REVIEW OF THE LISTING REGIME ABI RESPONSE TO FSA CONSULTATION PAPER 203

Transcription

1 REVIEW OF THE LISTING REGIME ABI RESPONSE TO FSA CONSULTATION PAPER 203 INTRODUCTION 1.1 The Financial Services Authority (FSA) as UK Listing Authority published in October 2003 its consultation paper on the review of the UK s Listing Rules which had been launched in the preceding Discussion Paper This document is the response of the Association of British Insurers whose 400 members, as institutional investors, have around 1,100 billion of funds under management including approximately 300 billion in the equity shares of UK-listed companies, equal to approximately 20 per cent of the capitalisation of the UK market. As both present and potential shareholders in listed companies they therefore have a keen interest in supporting a regime which safeguards investor protection and promotes effective governance in the companies in which they invest on behalf of policyholders and other fund beneficiaries. In addition, a number of ABI members are UK-listed companies. From these various perspectives, ABI members recognise the importance of the Listing Rules in providing a framework that aims to help both to reduce cost of capital for, and increase the financial returns from, companies that maintain a listing. 1.3 We have been pleased to have the opportunity to date to contribute and participate in the review process which has been characterised by thorough consideration of the topic, and we are pleased now to have the opportunity to respond to the FSA s consultative paper. GENERAL COMMENTS 2.1 ABI members have long recognised the merits of the UK s listing regime, compliance with which is in the interests of issuers, their shareholders and their potential investors. This has afforded confidence and quality assurance within a framework that is flexible (by comparison for example to regulation directly or indirectly, under statute) as to its design and its application. The strength of the Listed Company concept is that companies must meet the quality threshold. A regime that merely required disclosure as to whether the benchmark has been achieved (an option for change which has been suggested in a number of the consultation questions) would be quite different in nature.

2 2.2 The Listing Rules have worked well over many years and continue to do so. Our strong presumption is that the Rules as they are currently framed should be regarded as being reasonable and effective except where it is demonstrated otherwise. The burden of proof should be on those advocating changes. 2.3 The listing regime is a strength of the UK system. However, it has been argued that changes to EU directives could have profound implications for the future role of the UKLA and its ability to provide the consolidated set of rules which listed companies in the UK agree to comply with. We have not seen evidence that changes so far agreed in Europe should affect the operation of the listing regime. The FSA is right to favour the continuation of the role of competent authority for listing with broadly its present remit, which must be safeguarded. Our comments in response to the questions posed in the discussion paper are predicated on this continuing to be the case. SPECIFIC COMMENTS Q1 Do you support the proposed move to a regime which has overarching general principles supported by specific rules and guidance? We support the introduction of a set of high-level principles and we believe that the six proposed are suitable for the purpose. The existence of principles will assist interpretation of the Listing Rules in a manner that will ensure congruence with the underlying spirit and purpose of the principles. We do not, though, consider that recognition of principles is a substitute for the detailed rules and we do not consider it right that enforcement action should be taken in respect of alleged breaches of principles only. Q2 Do you foresee any problems with the six proposed Listing Principles? Are there any gaps that you think the proposed Listing Principles fail to cover? We do not believe that a set of six high-level principles can sufficiently encompass the scope of all detailed rules but nor is it necessary that they should. An analogy could be drawn with the new Combined Code which has introduced supporting principles to underpin main principles with detailed code provisions following on. Equity investment by its nature involves the acquisition of an ownership interest whilst listing of equity investments and their admission to trading on exchanges leads to more dispersed share registers. This separation of ownership and control presents additional challenges in ensuring accountability to shareholders and thus appropriate safeguards for investors. The Listing Rules already address this dimension in a number of their provisions, and rightly so, though it is difficult to see how the principles as framed genuinely address this 2

