key objectives.

I would also make the following points from our particular perspective as a securities market regulator.

It is of course an obligation for listed issuers to disclose price sensitive information about their financial position as soon as possible. Should listed issuers determine that, during their annual results compilation, price sensitive information may be present, there may be a need to bring forward any pre-planned announcement date. They should nonetheless be comfortable as to the accuracy of any published information and ensure that it equips investors with the necessary knowledge to make informed decisions.

While the FSA is not responsible for regulation of accounting and audit in the UK, I would like to take this opportunity, in the context of our market confidence objective, to remind Listed Companies that they are required to provide disclosures which are sufficient to allow investors to understand the current status of, and opportunities and risks in, their businesses; which are comparable across peers; sufficiently comprehensive to give a true, and not misleading, view; and which give investors an understanding as to the basis of quantitative disclosures being made. There is a range of channels through which they can supply information to investors, and issuers should ensure that each of these is used appropriately. We will maintain our engagement with the market on these points as the reporting season approaches.

Well, I certainly don't want to end on a downbeat. This session has been about how we're working to enhance even further our relationship with you. This relationship lies at the core of our work, and we value – and enjoy - it enormously. We all look forward to seeing it continue to flourish. Thank you.

 

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