Steve Banfield
Industry Director at EQ
The basis for many of these changes can be linked to Lord Hill’s Listing Review, Mark Austin’s Secondary Capital raising Review and the Edinburgh Reforms, supported by His Majesty’s Treasury (HMT) and the Department for Business and Trade (DBT), and championed by the Capital markets Industry Taskforce (CMIT).
They include the creation of Taskforces to research and deliver Accelerated Settlement (T+1), changes to how investment research is conducted and paid for and the removal of share certificates and the digitisation of payments and corporate communications. We have also seen the Financial Reporting Council (FRC) row back on many suggested changes to the Governance Code, reinforcing their comply or explain regime, and an increased focus on the role of directors to oversee and be held accountable for business operations and resolution of negative audit findings.
The T+1 recommendations aim for delivery before the end of 2027, in line with EU member states (although is expected that many supporting aspects can be delivered in 2026), and we now expect to see the final recommendations of the Digitisation Taskforce by the end of 2024. The recommendations will be made to HMT, who will need to consider the content, and will almost certainly look to engage industry, creating workstreams to resolve the legal, operational, communication and practical challenges that exist. As digitisation will impact so many individual investors, the Taskforce’s focus has rightly turned to transitional arrangements to help simplify and expedite delivery.
There are also ways in which companies can support further digitisation in advance of the final recommendations, such as an increased focus on e-comms, especially for institutional investors, removing cheques for dividend payments, and removing the need for a paper tax voucher, by utilising the CREST system to make dividend payments. If company Articles are required to be amended to achieve further digitisation, now could be the ideal time to consider this for the 2025 shareholder meeting.
The Capital Markets of Tomorrow report has been published, authored by some of CMITs leading members, and focusing on delivering £100bn of new capital into the UK economy every year. The report contains a UK elevator pitch, intended to raise the political and public profile of the UK capital markets, demonstrate that the UK can be competitive and grow outside of the EU, and strengthen the connectivity between the UK capital markets and boosting economic growth, creating British tech and life science companies and decarbonising our economy.
The report also describes the role of regulation to help the UK become Match-Fit, and the need to drive growth and create wealth, through four priorities; The green opportunity, creating UK advantage; Restoring the UKs risk appetite; and unleashing the power of UK retail investors.
In line with the focus on simplifying the UK capital markets, over the summer the UK Listing Rules received a makeover, and no sooner had the Financial Conduct Authority (FCA) approved those changes that they got to work on a review of the prospectus regime, designed to deliver a new, smarter legal and regulatory framework for the regulation of admission of securities to trading. This will see an Admission to Trading on a Regulated Market (PRM) replacing the existing Prospectus Regulation Rules, in the FCA Handbook.
Under the Public Offers and Admissions to Trading Regulations 2024 (POATRs), the FCA has the powers to determine the new prospectus regime. The POATRs remove the requirement to produce a prospectus when offering secondary shares to the public.
The current threshold for an issuer to produce a further admission prospectus is when more than 20% of the issued share capital is being raised, within a twelve-month period. If these proposals for prospectus reforms are implemented as drafted, it will mean that companies can conduct a secondary capital raise of up to 75% before they are required to publish a prospectus. The proposed exception to this is if the capital raise is to secure rescue financing, designed to protect investors. The requirement to obtain shareholder approval under the current pre-emption group guidelines remains.
If a retail offer prospectus is required, the current six working day publication period will be reduced to three working days, as well as an extension of the permitted length of summaries to ten pages, with fewer mandatory financial disclosures and the ability for companies to cross-reference to other parts of their prospectus.
Other main changes include more flexibility and choice when it comes to publishing financial and complex history, and although working capital statements will still be required, under the new regime companies would be able to include assumptions. Companies will be required to make more sustainability related disclosures, relating to material climate-related risks or opportunities.
If a company is seeking international investment, in a jurisdiction requiring a prospectus, or if the directors or underwriters consider a prospectus would support investors to make informed investment decisions, the company could publish a prospectus on a voluntary basis, which the FCA could approve.
Compared to the EU reform to its prospectus regime, with the threshold raised to 30%, it is clear to see the ambitious nature of these proposed changes and how they are designed to differentiate the UK from competitor markets.
Examples of complex history, and how these changes impact takeovers that result in the issuance of new shares will be set out in a technical note to support companies to understand their disclosure requirements.
Continuing with the speedy delivery of change, the deadline for comments on the proposals is 18 October 2024, with the FCA aiming to implement the new ‘Prospectus Rules’ by the end of H1, 2025.
Companies listed on a Primary MTF, such as AIM and the AQSE Growth Market, are currently required to issue a MTF admission prospectus, except when an issuer makes use of the AIM Designated Market Route or AQSE fast-track, but not on future capital raises. This will continue, although market operators will be able to set their own threshold for prospectus issuance for future capital raises, should they choose to do so.
It will be interesting to see if the FCA has the balance right, removing the need for a company to publish a prospectus document, reduce the amount of reporting and disclosure requirement, whilst ensuring there are sufficient investor protections in place. A company listed on a regulated market should have sufficient controls in place to provide investor certainty, however investors have long memories and will remember the 2008 financial crisis, as well as the well documented downfalls of BHS, Carillion and Patisserie Valerie. It seems that a key focus of the FRCs current review of the Stewardship Code might have to be to strengthen the system, further safeguarding investors in UK companies.
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