3 dimension. In any more detailed set of Listing Principles, if this were contemplated, we would expect to see reference made to facilitation of good corporate governance through supporting the exercise of shareholder rights. Q3 Do you believe the Listing Rules in this area should be more closely aligned with the rules applying to CISs? Listing Rules provisions need to be focused on the needs of investment market users and we would be wary of regulatory architecture relating to consumers of financial products driving decisions in the area of listing. Q4 If so, do you agree that additional rules are unnecessary for schemes subject to the CIS Sourcebook? It is reasonable that Listing Rule provisions for financial products should be appropriately tailored for such classes of security. Whilst mismatch or duplication of regulation would not be helpfu, we would not, however, wish to see an absence of such regulation under the Listing Rules as ought to be applicable to any listed security. Q5 Do you support the proposed move to a building block structure for the sourcebook? If not, please explain your objections. Conceptually this approach has merit. We have not, though, given indepth consideration to its practical merits. Q6 Do you agree with the three sections that we are proposing? Are there any gaps that you feel we have failed to cover or would have expected to see covered? Do you foresee any problems with the proposed new structure of the sourcebook? The three sections as proposed appear appropriate. Q7 What are your views on moving towards a requirement for three years accounts, rather than a three-year track record and unqualified accounts? We are not convinced that removal of the requirement for unqualified accounts is the interests of the majority of listed companies or of investors. At the very least, we would expect the UKLA to retain a requirement for unqualified accounts for the most recent year prior to admission. Q8 Do you consider that we should relax or maintain our requirement that issuers provide a clean working capital statement? We consider that the existing requirement for issuers to provide a clean working capital statement should be retained. The UKLA is right that 3

4 requiring the issuer to do due diligence on this point and to provide prospective investors with the resultant information, is necessary to ensure sufficient investor protection. It is difficult to see what benefit is provided to the investment markets through requiring prospective issuers merely to disclose that they do not have sufficient working capital for the initial twelve months following. Q9 What are your views on whether the Listing Rules requirement for the disclosure of directors experience and expertise should be replaced by the provisions in the PD and by enhanced UK corporate governance standards? The revised Combined Code published in July 2003 incorporates the recommendations of Sir Derek Higgs s Review on The Role and Effectiveness of Non-executive Directors and Sir Robert Smith s Report on Audit Committees. Neither of these were concerned with the business experience of Executive Directors on which the existing Listing Rules provisions are focused. We therefore would prefer retention of the substance of the existing Listing Rules provision. Q10 What are your views on whether the requirements for independence and control over the majority of assets held should be repealed? We see limited sense in having more demanding criteria in these areas in respect of admission to listing than would apply on an ongoing basis. However, the more appropriate approach may be to enhance the scope of post-admission requirements rather than reduce those applying on admission. We do not consider there to be a problem in the Listing Authority exercising appropriate discretion at point of listing and we would have thought the distinction between investment companies and trading companies to be of obvious relevance. We do not consider the proposed Listing Principle 2 to be an adequate alternative to proper Rules to govern situations where there is a controlling shareholder. Q11 Do you support our proposal not to follow the PD definition of debt securities in relation to eligibility and continuing obligation requirements? Yes, given the importance of the UK s specialist debt market. Q12 Q13 Q14 What are your views on dropping the requirement for a two-year track record for specialist issues? What are your views on removing the requirement for a working capital statement and accepting a two-year track record in relation to nonspecialist debt issues? Do you think that the authorised adviser regime should be retained for specialist debt issues? We have no specific comments to make on these questions. 4

5 Q15 Do you agree with our proposals to tighten the rules for overseas issuers with primary listings so that these are brought into line with those applicable to listed UK issuers? Yes. Whether or not an issuer has a primary listing in the UK is of defining significance as regards the compliance with the full UK standards expected by UK investors. Q16 In particular, do you think overseas issuers with a primary listing should be required to comply or explain against the Combined Code? We agree. It is unacceptable that companies with a primary listing in the UK should be exempt from the comply or explain requirement. It would also seem appropriate that it is the UK Combined Code against which they measure their compliance. Q17 What are your views on whether overseas issuers with a primary listing should be required to report in IAS or US GAAP rather than local GAAP? We consider that any company with the type of international profile that makes it appropriate to maintain a primary listing in the UK instead of or as well as some other jurisdiction(s) should be expected to report under an internationally recognised accounting regime. We agree that IAS standards would be appropriate for this purpose, US GAAP rather less so. Q18 Do you agree that in future overseas issuers with a primary listing should be required to comply with the Listing Rules on pre-emption rights for shareholders or provide appropriate alternative protections? We consider rights of pre-emption to be of fundamental importance. Overseas issuers with a primary listing in the UK should be expected to comply with UK standards in this regard. They should provide the substance of pre-emption rights though the precise form may be permitted to vary slightly. It is unclear, though, what the UKLA understands by alternative protection in this regard. Q19 We also invite comment on whether there are any other areas of company law or practice that you consider are fundamental to shareholder protection. The questions above have covered the main areas where the listing regime can be used to ensure overseas companies compliance with the substance of UK standards embodied in company law. Q20 Do you agree with our proposal to retain secondary listings? Yes. We agree that the facility should be retained for overseas companies to maintain a secondary listing in the UK. 5

