In the last month, the FCA has published various proposals to reshape and enhance the UK's primary markets. The publications form a key part of the FCA's wider work on improving the efficiency and effectiveness of the capital markets for issuers and investors – an objective which was set out in its 2016/17 Business Plan.
The proposals are set out in:
- a discussion paper: 'Review of the Effectiveness of Primary Markets: The UK Primary Markets Landscape' (DP 17/2) which prompts a discussion on the effectiveness of its primary capital markets for issuers and investors (the Discussion Paper);
- a consultation paper: 'Review of the Effectiveness of Primary Markets: Enhancements to the Listing Regime' (CP 17/4) which proposes certain enhancements to the Listing Rules (the LR Consultation Paper); and
- a consultation paper: 'Reforming the availability of information in the UK equity IPO process' (CP 17/5) which proposes measures to enhance the quality and availability of information available in the IPO process (the IPO Reform Consultation Paper).
How effective are the UK's capital markets?
The Discussion Paper considers significant structural changes to the UK's primary markets and calls for feedback on suggested reforms, including:
- whether the boundary between the standard and premium listing categories is appropriate, particularly in relation to overseas issuers and exchange traded funds. Views are also sought on whether there should be a new international segment of the Main Market for overseas issuers and whether there is a place for the standard listing regime in today's markets;
- whether the UK's primary equity markets effectively support the growth of early stage science and technology companies; and
- whether a UK primary debt multilateral trading facility should be introduced and if so, how it should be structured. The FCA also asks whether there are any measures which would encourage greater retail participation in the debt markets.
LR Consultation Paper
The LR Consultation Paper proposes various enhancements to the Listing Regime, by amending or proposing new rules and guidance to:
- clarify the eligibility requirements for a premium listing of commercial companies;
- clarify the existing 'concessionary routes' to premium listing for applicants in the minerals and science research based sectors which are exempt from certain eligibility requirements. A new 'concessionary route' for property companies is also proposed;
- update how premium listed issuers may classify transactions, with particular changes to the profits test. In particular, one of the key changes proposes that, where the profits test result is 25% or more, but the results of all other applicable class tests are below 5% and the profits test result is anomalous, having sought the guidance of its sponsor, the issuer may, having sought the guidance of its sponsor, disregard the profits test result without consulting with the FCA in advance. In these circumstances, the transaction will be treated as unclassified; and
- revise the FCA's approach to the suspension of listing for reverse takeovers, so that it will no longer assume, where a reverse takeover of a listed company (other than a cash shell or special purpose acquisition vehicle) is in contemplation, that there will be insufficient information in the market about the target, with a resulting suspension of listing.
A win for investors: making information available earlier in the IPO process
The IPO Reform Consultation Paper proposes a package of measures to address concerns in the IPO process concerning the timing, sequencing and quality of information being provided to market participants. The proposals include:
- new rules which seek to ensure that an approved prospectus or registration document is published, and unconnected analysts have access to the issuer's management – before any connected research is published, and
- new guidance clarifying its expectations on analysts' interactions with the issuer's management and its corporate finance advisers around the time when an underwriting or placing mandate and subsequent syndicate positioning is being considered. The current guidance contained in COBS 12.2.9G states that an analysts should not become involved in activities which are inconsistent with the maintenance of their objectivity. The guidance provides examples of these activities which include participation in investment banking activities, such as underwriting, and participation in 'pitches' for new business. The new guidance will clarify that the FCA will regard 'participating in pitches' to include where an analyst interacts with the issuer or its representatives until:
- the firm has accepted a mandate to carry out underwriting or lacing services for the issuer; and
- the firm's position in the syndicate has been determined.
This guidance is intended to mitigate the risk of bias being imparted to connected research – a key objective of the proposed reforms.
The IPO Reform Consultation Paper also calls for evidence on whether a separate consultation is required in relation to the IPO processes for transactions on multi-lateral trading facilities, such as AIM and NEX Exchange Growth markets.
Additionally, the FCA calls for feedback on how issuers and their advisers are considering their obligations under the Market Abuse Regulation (MAR) in the IPO process, and specifically , on their justification for the disclosure of inside information during an analyst presentation being in compliance with MAR. The FCA will then consider whether it is appropriate to issue formal guidance on any of the MAR obligations in this context in due course.
Click here to read each of our notes for more detail and commentary on the proposals set out in the Discussion Paper, the LR Consultation Paper and the IPO Reform Consultation Paper. What happens next?
- Responses to both the Discussion Paper and the LR Consultation Paper must be submitted to the FCA by 14 May 2017. If after receiving feedback to the Discussion Paper, the FCA decides to take forward any specific policy proposal, it will issue a further consultation paper. The FCA expects to publish its new rules as proposed in the Consultation Paper in the second half of 2017.
- Responses to the IPO Reform Consultation Paper must be submitted to the FCA by 1 June 2017. Depending on the nature of the feedback, the FCA expects to publish any changes later in 2017.
London remains open for business
The package of measures is designed to enhance the effectiveness of the UK's capital markets for market participants - but it comes at a significant time when the Government will be looking to boost the attractiveness of the UK as a viable listing destination for overseas issuers and investors, particularly in the light of market uncertainty regarding Brexit. In its Discussion Paper, the FCA notes that it will keep its proposals under review and will make the appropriate changes depending on the outcome of the Government's negotiations regarding Brexit.