On November 27 2014 the Financial Conduct Authority (FCA) published Primary Market Bulletin 9, which contains further information on the approach taken by the FCA in respect of non-equity prospectuses aimed at retail investors.
In October 2013 the FCA published its Primary Market Bulletin 7 and commenced a market consultation regarding its proposed guidance on the FCA's approach in respect of non-equity retail prospectuses. The FCA previously proposed that its guidance would apply to all prospectuses and base prospectuses approved by the FCA where the denomination of the securities is less than €100,000, irrespective of the end investor or the types of investor to which the securities are marketed.
The consultation generated significant interest of stakeholders in both retail and wholesale debt and structured products markets. In Primary Market Bulletin 9 the FCA has published an amended version of its guidance on this topic and a discussion of its rationale behind the changes made.
FCA view of UK retail bond markets
Since their inception in the 1960s, the UK bond markets have been almost exclusively the preserve of sophisticated institutional investors. However, recent years have seen increasing interest in the bond markets from retail investors. Under the EU Prospectus Directive regime, there is a requirement that the prospectus be "easily analysable and comprehensible", taking into account different categories of investor and their level of expertise. It is the view of the FCA that the standard and style of disclosure contained in wholesale bond prospectuses are unlikely to be suitable for retail investors. If a retail bond market is to develop in the United Kingdom on a sustainable basis, the FCA contends that the content and style of prospectuses aimed at this market need to be addressed.
Scope of guidance
Following concerns raised in the market during the consultation process, the FCA has narrowed the scope of its draft guidance. It is now proposed that, once finalised, the guidance will apply to all non-equity prospectuses, except those:
- for securities to be admitted to trading on a regulated market with a denomination of at least €100,000 (or equivalent in other currencies); or
- which relate to the admission to trading on a regulated market of securities with a denomination of less than €100,000 (or equivalent in other currencies), where the prospectus makes an exempt offer to qualified investors only, unless the securities are to be admitted to trading on a regulated market or a segment of a regulated market which is marketed at retail investors.
In relation to a prospectus that falls within this second bullet point, the FCA expects a clear statement in the prospectus that:
- the issuer does not consent for the prospectus to be used in relation to offers other than those to qualified investors; and
- selling restrictions prevent the relevant dealers or managers from offering the securities other than to qualified investors.
The FCA has stated that where a prospectus has been approved on the basis that it falls outside the scope of the guidance, it will be impossible to update the prospectus by way of a supplement so as to enable the prospectus to be used to offer securities to retail investors. However, where an issuer has published a prospectus which falls outside the scope of the guidance, the issuer may publish a subsequent drawdown prospectus for use in a public offer incorporating by reference the relevant parts of the previously approved prospectus. The public offer drawdown prospectus would fall within the scope of the guidance.
Content of guidance
The FCA has outlined a number of key areas for issuers to consider when determining that a prospectus is easily analysable and comprehensible to retail investors. Depending on the nature of the securities, other factors may also be relevant to a specific offer.
The key areas highlighted by the FCA in its draft guidance are as follows:
- Language – the prospectus should not be written in a legal style or make excessive use of defined terms, technical language or market jargon. Where such language is used, it should be restricted to where it may aid the retail investor's comprehension and be clearly explained. The FCA recognises that terms and conditions may be reproduced from other legal documents (eg, an agency agreement), and therefore these sections of retail prospectuses do not need to be presented in easily analysable and comprehensible language.
- Navigation – the prospectus should give clear instructions to the retail investor as to which sections of the document are relevant. In addition, issuers may wish to consider the use of signposting in the prospectus to assist in navigation. In the context of base prospectuses in particular, the FCA suggests that issuers include a section at the start of the prospectus detailing topics such as:
- the types of securities which may be issued under the base prospectus;
- how an investor should use the prospectus; and
- a description of the types of underlying asset to which securities may be linked.
- Calculating returns where there is a derivative component – prospectuses relating to structured products must give "a clear and comprehensive explanation… of how the value of the investment is affected by the value of the underlying instrument(s)". This explanation should focus on the features of the securities and does not require an indication of the possible performance of such securities. The description of an investor's return should be presented without complicated technical jargon or complex mathematical formulae. Issuers may use examples to explain complex securities, especially where various separate pay-out features or underlying linked terms may need to be explained to investors, either separately or together, producing a series of different outcomes. In some cases a simple equation or narrative describing the yield in the case of less complex securities may also be acceptable.
- Frequently asked questions (FAQ) sections – FAQs are not essential in prospectuses, but may be helpful to an investor and help to demonstrate that a prospectus is easily analysable and comprehensible.
- Explanation of features of the bond and risks – retail investors may not be knowledgeable of the interplay between an issuer's credit rating and the coupon paid under its bonds. In particular, where a bond is not a plain vanilla unsecured and unsubordinated issue, for a retail investor to understand the nature of the investment, the prospectus should clearly identify the features and risks associated with that bond. The prospectus should also clearly explain how the protections and rights that have been built into the bond might work in case of default. To ensure that this information is fully understood by retail investors, information on risks, protections and rights associated with a bond that is not a plain vanilla unsecured and unsubordinated bond should be presented in an easily analysable and comprehensible format, through either a clear narrative or the use of a diagram.
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