6 Q21 Do you believe that the argument for comparability of data is sufficiently strong for us to introduce a requirement for equity issuers with a secondary listing to use either IAS or US GAAP? We are unsure, in the shorter term, whether such a requirement should be introduced though, in the longer run, the impetus and rationale behind international accounting convergence makes this worth considering. Q22 Do you agree with our proposal for non-uk EU issuers? Yes. Provided such companies fully comply with UK standards if they wish to take a primary listing here, they should be permitted to do so. However, it is unclear what implications this would have regarding eligibility for inclusion in domestic indices. Whilst this is not a point that falls squarely within UKLA s jurisdiction this is a dimension which the UKLA should not overlook in assessing the overall coherence of its current proposal. Q23 Do you agree that the introduction of Listing Principles 1 and 2 (coupled with a subsidiary rule) will provide sufficient investor protection or would you like to see more prescriptive rules or guidance as to what systems and procedures we consider appropriate? We agree that the UKLA should address this matter in this manner. These are points of principle rather than being easily susceptible to being encompassed by rules. It is also appropriate that these provisions should apply on a continuing basis and not just on admission. Q24 Would you favour our having the power to disqualify a director of a listed company, where he had been involved in a serious breach of the Listing Rules? Do you have any views on whether this power should be exercised through the tribunal process or through the court? We agree that a director of a listed company who has been involved in a serious breach of the Listing Rules should be capable of being disqualified from being director of another listed company. Whether such grounds for disqualification should apply to being director of a non-listed company is of less relevance to our Members as investors. It would seem that track record in this regard should at least be capable of being taken into account by the relevant authorities. The scope of this proposed regulation would probably be better defined as encompassing any director of a company with listed securities. This would ensure that breaches in respect of listed debt as well as equity would be covered. 6

7 Q25 Do you agree that we should maintain a requirement for shareholder approval of Class 1 transactions? Yes. The UKLA s proposal is soundly based for the reasons given in the consultation paper. The recognition, in paragraph 9.10, of the importance of the shareholder voting requirement in respect of Class 1 transactions renders the first possible amendment suggested in paragraph 9.9, that of abolishing the voting requirement while retaining the obligation to produce a Class 1 circular, redundant. Of the other two possible amendments, we do not consider these have any merit in principle. Given, also, the practical implementation difficulties identified in the consultation paper these possible amendments should be discarded. Q26 Do you support our proposed extension to the Class 1 regime? How do you think securitisations should be treated under the new regime? Are there any other kinds of transactions that you consider should be caught or not caught by this new approach? Yes, this modest extension to the Class 1 regime seems justified given the substance of the transactions involved. We are unaware at the present time of any other kinds of transactions to which the Class 1 regime should similarly be extended. Q27 We welcome views on the quantitative criteria that should be applied to classifiable transactions. The 25% threshold for assessing whether transactions should be classified as Class 1 is both well-established and widely recognised to be appropriate. The case for retaining this formulation is therefore very strong. Q28 What are your views on our proposals to strengthen shareholders rights where a company intends to cancel its listing? We strongly agree with the UKLA s recognition that the present regime provides inadequate protection for minority shareholders. We concur with the adoption of a threshold requiring 75% of shareholders to agree to de-listing. There may, however be circumstances in which a company that has previously given an undertaking to retain a listing subsequently wishes to cancel it. In such circumstances, we believe that de-listing should also be contingent of at least 50% of shareholders not connected to a controlling or substantial shareholder also voting in favour. We are also concerned at the possibility that companies might seek to transfer to another quoted market that does not provide for shareholder consent for a delisting and then seek to cancel the quotation there. The UKLA needs to ensure that companies are not able to create a 7

