Please contact me should you wish to discuss any of the points raised in the attached response.

Transcription

1 16 April 2008 Our ref: ICAEW Rep 44/08 Adetutu Odutola Markets Policy The Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS By Dear Ms Odutola FSA DP08/1 A review of the Structure of the Listing Regime The Institute of Chartered Accountants in England and Wales is pleased to respond to your request for comments on Discussion Paper 08/1 A review of the Structure of the Listing Regime. Please contact me should you wish to discuss any of the points raised in the attached response. Yours sincerely Katerina Joannou Manager, Capital Markets Policy Corporate Finance Faculty T +44 (0) F +44 (0) E katerina.joannou@icaew.com cc Bhavika Chauhan, HM Treasury (para 6 in respect of FSA DP08/1 para 6.11) David Moran, HM Revenue & Customs (para 6 in respect of FSA DP08/1 para 6.11) Chartered Accountants Hall PO Box 433 Moorgate Place London EC2P 2BJ T +44 (0) F +44 (0) DX DX 877 London/City

2 ICAEW Representation ICAEW REP 44/08 A REVIEW OF THE STRUCTURE OF THE LISTING REGIME Memorandum of comment submitted in April 2008 by The Institute of Chartered Accountants in England and Wales, in response to Financial Services Authority discussion paper A review of the Structure of the Listing Regime published in January 2008 Contents Paragraph Introduction 1 Who we are 2-3 Major points 4-9 Responses to specific questions Chartered Accountants Hall PO Box 433 Moorgate Place London EC2P 2BJ T +44 (0) F +44 (0) DX DX 877 London/City

3 INTRODUCTION 1. The Institute of Chartered Accountants in England and Wales (the ICAEW) welcomes the opportunity to comment on the discussion paper A review of the Structure of the Listing Regime published by the Financial Services Authority (the FSA). WHO WE ARE 2. The ICAEW operates under a Royal Charter, working in the public interest. Its regulation of its members, in particular its responsibilities in respect of auditors, is overseen by the Financial Reporting Council. As a world leading professional accountancy body, the ICAEW provides leadership and practical support to over 130,000 members in more than 140 countries, working with governments, regulators and industry in order to ensure the highest standards are maintained. The ICAEW is a founding member of the Global Accounting Alliance with over 700,000 members worldwide. 3. The ICAEW s Corporate Finance Faculty (the Faculty) is a network of over 6,000 corporate finance professionals. This response draws on the expertise of Faculty members, which include sponsors and reporting accountants as well as the wider experience of the ICAEW in corporate governance, taxation and company law. MAJOR POINTS Support for the initiative 4. The FSA s discussion paper on the structure of the Listing regime cites the evolution in global markets and the changing EU legislative structure as key reasons for the review. We agree it is sensible to take stock of the current position and are supportive of efforts to make the regulatory framework for listing easier to understand. We also agree with the FSA s objective to ensure that the Listing regime is optimally structured to support an appropriate balance between investor protection and maintaining the competitiveness of the UK capital markets for both UK and overseas issuers. 5. We feel that investor appetite for some of the proposals is, in some cases, unclear. We believe that more evidence is needed of the preferences of issuers and investors for Secondary Listing for UK companies, a sponsor regime for GDRs and trading on multilateral trading facilities. 6. The FSA s discussion paper considers two options for restructuring the Listing segments and as explained later in this response, we support option 2. If, however, the FSA is persuaded by response to choose option 1 we strongly believe that a fuller understanding is needed of the potential tax implications of option 1 prior to its adoption. Option 1 envisages a single Listing segment for equity securities with super-equivalent standards, under which certain securities would lose their current listed status. The tax system has built many of its exemptions and reliefs on the basis that companies are, or are not, listed and, in many cases, financial advice is driven by the tax consequences. Past plans and decisions will have been made in the light of the advantages or disadvantages of listing (or not), both from the point of view of companies but also from the point of view of investors. Potential unintended consequences for the tax system from a change to the Listing regime would need to be identified and a future consultation on the two options should, in our view, be accompanied by an in-depth review

