21 June 2002

Sir Howard Davies: Rethinking the Listing Regime

Excerpt of speech

The changes (to legislation in Financial Services) are very largely driven by European directives, though not entirely.

The Enron collapse (…) focused attention on corporate governance, accounting standards and market regulation generally. It is worth spending a moment to review the external influences on listing, and on our rules. The picture is somewhat complex. But we believe it is possible to put all the pieces together in a comprehensible way, and indeed that it is vital to do so quickly, to ensure that we do not inadvertently lose parts of the current regime which are beneficial both to market confidence and consumer protection.

Taking the European scene first, we are in the midst of a large set of changes to financial regulation in Europe, which are brigaded together under the general heading of the Financial Services Action Plan. The broad aim, of course, is to create a single financial market in Europe, which will create the conditions here for a capital market to rival that of the United States, with benefits for capital raisers and investors, alike. From time to time I remind myself of this worthy objective, as I sit in interminable regulators meetings in Brussels looking at the detail of individual harmonising directives, whose greater purpose is often obscure.

The political commitment is to complete the directives relating to the capital market in 2003, and to complete the full programme by 2005. Whether that will be achieved, I could not precisely say, but there is no doubt that the fertility rate of the Commission has stepped up in recent months. And I would judge it probable that a new set of directives will be in place by the end of next year to replace the Consolidated Admissions and Reporting Directive.

In the interests of greater harmonisation and a single passport for issuers, the listing landscape will be changed profoundly. Indeed, the concept of listing as such is likely to disappear. The prospectus directive is still under lively debate in the European Council. But the Commission’s clear intention is to ensure that a prospectus once vetted and approved in one member state would be valid in any other member state. Furthermore, the directive is therefore what we know in the jargon as a 'maximum harmonisation directive'. This means that there will be no ability for a competent authority to impose prospectus disclosure requirements in addition to those specified in the directive. Again, to use the jargon, it will not be possible to impose super-equivalent provisions.

And a likely consequence of the prospectus directive is that the UK concept of listing would be replaced by the notion of admission to trading on a regulated market. The admission standards would then be set by the selected regulated market. (…)

My own view is that this is a very curious time to choose to dismantle a well-functioning feature of our regulation of corporate governance. In the aftermath of the Enron affair it is remarkable to think that we may soon lose the basis on which many corporate governance and disclosure provisions rest. Furthermore, the regime is one which – our survey shows – is attractive to both investors and capital raisers.

The argument we hear is that regulatory competition cannot be allowed in the EU. Why not? Because, I am told, we would see regulatory arbitrage and a ‘race to the bottom’. That seems highly unlikely to me, especially at a time when investors are, not unreasonably, nervous about unconventional corporate structures and opaque accounts. (…)

We must also take account of the company law review here, which will result in a new Companies Act which will in turn have consequences for the listing rules in areas such as corporate governance and financial reporting. Indeed it is important that it does, given what I have said about the prospectus directive itself. (…)

At the same time, we will see the implementation of international accounting standards in Europe by 2005. With our securities regulator hat on we have been involved in IOSCO in promoting international accounting standards, and in seeking to reach agreement with the US on their use in North America.

Commenting on Sir Howard Davies's, Chris Huhne MEP, the economic spokesman for the European Liberal Democrats and the draftsman on the Prospectuses Directive, said:

'We need to ensure that countries cannot add requirements onto core EU standards, or they could block UK financial services firms from providing services throughout the union. But that does mean that where we have added our own requirements, we will have either to incorporate them into new pieces of EU legislation or alternative into UK companies law.

'Where the EU Commission can be faulted is in failing to explain how all the elements of the new regime - contained in the Financial Services Action Plan - knit together to ensure that there is sound investor protection and market confidence' said Mr Huhne.

See full speech

Note: The FSA is preparing a discussion paper, presenting a clear taxonomy of the existing rules, identifying the areas in which change may be needed and, in particular, the areas in which the existing listing authority requirements will fall away.

© FSA - Financial Services Authority