8 loophole in this way out of the proposed exemption from obtaining shareholder approval if retaining a quote elsewhere. We also believe that shareholders right to a maintenance of listing of their securities is equally valid in the case of preference shares as it is for equity shares. The legal rights of preference shareholders derive from the same source documents as they do for equity shareholders i.e. company law and the company s articles of association and, in this regard, the UKLA should apply a similar regime to all classes of share capital (i.e. both equity and non-equity) unless the company s articles of association clearly specify other terms or procedures. Q29 What issues would you like us to address in streamlining the Model Code? We share the recognition of the high regard in which the Model Code is held and we believe that, whilst it will benefit from updating, any streamlining should not reduce the substance of the safeguards that it provides or be allowed to detract from the perception of its value in maintaining confidence in listed companies and their directors. The issues identified by the Model Code Roundtable seem the appropriate areas to address. Q30 What are you views on giving the company secretary the role of giving clearance/approval to deal? We would be relaxed with the proposal to add the Company Secretary to the pool, currently restricted to directors, from which the designated individual giving clearance must be drawn. This is not to say, though, that the Company Secretary will always be appropriate for the role and, indeed, may not be appropriate if also an executive director of the company. The Chairman should remain responsible for ensuring that, if he does not retain the role himself, it is delegated to an appropriate and unconflicted individual. Q31 Do you agree with our proposal enabling issuers to publish additional information provided that the source of such information is fully disclosed and it is made clear whether or not such information is unaudited and that there is subsequent comparability? Yes, we agree that issuers should publish such additional information as they wish provided that relevant disclosures identified in the question are made so that investors are enabled to assess such information properly. Q32 Do you agree that the introduction of the two overriding concepts will adequately replace paragraph 2.20? If not, what do you think the current requirements add and what alternative might be introduced? We would on balance concur with the UKLA s proposed change. 8

9 Q33 Do you agree that companies should be allowed to disclose nonstatutory figures alongside statutory ones, or do you think such disclosures should only be allowed if the disclosures are audited? We agree that companies should be permitted to disclose non-statutory figures, as these may be more informative for investors in certain cases. It would, however, be appropriate that any such figures are reviewed by the company s auditors. Q34 Do you think that the requirement to report on forecasts should be removed where the information is not disclosed in a prospectus? This would be acceptable change if it will encourage meaningful and timely disclosure of prospective financial information prepared in accordance with professional guidance. The disclosure of such information should of course be made in a manner consistent with the regime on disclosure of unpublished price-sensitive information. Q35 Do you agree that proposed approach will continue to allow appropriate information to be released to investors? Is the list of key attributes that financial information must possess adequate or are there other elements you believe should be included? The list of key attributes appears appropriate. Q36 What are your views on removing the requirement for a significant change statement in Class 1 circulars, if quarterly reporting is introduced? We would not support the removal of this requirement. It is right and appropriate that companies should be obliged to convey to shareholders and other investors the substance of any significant change on the occasion of the publication of a Class 1 circular. This should, in principle, be required irrespective of the frequency of routine financial reporting. Q37 What do you think should be meant, in this context, be the word significant? We see no particular reason to believe changes that would not be material to investment assessment need be regarded as significant. In the spirit of transparency and accountability, it would be reasonable to expect companies to make judgments in good faith to disclose any other matters that could reasonably be considered might be relevant to shareholder assessment of the merits of the matter the subject of the Class 1 circular. Clearly, if knowledge concerning the change in question would be likely to be price-sensitive, such information should be disclosed. 9

