UK: FSA Consultation on the Listing Rules

The Financial Services Authority has published for consultation its detailed proposals for a new Listing Rules sourcebook.

The proposed changes reflect:

• the outcome of the wider review of the Listing Rules which has been carried out by the FSA over the last four years
• structural changes to the regime for public offerings of securities resulting from the implementation of the Prospectus Directive
• the FSA's desire to integrate the Listing Rules into the FSA Handbook.

Overall, these drivers result in a complete re-writing of the Listing Rules. For existing companies with listed shares, there will be relatively few changes of substance (although there will be a large number of more minor adjustments) as the outcome of the wider review process has been effectively to endorse much of the existing listing regime. However, the implementation of the Prospectus Directive will have significant implications for the debt markets.

The most significant changes are as follows:

Listing principles - despite consultation responses which expressed concerns as to the creation of uncertainty and the basis of their enforcement, the FSA is proposing six new over-arching "principles", enforceable as rules, that cover:

• directors' understanding of their responsibilities and obligations
• proper procedures, systems and controls
• integrity
• avoidance of a false market
• equality of treatment for equity securities holders
• open and cooperative dealings with the FSA.

These principles will only apply to issuers of equity securities, including both ordinary shares and securities, such as convertible bonds, that convert into ordinary shares.

Sponsors' regime - in an earlier consultation on the listing regime, the FSA asked whether the sponsors' regime should be retained in its present form, made voluntary or even abolished. As has become clear from the FSA's pronouncement in the most recent edition of its LIST! newsletter its approach will be none of these, but a compulsory regime accompanied by a much greater focus on the active regulation of sponsors by the FSA. For example, sponsors will be required to consider whether an issue of listed securities will be detrimental to the interests of investors and, if so, to notify the FSA. This value judgement must be made in addition to the existing confirmations given by a sponsor in respect of working capital, financial reporting procedures and the issuer's ability to comply with listing obligations (including, also, the new listing principles). In addition, the FSA is reconsidering the eligibility requirements for sponsors and plans to introduce new obligations on conflicts of interest, record keeping and systems and controls. The FSA will be devoting extra resources to monitoring and supervising sponsors more closely and to visiting sponsors to review their performance and compliance. This increased degree of regulation will paid for by a significant increase in sponsor fees.

Debt markets - in addition to the retail and wholesale debt regimes contained within the Prospectus Directive, the FSA proposes to list specialist securities that are not traded on a regulated market and thus fall outside the Prospectus Directive regime. The London Stock Exchange plans to create a new market segment for these purposes which will not be a regulated market for the purposes of the EU directives and will extend to cover debt, convertible/exchangeable bonds and GDRs. The listing obligations for these securities will be based on the regime for wholesale securities under the Prospectus Directive (although regardless of the denomination of the securities) but will exempt specialist issuers from obligations to report under International Financial Reporting Standards and will facilitate the grandfathering of existing programmes.

Overseas issuers - despite considering an increase in the obligations of overseas issuers with a primary listing, the FSA will not require such companies to "comply or explain" with the Combined Code, or to adhere to UK-style pre-emption requirements. Overseas companies with a secondary listing will not generally be subject to requirements in excess of those imposed under the relevant directives (e.g. the class test and related party transaction rules will continue not to apply to such issuers).

Delisting - although the FSA considered a proposal that an issuer wishing to delist securities should seek 75% approval of its shareholders as part of the wider review, this matter has now been fast-tracked and final rules on this proposal are to be published shortly.

Other matters to be consulted on - further consultation is expected in 2005 on the chapters dealing with investment entities, venture capital trusts and securitised derivatives.

Comments are invited on the proposals set out in the consultation paper by 14 January 2005. In the near future HM Treasury will also be consulting on the legislative changes necessary to implement the Prospectus Directive in the UK.

We will publish a more detailed special report on the consultation shortly.

This article is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters.