UK: The FSA’s Listing Rules Consultation Paper

Responses were invited on the CP and had to be submitted by 31 January 2004.

To a large degree, the future of the listing regime has been dictated by European legislation initiatives designed to deliver a single market for financial services across the EU (known as the Financial Services Action Plan). The key directives which are likely to impact on the listing regime in the future are:

• The Prospectus Directive (sets out the contents requirements for prospectuses).

• The Transparency Directive (imposes continuing disclosure requirements on issuers, e.g. financial reporting, major shareholders).

• The Market Abuse Directive (will harmonise rules on prevention of insider dealing and market manipulation and will govern the dissemination of price sensitive information).

In addition to the European influences, the new Companies Bill will impact on the listing regime. However, this Bill has now been delayed which means that any knock-on effects of that Bill will only be known after the listing review is complete.

The FSA’s proposals for reform will, if implemented, mostly impact equity issuers and sponsors. The FSA is consulting on several key proposals, some of which are:

• Listing Principles: to introduce six overarching Listing Principles to reflect the fundamental obligations of all listed companies.

• Corporate Governance: to introduce a listing rule to deal with directors’ conflicts of interest; to give the FSA power to disqualify directors of listed companies for serious breaches of the Listing Rules; to streamline the Model Code and ensure it operates in a way that is complimentary to the market abuse and insider dealing regimes which will be brought in by European legislation.

• Class Tests: to maintain the existing requirement for shareholder approval of major transactions; and to revise the Class 1 rules so that all transactions that are outside the ordinary course and result in a change in shareholders’ economic interest in an asset are classifiable if they meet specified size thresholds.

• Sponsors: whether to retain the requirement for issuers to engage a sponsor for new issues and major transactions or to abolish the mandatory requirement and leave it to issuers to decide whether or not to use a sponsor.

• Delisting: whether to require issuers to obtain shareholder approval in order to delist in certain circumstances so as to protect shareholders.

• Product Approach: to restructure the Listing Rules sourcebook so that it is divided into three sections under the categories equity, debt and financial products and to incorporate the guidance manual into the rulebook. The FSA is hoping to make the sourcebook more user friendly and flexible.

As mentioned above, the FSA proposes to introduce six Listing Principles which are intended to provide flexibility, transparency and consistency in interpreting and applying the Listing Rules (rather like the Combined Code where you have general principles and then more detailed rules). The FSA would be able to enforce the principles as rules against issuers.

The proposed Listing Principles are that an issuer must:

1. take all reasonable steps to enable its directors to understand their responsibilities and obligations under the Listing Rules;

2. take all reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with the Listing Rules, both on initial admission to listing and on a continuing basis;

3. act with integrity in its relations with holders and potential holders of its listed securities;

4. communicate information to holders and potential holders of its listed securities as required under the Listing Rules in a clear and timely manner, and to take all reasonable care to ensure that such information is not misleading, false or deceptive;

5. ensure equality of treatment for the holders of the same class of its listed securities in respect of rights attaching to such securities; and

6. deal with the Competent Authority on the application of the Listing Rules in an open and co-operative manner.

The impact of the Listing Principles could be far reaching, particularly bearing in mind that directors are exposed to disciplinary action for being knowingly concerned in a breach of the Listing Rules. The fundamental concern with a principle-based approach, particularly where disciplinary action can be brought on the basis of principles alone, is that it is very difficult to measure conduct against principles with any degree of certainty.

Implementation of the proposed changes is planned for the summer of 2005. 

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