UK's Financial Services Authority Consults On Listing Rule Changes And Transparency Directive

The Financial Services Authority (FSA) has today published a consultation paper on proposed changes to the Listing Rules (LR) for investment entities and on proposed changes to the Listing Rules and Disclosure Rules to implement the Transparency Directive (TD).

The proposed changes for investment entities replace the existing regime with a more principles-based approach to determining eligibility for listing. This would enable those employing a wider range of investment strategies, including those currently pursued by some hedge funds, to list in the UK for the first time. Appropriate investor protections would be maintained through revised and enhanced disclosure requirements.

The TD forms part of the EU's Financial Services Action Plan (FSAP) and is designed to enhance transparency across the EU's capital markets by harmonising information requirements across the EU. It requires companies whose shares are admitted to trading on regulated markets to produce periodic financial reports and shareholders to disclose major holdings in such companies.

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

"Our proposed reform of the Listing Rules for investment entities will modernise the UK's regime, providing companies with greater flexibility over their investment strategies, while maintaining strong disclosure-based investor protections. This approach is consistent with the conclusions of our work on Wider Range Retail Investment Products which we announced last week and which we believe is a sensible approach to developments in the investment market.

"The Transparency Directive largely replaces existing UK rules which ensure that a high standard of information is provided by listed companies to the market on a continuous basis. We are asking market participants whether we should implement the directive's minimum requirements or if we should retain key features of the existing UK regime for financial reporting and shareholding disclosures, which currently go beyond the directive's requirements."

Changes for investment entities

The proposed reforms cover two principal areas – eligibility for listing (for entities seeking a listing for the first time) and continuing obligations of entities once listed.

The main changes being proposed are:

• to replace the current, rather mechanistic rules, governing what qualifies as an adequate spread of investment risk with a more principles-based approach, which will allow investment entities to have greater flexibility in their choice of investment strategies. It will also remove restrictions on short selling and enable greater use of synthetics;
• to ensure investors remain appropriately protected by: requiring, as a condition of listing, new investment entities to have sufficient working capital for 12 months; and
• requiring investment entities to state in their annual report and accounts how they are achieving their objectives of spreading investment risk; and to immediately notify any significant changes to their risk profile;
• to remove what is effectively duplication by looking to rely where possible on other relevant regulatory provisions – such as the regimes for authorising fund managers, and for authorising Open-Ended Investment Companies - rather than imposing additional listing requirements;
• to simplify other ongoing disclosure obligations, for example by removing a number of detailed financial disclosure requirements to be included in an investment entity's annual report and accounts regarding portfolio composition
• to remove restrictions presently in place on property investment companies, thus ensuring the compatibility of listing rules with tax rules that are to be introduced under the new REITs regime.

Transparency Directive Changes

The TD will introduce requirements in three areas, namely: publication of financial information, disclosure of shareholdings and the dissemination of TD information.

Publication of Financial Information

The TD requires issuers to produce annual and half-yearly reports, and also to produce interim management statements. The FSA proposes to:

• copy-out the TD requirements for such reports and statements into the Disclosure Rules;
• remove the requirement for issuers either to publish half-yearly reports in a newspaper or to send such reports to every holder of their securities; and
• retain a number of Listing Rules that set slightly more stringent requirements than the TD (for example, the requirement for wholesale debt issuers to produce annual financial reports), or lie outside the TD's scope, and to remove the remainder whose benefits are unclear.

Disclosure of Shareholdings

The TD sets out requirements for the disclosure of acquisitions or disposals of major shareholdings. This is currently a Department of Trade and Industry (DTI) responsibility and will transfer to the FSA on the implementation of the TD. The

FSA is inviting views on two possible options:

• retaining the broad parameters of the current UK regime, with notifications necessary when shareholdings reach a 3% threshold, and every 1% thereafter threshold (the issuer being notified within two days of the notifiable event, and the issuer notifying the market no later than the end of the business day after receipt). This would apply to holdings in issuers with shares admitted to trading on a regulated market, and to holdings of shares in UK companies traded on exchange-regulated markets (including AIM and Ofex); or
• introducing the TD minimum requirements, under which notifications become necessary when shareholdings reach thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%. Shareholders must notify the issuer no later than four trading days of the notifiable event, with the issuer notifying the market no later than three trading days after receipt. This would apply to holdings in issuers with shares admitted to trading on a regulated market only.
  The FSA does not propose to extend the scope of disclosure requirements to cover economic interests in shares more broadly (such as CFDs). However, the FSA welcomes views on the issues which would be raised by such an extension, and the likely costs and benefits.

Dissemination of Information

The TD requires issuers to disseminate TD information in a timely manner on a pan-European basis. The FSA proposes:

• to retain the UK's current model, where issuers report information through a small number of Primary Information Providers for onward dissemination; but
• to invite views on whether, as the TD allows, issuers should have a choice of disseminating directly or through a service provider.

The TD requires the establishment of at least one Officially Appointed Mechanism (OAM) for the central storage of such information. The Commission has indicated that interim solutions will be acceptable pending their formal legislative determination of the standards which an OAM will have to meet. The FSA proposes, as an interim solution, to use the FSA website to provide hyperlinks to commercial websites that provide access to this information.

CP06/4: Implementation of the Transparency Directive / Investment Entities Listing Review

Background

1. 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.
2. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.
3. 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.
4. A feedback statement to the Discussion Paper 05/3 Wider Range of Retail Investment Products: Consumer Protection in a Rapidly Changing World was published on 23 March.
5. The FSA introduced changes to the listing rules for investment companies in 2003 (see Policy Statement 164.)