“The FSA, as a regulatory organisation, discharges its responsibilities without regard to the nationality of the management or ownership of the entities which it regulates both in the rules it sets and how it applies them. This policy has brought great benefits to the UK, which is the most international capital market in Europe and worldwide. Our decision on the regulatory regime for Abbey after its acquisition by Santander is the most recent significant example of the reality of our openness to foreign acquisition, provided appropriate regulatory arrangements are agreed. It is a policy in marked contrast to that adopted by at least some Member States, which seek to limit or prevent foreign ownership of financial firms.
“In discharging our regulatory responsibilities in respect of any offer for the London Stock Exchange (LSE), the FSA will adopt the same approach: that is, we will be indifferent to the nationality of the owners or the managers of any future combined operation, and will be concerned to ensure that the future operation meets our regulatory standards. If the LSE remains a UK exchange under a new parent it will continue to be subject to FSA regulation as a Recognised Investment Exchange (RIE).
“This will require the FSA to be satisfied that, inter alia:
- the governance arrangements of the exchange are such that the exchange is a “fit and proper” person to perform its functions;
- the UK entity has sufficient financial resources to ensure that, in the event of the need arising, its business could be wound down in an orderly fashion;
- the exchange’s systems, including satisfactory clearing and settlement arrangements, work and offer adequate protection to investors; and
- the exchange’s risk management and internal and external audit procedures are robust.
“It cannot, however, be certain that in the long term the new entity would choose to maintain its activities as an entity located and regulated in the UK. The services of the LSE could be provided from another EU Member State as a “passported” activity - that is through the provision of trading screens in the UK and with securities admitted to trading on a market operated from elsewhere. Such a move, were it to occur, would potentially have significant implications for various aspects of the wider regulatory regime.
“The LSE, as a UK RIE, plays a key role as a focal point for the wider regulatory framework, including capital raising and corporate governance. The attractiveness of the UK financial markets, and ultimately the competitiveness of EU capital markets, depends, in part, on a system of corporate governance and of regulation which is of a high standard, but is proportionate and adaptable and attuned to the requirements of users.
“Until now, there has been little public discussion of the possible longer term implications of a take-over of the LSE, including potential changes to the present system. We wish to indicate some of the more significant of these changes, so that all involved can consider them.
“The first implication of such a move, under which trading screens and other facilities are provided to market participants in the UK and elsewhere by a market regulated in another Member State, is that there might be significant change to the application of the present UK listing regime, including those aspects of corporate governance which depend on special UK listing requirements that go beyond what is required in EU directives and which are valued by market participants. The UK listing regime, including the current requirements for shareholder approval for significant transactions and the corporate governance regime under the Combined Code, would no longer apply to the companies on that market. Although other means might be found to maintain the UK listing regime, these may have to be achieved through legislation.
“There would also be important changes in the responsibilities for investigating market abuse on the LSE’s passported markets, with these responsibilities being shared between the FSA and the authorities in the Member State which would then regulate the LSE’s markets. The FSA might not be the lead competent authority responsible for investigating market abuse of, for example, UK stocks admitted to trading on the LSE’s markets. The FSA could be confined to assisting the regulatory authority in another Member State, which would be responsible for deciding whether an investigation should take place, or enforcement proceedings pursued. There would also be various practical implications of this change in terms of the mechanics of gathering and reporting information relevant to identifying market abuse.
“AIM, the LSE’s market for smaller, growing companies, could also be operated as a passported market from another Member State. The regulatory authority of that Member State would then be responsible for the continuation of a regulatory regime which has been designed to be less burdensome to small companies and which is generally recognised as assisting AIM in becoming the most successful market of its type in Europe.
“The role of the Takeover Panel and the Takeover Code would undergo change. In this case, under the Takeover Directive, there is likely to be a split of responsibility between the Panel, as company regulator, and the equivalent authority in the other Member State where the market is regulated, creating additional complexity in takeovers.
“It is clear that these changes would represent a significant change to the present regime in which the LSE operates. They merit careful consideration by those who use the LSE - those seeking to raise capital, intermediaries and investors - as well as those who run the LSE or who seek to own the LSE. They are, of course, all changes which would occur only if there was a change from a UK RIE to a passported arrangement. Any exchange is entitled under European law to operate in such a way, remotely from a single location by placing trading screens anywhere in the European Community.
This is not a decision for regulators, but a decision for the exchange - taking into account the views of its stakeholders. In this context, it is not a question of the ownership of the exchange but the short and longer term intentions for its operations, corporate governance arrangements and the wider regulatory regime that needs to be considered.
“It is therefore worth stakeholders raising the question of how any bidder will address these issues. There are a number of ways in which stakeholders may be reassured about the longer term durability of the arrangements including, as some have suggested, having the parent company or “topco” located in the UK with its primary listing on the LSE.
“Those stakeholders who have an interest in the future of European financial markets will want to consider the issues presented here carefully.”
Background
- 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.
- The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve our business capability and effectiveness.