4 and impact assessment of the proposals by HM Revenue & Customs, with the collaboration of HM Treasury. Major points 7. We consider that the UK super-equivalent Listing standards should be retained and, in the interests of quality and consistency, they should continue to be set by the FSA. 8. We consider option 2 for restructuring of the Listing segments to be optimal. This option would retain the status quo of the existing two-tier structure but with modernised labels. The FSA should raise awareness of the labels to reinforce the distinction between super-equivalent and directive minimum standards and, in the interest of investor protection, we consider that greater clarification should be provided as to the customary levels of due diligence for the different Listing segments. 9. We consider that the analysis of the GDR market is a critical factor in deciding whether to require appointment of a sponsor. To the extent that it is a wholesale market for professional investors we do not consider a sponsor regime to be appropriate. The GDR market is highly mobile and, in the absence of failure in the current regime, any moves to impose the requirements of a sponsor could reduce the attractiveness of the London market. If ongoing analysis shows that there are retail investors of GDRs, we believe that additional regulation would be needed for investor protection and that this should be considered at the European level. This review provides a good opportunity to clarify the differences between the Primary Listing and GDR regimes in terms of regulation and market practice for due diligence. RESPONSES TO SPECIFIC QUESTIONS Q1: Do you consider that the UK super-equivalent Listing standards should be retained? 10. The success of the UK s Listing regime is dependent on London being an attractive place for UK and foreign issuers seeking a listing. 11. Current statistics show a decline in numbers of UK companies seeking a Primary Listing. We believe that this can be partly attributed to the fact that, for some companies, the super-equivalent standards are seen to be too onerous and costly. For a number of such companies AIM has offered a preferred alternative. Notwithstanding this trend, we do not believe that the super-equivalent standards should be phased out. A move to a market which is purely directive minimum would be a major change; it could substantially alter the UK markets and could adversely affect investor confidence. Moreover, the market signalled its acceptance of the current regime very recently (2005) and feedback from ICAEW members indicates continuing support for the current regime. We believe that the super-equivalent standards work to provide investor protection, reduce the cost of capital to companies and enhance the London Listing brand. 12. We thus support the retention of the UK super-equivalent Listing standards. Indeed if these were not retained, it is possible that exchanges (or other bodies) would seek to apply super-equivalent standards within their admission rules which we do not consider would be desirable.

5 Q2: Do you consider that the super-equivalent Listing standards should continue to be set by the FSA or should they be determined by the market (exchanges, trade associations or other independent body)? 13. We would be concerned if there were to be a transfer of super-equivalent standard setting powers to one or more exchanges or trade associations, which could lead to a fragmented regime and concerns over independence or bias within the standard setter(s). Such factors could impair investor confidence. 14. We believe that the super-equivalent Listing standards should be set by an independent body to avoid a fragmented regime and provide greater assurance of quality. Furthermore we believe it is optimal that such a standard setting body should be the same as the one that supervises the directive minimum requirements so that any interpretation of the two sets of standards can be applied in an appropriate and, where relevant, consistent manner. 15. Accordingly, we believe that the FSA, as the competent authority for Listing in the UK, is best placed to continue to set the super-equivalent Listing standards, a role it assumed in 2005 when the Prospectus Directive was implemented and after a wholesale review of the Listing Rules. At the time the market accepted that this was in the interests of investor protection. This has the advantage that it permits the wealth of knowledge and expertise within the UK Listing Authority team to be utilised in the future. Q3: Should we allow equity securities to be admitted to the Official List if they are only to be admitted to trading on a MTF operated by an RIE or an investment firm and not on a Regulated Market of an RIE? If so, on what basis? 16. The proposal is that a Primary Listing could be accompanied by admission to trading on platform that is not regulated. Such a platform might be a multilateral trading facility (MTF) operated by a Recognised Investment Exchange (RIE) or an investment firm. It is important to reinforce the point that unregulated does not mean unsupervised. 17. We believe that a distinction may be drawn between Listing and trading. If a company complies with the super-equivalent standards associated with a Primary Listing, then its securities should be capable of being admitted to the Official List irrespective of where the shares are traded or to be traded. Accordingly we would support a proposal to permit Official List securities to be traded on an unregulated platform of an RIE providing it is not a way for issuers to avoid any obligations of listed markets. If the rules for admission and continuing obligations apply, this will ensure that trading of Primary Listed securities on an unregulated platform will not reduce investor protection. 18. However some of our contributors felt that the timing of introducing this option may not be optimal: The objective of this review is to remove the perceived risk of confusion among investors and issuers about the current segments of the Listing regime. It is perhaps not the time to introduce new trading options which could add to complexity especially if unregulated and regulated platforms have different regulatory frameworks.