10 Q38 We would welcome your views on whether the Listing Rules should require issuers that do not have subsidiaries (solo companies) to prepare their accounts in accordance with IAS. As regards listed companies, we see no basis to exempt such companies from the requirements that will apply to all others to produce accounts to IAS standards. Q39 Q40 What are you views on the proposed options for the sponsor regime? and Would you welcome the choice for issuers of whether or not to use a sponsor? What difficulties do you foresee with this option? We consider that the sponsor regime is a key feature of the UK listing environment that provides confidence for investors. Although the role is not replicated in other jurisdictions such as the United States, other features of the issuance environment are different in those markets and in the UK the sponsor regime provides an element of assurance that in the US context may be provided, at least in part, by the regime of statutory liability for underwriters. Removal of the obligation of issuers to have a sponsor could damage the ecology of the UK system. Alignment with US practice considered broadly, does not therefore necessarily point in the direction of abolition of the UK sponsor regime. Accordingly, we do not consider Option 2, to make sponsors voluntary, to be desirable. The fact that the UKLA also derives benefit from the sponsor role, to the extent that it envisages continuing to support regulation of the regime if it were not an actual requirement on issuers, further demonstrates the merits of the current system. Q41 What is your view on the possible consequences of us needing to spend more time on transactions and recovering our cost accordingly? We do not consider that issuers without sponsors should effectively be cross-subsidised by those that choose to avail themselves of a sponsor s services. Q42 In relation to the eligibility criteria for sponsor: Do you think that the requirement for four eligible employees is too stringent? What other experiences do think should be added to list of significant transactions? What are your views on reducing the requirement for an eligible employee s experience to three significant transactions in thirtysix months on a rolling basis? 10

11 If a clear case for changes in these regards can be made then changes to the eligibility criteria for sponsors should be considered. However we are not ourselves aware of strong views on this point. Q43 Do you agree with our proposals addressing conflicts of interest? An economic interest of the order of 50% of shares in the issuer clearly creates a conflict of interest. This threshold should be set much lower. Q44 What are your views on the Code of Practice for sponsors on the Listing Rules? We are content with the approach proposed. Q45 What costs do you believe you would incur as a result of such restructuring? How would you value the benefits? We do not believe we or our Members would incur any direct costs. There are no obvious benefits that would accrue either. Q46 We would appreciate any data you could provide on the costs of producing a working capital statement, including whether the costs would reduce significantly if the statement was not required to be clean. What additional costs do you consider would be incurred by a requirement for a three-year track record as opposed to three year s accounts? We do not have any relevant data. Q47 Do you agree with the benefits of a differentiated regime? What costs do you foresee in the event of our not providing a separate regime? Do you agree with our assessment of the benefits of removing the working capital statement requirement for non-specialist issues? Could you evaluate those benefits? We have no specific comment. Q48 We would appreciate any data you could provide as to the likely costs to overseas issuers and any possible detriment to the London market of these proposals. We do not have any relevant data. Q49 We would be grateful for any data which might value the benefits of class tests (for example how would an investor value in share where such rights were not available). What information can you provide us with as to the costs of compliance with the class test regime? The existence of appropriate governance safeguards for UK companies and thus for UK equities as a class, is one influence on UK 11

12 institutional investors in determining their asset allocation. A key benefit of standardised requirements is that investors are not required to make individual judgments regarding the non-existence of such safeguards on a case-by-case basis. As shareholders in UK companies our members are confident of the advantages the class test regime provides. This should perhaps be seen, conceptually, less as having a downward and therefore beneficial impact on equity cost of capital and more as a safeguard that transactions that would have a net negative impact on shareholder value will be deterred. Q50 We are satisfied with the data we have but would welcome any comments on the CBA argument. The de-listing of a company will often have a very material negative impact on investor value. If shareholders vote in favour of a de-listing then the comparatively modest cost of holding the EGM would be an incremental cost compared to current arrangements. If shareholders do not support the de-listing, this will be evidence that they consider the ongoing costs of maintaining a listing to be worth incurring. If so, it is right to maintain the listing as the benefits have been assessed by the company's shareholders as greater than the costs. It seems to us that the 75% majority requirement is probably pitched at about the right level to optimise the cost-benefit trade off of introducing a shareholder approval requirement for de-listing. Q51 What do you estimate to be the costs of the reporting requirements on PFI? We have no data or specific insight on this point. 30/1/04 m:\mmck\response\fsacp203lr 12