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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.