6 Q4: Which of the options described above do you consider to be optimal? Please provide the reasons for your chosen option. 19. We acknowledge that the term listed is used loosely by the market and the media, often to refer to securities that are not on the Official List, including securities traded on AIM. For this reason we believe that it is not pragmatic to reclaim the term listed and apply it only to the super-equivalent regime, as envisaged under option It is also realistic to expect that depriving GDRs of the listed label as envisaged under option 1, will reduce the attractiveness of issuing GDRs in the UK. Furthermore removing the listed label from issuers with a Secondary Listing has uncertain implications for the Professional Securities Market. 21. We believe instead that focus should be placed on promoting the distinction in the respective obligations to which issuers are subject in super-equivalent and directive minimum regimes. For this reason we prefer option 2 as it would help raise understanding of that distinction: Tier 1 securities being those that are subject to a super-equivalent regime while Tier 2 securities being those that follow directive minimum regulation. 22. When distinguishing between the two tiers which are proposed, in addition to setting out the differences between the applicability of rules (as illustrated on page 21 of the discussion paper), it may also be worth identifying the different levels of due diligence that are customarily performed on issuers of Primary as compared with Secondary Listings and GDRs to build investor awareness. Q5: What are your views about opening up Secondary Listing for UK incorporated companies? 23. UK companies, unlike overseas companies, are not currently eligible for a Secondary Listing. In contrast, other EU companies can access a directiveminimum Listing regime in the UK as well as in their local market. This situation is due perhaps to an historic assumption that UK investors prefer to invest in UK blue-chip companies but, in theory at least, the option of a Secondary Listing is currently available to a UK company where it has a holding company registered in the Channel Islands. However such a company would not be eligible for inclusion in the FTSE index series, which is presently only open to companies with a Primary Listing. 24. Some of our contributors believe that UK companies should have the choice of both methods of listing and that there is no reason to restrict a UK company s ability to list in the manner in which overseas companies can come to the UK and UK companies can list overseas. 25. Opening up the Secondary Listing route to UK companies would provide UK issuers with another alternative to a Primary Listing, an existing alternative being an admission to trading on AIM. The extent to which UK companies currently opt for a directive minimum listing in another EU market is unclear but adopting the directive minimum regime of a Secondary Listing would be a fairly radical change for UK companies. For a Secondary Listing, issuers do not require a sponsor whereas AIM companies require a nominated adviser at all times a regime which is not far off the sponsor regime and which is an ongoing relationship.

7 26. There are two arguments to counter the equality argument for allowing UK companies a Secondary Listing. The pool of liquidity and investor base available to Secondary Listed companies is not as great as for Primary Listed companies which attract tracker funds. Moreover if UK issuers opt for a Secondary Listing in order to avoid the requirements of the sponsor regime, this increase in choice could be at the expense of investor protection, as explained in the next paragraph. 27. Article 44 of Consolidated Admissions and Reporting Directive (CARD) provides that an applicant must have published or filed its annual accounts in accordance with national law for the three financial years preceding the application for official listing. It goes on to provide that the competent authorities may derogate from this condition where such derogation is desirable in the interests of investors and where the competent authorities are satisfied that investors have the necessary information to arrive at an informed judgment on the company and the shares for which listing is sought. Article 44 of CARD is implemented in LR 6.1.3, but nowhere else. All other requirements of CARD are implemented in chapter 2 of the Listing Rules and hence apply to Secondary Listings via , or are directly implemented in chapter 14 of the Listing Rules. Thus, technically, the chapter 14 requirements are slightly less than the directive minimum because the requirements of Article 44 of CARD do not apply to Secondary Listings. 28. Given that it is unclear if there is investor appetite for this level playing field with overseas companies and for a listed alternative to AIM, we would suggest that the status quo is maintained until the preferences of issuers (including their attitude to the prospect of not being included in the FTSE index series) and influencing investors have been established and thorough consideration has been given to the level of investor protection which should be applied to directive minimum UK company listings, including appropriate levels of due diligence. Q6: What are your views on how the provisions we have described above under core requirements should apply to overseas Primary Listed companies? 29. The proposal is to apply to overseas Primary Listed companies three core requirements of the super-equivalent regime: Combined Code; pre-emption rights; and Takeover Code, which would level the playing field for issuers with Primary Listings. 30. An objective of the proposals in the discussion paper is to create clarity for investors regarding a Primary Listing. In the discussion paper attention is drawn to the FTSE UK index series practice note which refers to criteria currently taken into consideration for inclusion of an overseas company in the FTSE UK index series. The criteria are compliance with the UK Combined Code, the Takeover Code and pre-emption rights. The FSA states: If all primary equity issuers were subject to exactly the same requirements, whether they were UK companies or overseas companies, that could give further clarity to the Primary Listing segment, and remove one possible source of uncertainty and confusion. (FSA DP08/1 para 6.19) 31. It would be interesting to know how many overseas companies are motivated by the desire for inclusion in the FTSE index series and seek to conform to these requirements voluntarily and are permitted to do so by their home jurisdiction. However, we understand that the FTSE practice note can be applied with some discretion and on a case by case basis by the Nationality Committee of the FTSE

