Compliance Corner – Financial Conduct Authority; Proposed Prospectus Rule Changes

Editorial Staff

29 July 2024

Financial Conduct Authority
Late last week, the UK’s set out a package of measures designed to bolster the UK’s capital markets, coming shortly after moving to also make London’s stock market more attractive as an equity listing hub.

The FCA proposes to set up a new Public Offers and Admissions to Trading Regime (POATRs), which will replace the existing UK Prospectus Regulation.

Companies must still publish a prospectus when first admitting securities to public markets. However, a prospectus would not be required when a company raises further capital except in limited circumstances, the FCA said in a statement on Friday.

“Together with other existing disclosure obligations, these proposals will make sure investors get the information they need while significantly reducing the costs associated with further capital raises for companies,” the FCA said.

Policymakers in the UK – including the recent Conservative government – have been looking at ways to make the City more attractive as a listings and capital-raising venue. In recent years, listings have shrunk, prompting worries that London – now outside the European Union – could lose to rival hubs, including New York.

The FCA said it is also consulting on proposals for a new activity of operating a public offer platform. These platforms will offer an alternative route for companies to raise capital outside public markets including from retail investors.

“The introduction of the platforms should promote scale-up capital raising for smaller companies while ensuring that investors get the right disclosures on the key terms and risks of an investment,” it said.

Unbundling reversed
The FCA has also confirmed new rules that give asset managers greater freedom in how they pay for investment research, by allowing the “bundling” of payments for research and trade execution. The new payment option is also compatible with rules in other jurisdictions, making it easier for asset managers to buy research across borders, the FCA said.

“The package we have set out today, alongside our recent reforms to the listing rules, will help to strengthen the UK’s position in wholesale markets. We know we need to strike the right balance between protection for investors and allowing capital markets to thrive,” Sarah Pritchard, executive director of markets and international at the FCA, said.

Under the EU’s Markets in Financial Instruments Directive, commonly known as MiFID II, the UK – then an EU member state – enacted reforms including unbundling of sell-side research. The directive was transposed into UK law in 2018. It was designed to protect investors from mis-selling and to ensure that they are not put into investments that do not suit them. This “unbundling” process did not start with MiFID II but it accelerated in the EU. One effect, as this publication was told by UK-based brokerages such as Peel Hunt, is to squeeze the amount of sell-side research on companies. Small- and medium-sized firms are not as widely covered as they were a few years ago. And this cut in coverage reduces liquidity and increases volatility in some of these firms’ shares, practitioners say.

David Robinson, partner at law firm, Fladgate, liked the FCA’s move to make it easier for smaller firms to pay for producing a prospectus.

“The FCA’s proposals will be welcomed, particularly by smaller-cap issuers for whom the costs of producing a prospectus are often disproportionate,” Robinson said. “The proposal to increase the threshold for triggering a prospectus from 20 per cent to 75 per cent of existing share capital and the use of a public offer platform should allow companies to raise funds more easily, more cost effectively and from a wider investor base. When combined with the imminent changes to the listing regime, the proposals should make UK listings more competitive.”