Summary and implications

Under current reforms to the financial services sector, the Financial Services Authority (FSA) will be replaced by a new “twin-peaks” system of financial services regulation which is currently planned for the end of 2012. As part of this reform the functions carried out by the UK Listing Authority (UKLA) will become the remit of a new body called the Financial Conduct Authority (FCA). The FCA will be charged with protecting and enhancing confidence in financial services and markets.

The UKLA currently deals with the listing rules in Part 6 of the Financial Services and Markets Act 2000 (FSMA). Under current draft legislation, the powers of the new FCA will be dramatically widened from those the UKLA holds presently. Most notable is the ability of the FCA to require an issuer, sponsor or primary information provider (PIP) to appoint a “skilled person” to prepare a report on any matter relating to the FCA’s functions under Part 6 of FSMA.

  • This is a significant change to the current regime and could lead to a large number of firms coming under the scrutiny of the FCA via the listing, prospectus, disclosure and transparency rules as it pursues its objective of protecting and enhancing confidence in the financial markets.
  • Despite arguments against the skilled person’s report requirement in a recent consultation, the Government has confirmed its intention to continue with this approach. It considers that it will strengthen the listing regime and maintain London’s reputation as a leading centre for capital-raising and primary markets.
  • Although these powers are a continuation of those exercised by the UKLA, they are much wider. It is hoped that the Government will clarify the exact scope of these new powers as soon as possible.

The skilled person’s report

The draft legislation states that the FCA can require an issuer, sponsor or primary information provider to appoint a skilled person. This change in the legislation extends the reach of the new FCA to a sector much wider than FSMA-authorised firms.

The skilled persons report can be requested on any matter which is reasonably required in connection with the exercise by the FCA of its functions under the Part 6 rules (including the listing, prospectus, disclosure and transparency rules). Although the exact scope of this power is drafted so widely in the legislation, it is expected that the FCA will have no option but to limit the application of its supervisory powers. It would be too costly, and arguably impossible, to supervise the entire market; nonetheless, this is a significant enhancement of the UKLA’s current powers. Firms should be aware that a skilled person’s report may be required if they fail to comply with the Part 6 rules. This can both be costly and cause unwanted and potentially embarrassing reputational risks if the FCA subsequently takes further enforcement action.

The FCA’s functions and objectives

The FCA will have the single strategic objective of protecting and enhancing confidence in the UK financial system and three operational objectives of protecting consumers, promoting efficiency and choice in the financial markets and protecting and enhancing the integrity of the UK financial system.

The FCA will also be subject to recommendations by the Financial Policy Committee of the Bank of England which will be responsible for macro-prudential policies and spotting and acting on systemic risks. Under these recommendations and its objective above, the FCA could end up regulating the primary markets and bringing with it more intrusive supervision, skilled person’s reports and more enforcement actions. Many have commented that this seems inappropriate and overly burdensome, but the Government is determined to proceed.

In the FSA’s recently published approach document, it is stated that “the FCA’s regulatory resources relating to the integrity of the market will be concentrated on those markets which have a clear, direct and immediate link to wider confidence in the financial system.” For the meantime, it appears that whilst the scope of the FCA’s new powers are broadly drafted, in practice they are likely to be applied much more strategically to major markets and significant risks.

Other extended powers

Apart from the skilled person’s report, the draft legislation also contains provisions which will allow the FCA to:

  • impose harsher sanctions on sponsors who breach the Part 6 rules. This will include the ability to impose financial penalties, which is not currently permitted as was seen in the recent public censure by the FSA of BDO LLP;
  • bring actions for breaches of the listing rules up to three years after the breach. This is an increase from the current two-year limitation period; and
  • make rules and impose sanctions on PIPs. Although PIPs currently have to be approved by the FSA, there are no such similar powers at present.

Conclusion

Although the legislation is only in draft form and subject to an ongoing consultative process by the Treasury, the Government does not look likely to backtrack on the implementation of these wider powers for the FCA.

On paper they give the FCA the authority to regulate many more firms, much more intrusively, than the UKLA has scope to regulate at present. It is hoped more information on these new powers will be published as the consultation process continues. However, all issuers should be aware that they could face more intrusive supervision than they have been used to from the UKLA when the FCA takes over its responsibilities.

The FSA is inviting firms to comment on its Approach Document and responses can be made until 1 September 2011. Similarly, the Government is consulting on wider financial regulation reform in its Blueprint for Reform. Responses to this consultation can be made until 8 September 2011.