8 thus, while of interest, it should not be used as a basis for deciding how to apply super-equivalent Listing standards for overseas companies. 32. Other considerations for this debate are whether there is evidence of sufficient demand for applying these core requirements and the impact on the competitiveness of the UK market. 33. Requiring overseas companies to adopt the UK Combined Code may add certainty and visibility and would result in a common set of standards for Primary Listings. We have encountered support among members for this proposal but, as may be seen in the paragraphs that follow, other contributors have expressed uncertainty at its potential effectiveness. Moreover the EU may see this proposal as running in a different direction to that envisaged in the company law directives. We believe there is a case for in-depth consultation on this point. 34. Those who support the proposal consider that the current corporate governance disclosures for overseas companies are confusing and are simply a two-stage way of disclosing of whether or not they comply with the UK standards. Rather than companies being required to confirm that they comply with the requirements in their country of origin and then to describe how such requirements differ from the UK, those in support consider that it would be preferable for overseas companies to comply or explain against the UK Combined Code. This approach is thought to be less confusing for investors and would enable better comparison with UK companies of a similar sector or of a similar size. 35. Those who do not support the proposal believe that the current corporate governance disclosures for overseas companies can result in more revealing and transparent disclosures than might a tick-box approach under comply or explain, if those companies adopt the procedures and structures recommended in the Code without properly addressing the underlying governance issues. Moreover, requiring overseas companies to adopt the Code assumes that it is appropriate in all overseas jurisdictions and could open up the possibility of UK companies listing overseas being required to fully comply with local codes. Finally there is also a concern that the proposal will create an undesirable hurdle for foreign issuers wishing to list in the UK. 36. Pre-emption rights cannot be enforced on an overseas company if this is contrary to the local law of the country in question. However this should not necessarily preclude a super-equivalent Listing. Again, overseas companies could be required to comply or explain against the UK requirements. Where there is a need to explain, the company should provide very clear disclosure and perhaps include standard risk warnings, so that investors would have a clear understanding of their investment. 37. We agree with the analysis that it would not be possible for the FSA to impose application of the UK Takeover Code on overseas Primary Listed companies. However the FSA could require companies to make it clear whether or not the company is subject to the UK Takeover Code and, if not, full disclosure should be provided as to what takeover regulations do apply so that investors can understand the relevant risks.

9 Q7: Should we require the appointment of a sponsor for a transaction involving the issuance of GDRs? If not, are there any other responses to the significant growth in GDRs that are necessary? 38. Like the wholesale debt market the GDR market tends to be transactionallydriven. It is one for professional investors with a lighter-touch regulatory environment and is highly mobile. In the absence of evidence of failure in the current regime, any moves to impose the requirement of a sponsor for a transaction involving GDRs could reduce the attractiveness of the London market. 39. A change that is not driven by regulatory failure should be market-led. More feedback should be sought as to whether financial advisers would want the additional due diligence from existing issuers of GDRs in order for them to satisfy sponsor requirements of a Primary Listing and whether investors would prefer issuers to bear the costs of application of a sponsor regime. Initial thoughts from some of our members are that investors would not. 40. A common understanding that the GDR market is a wholesale one is critical to the current regime, where no sponsor is required. Continuous monitoring and analysis of the growth in GDRs should be performed. If future analysis shows that there are retail investors in GDRs, the current light-touch regime should be addressed for investor protection purposes, ideally at the European level. Q8: Do you have views on the labelling options? 41. Consistent with our response to Q4, we believe that the labelling option 2 is preferable. This brings together all the directive minimum securities within the Tier 2 category, which is clearer, in that entities with the same Listing requirements all have the same label. 42. The Tier 1 / Tier 2 labelling system is appropriate in our view as it moves focus away from the terms listing and listed. While those terms are used by the market in a generic way, we believe the most important distinction required is on the respective regulatory standards for each segment. The Tier 1 / Tier 2 system also mean that less emphasis is given to Primary / Secondary distinction; such legacy terms carry more scope for market confusion. 43. In addition we think that the terminology Tier 1 / Tier 2 should be less confusing that the current Primary / Secondary terminology. A Secondary Listing can imply that the issuer has a Primary Listing in its home jurisdiction which, since 2005, has not been a pre-requisite of a Secondary Listing. 44. We consider that the FSA should raise awareness of the new labelling system and use this opportunity to clarify and enhance understanding of the respective levels of regulation and market practice for due diligence. The FSA could consider adopting some Tier 1 / Tier 2 marker within the ticker symbol so that it can be easily apparent to market participants the level of regulation to which a company is subject. Furthermore the FSA could consider requiring a listed company to maintain certain minimum regulatory information on the company s website (including its Tier of Listing) akin to the AIM requirements introduced in 2006, so that investors know how to access such information.

10 The Institute of Chartered Accountants in England and Wales 2008 All rights reserved. This document may be reproduced without specific permission, in whole or part, free of charge and in any format or medium, subject to the conditions that: it is reproduced accurately and not used in a misleading context; the source of the extract or document, and the copyright of The Institute of Chartered Accountants in England and Wales, is acknowledged; and the title of the document and the reference number (ICAEW Rep 44/08) are quoted. Where third-party copyright material has been identified application for permission must be made to the copyright holder.