FCA: Significant changes to UK listing regime confirmed

On 11 July 2024, the Financial Conduct Authority (FCA) published a Policy Statement (PS24/6) and final rules for a new, simplified and more competitive UK listing regime, which will come into force on 29 July 2024. More information about the new listing regime and the position for companies in the new equity shares in commercial companies (ESCC) category can be found here.

LSE: Amendments to LSE Primary Market Rulebooks confirmed – N06/24

On 11 July 2024, the London Stock Exchange (LSE) published a Market Notice confirming changes to the LSE’s Admission and Disclosure Standards (Standards) that will apply following the changes to the Listing Rules announced by the Financial Conduct Authority (FCA) on the same day and due to become effective on 29 July 2024.

The changes to the Standards reflect the fact that the FCA is replacing the standard and premium listing segments with a single listing segment. They also reflect other changes to the Listing Rules, in particular changes to the requirement for shares in public hands. The LSE is, as a result, going to close the High Growth Segment (HGS) given that its purpose is now redundant. Accordingly, references to HGS and the specific segment rules in Schedule 5 have been removed from the Standards.

The amendments to the Standards (shown in track changes) are set out in Attachment 1 to the Notice and the amendments to the Standards will become effective from 29 July 2024.

(LSE, Market Notice N06/24, 11.07.2024)

FCA: Primary Market Bulletin No. 50

On 11 July 2024, the Financial Conduct Authority (FCA) published Primary Market Bulletin No.50 (PMB 50). Published at the same time as Policy Statement PS24/6 which sets out major changes to the UK listing regime (see our briefing UK listing reforms: Radical reset to take effect on 29 July 2024), PMB 50 focuses on the sponsor regime and:

• Provides an update on the work the FCA has been doing in this area.
• Consults on the introduction of new technical notes relating to supervisory reviews of sponsor firms and the FCA’s expectations of a sponsor in relation to specialist due diligence.
• Consults on updates to the existing technical note on sponsor record keeping.

The consultation on the new and updated technical notes closes for comments on 5 September 2024.

Work on sponsor regime

The FCA notes that there has been a fundamental review of the sponsor regime as part of the Primary Market Effectiveness Review. Whilst feedback has supported the retention of the sponsor regime, broadly in its existing form, the FCA’s engagement with sponsor firms revealed concerns (as discussed in its December 2023 consultation CP23/31) in a number of areas including due diligence, record keeping, and the potential for misunderstanding within firms over the intention of the FCA’s supervisory approach and follow-up communications. 

Since then, the FCA has continued to engage with sponsors to understand their specific concerns and is now proposing a package of initial measures designed to address the points raised. Wherever possible, the FCA has tried to incorporate practical considerations and examples. It notes that these measures are against the backdrop of the wider changes to the listing regime which will have the effect of removing a number of sponsor services completely or simplifying some of the considerations sponsors make when performing sponsor services.

Specialist due diligence

Responding to sponsor concerns about their role in coordinating due diligence in specialist areas, the FCA has produced a new draft technical note for consultation which provides guidance on its reasonable expectations. In this context, PMB 50 notes that: 

• Sponsors are expected to apply the relevant rules with skill and expertise in the specific context of an issuer’s business and operations. 
• The FCA does not expect sponsors to be experts in every specialist discipline. 
• Sponsors should exercise common sense judgement when determining the due diligence proportionate to undertaking the sponsor role with due care and skill and providing opinions after due and careful enquiry.
• Sponsors should judge when specialist reporting by a third party is appropriate. The FCA does not expect to see third party reports where a sponsor is able to reach its opinion without such a report. 
• The draft technical note also discusses some practical considerations and the records the FCA expects sponsors to keep when placing reliance on third party reporting.

Record keeping by sponsors

This was an area where the FCA received significant feedback through its consultations and further engagement and where sponsors had requested further practical guidance. In response to these concerns, the FCA is consulting on an update to its existing record keeping technical note to include an appendix containing a Q&A section. 

Whilst record keeping remains an area for sponsor judgement (and it is not possible to specify the precise records that will be reasonable in all cases) the updated draft note includes a selection of questions that the FCA commonly receives from sponsors, or that it understands sponsors regularly deal with. In each case, the FCA provides a sense of its reasonable expectations and practical considerations or examples that a sponsor can consider when exercising its judgement. The FCA anticipates supplementing the note with additional Q&A, drawing on real life examples, as it completes further sponsor reviews or discusses good and bad practices around record keeping with sponsors.

The FCA has also (as part of changes in PS24/6) amended the Handbook guidance on matters taken into account when considering sufficiency of sponsor records. The revised rule refers to records that would enable a person with a basic understanding of the transaction (rather than no specific knowledge of the actual sponsor service undertaken) to understand and verify the basis on which material judgments have been made. It hopes this will have the effect of limiting the records required to be kept. 

Issuer understanding of sponsor’s role and obligations

The FCA notes that feedback has suggested the role of the sponsor is not always well understood by issuers, and that there is potential for additional cost and friction to arise where a sponsor requires additional reporting or documentation as part of its due diligence. 

The FCA expects its responses to the sponsor feedback as a whole will help sponsors ensure their approaches to due diligence are proportionate and so less problematic for issuers. 

However, it emphasises the importance of issuers understanding that the sponsor has responsibilities to the FCA. While the Listing Rules already impose obligations on issuers to cooperate with their sponsor, the FCA will make this clearer at the outset of an IPO, by writing to the board to explain its expectations regarding their interactions with the sponsor. The FCA will also clarify that the sponsor is assisting it in carrying out its functions, that sponsors are closely supervised and that a sponsor must be able to demonstrate, through its own records, that it has exercised due care and skill and provided opinions after due and careful enquiry. The FCA believes this should make clear to issuers the distinction between the sponsor and the other advisers on a transaction.

FCA supervisory reviews of sponsor services

Following concerns expressed by some sponsors that the FCA’s approach to supervisory reviews has led to a disproportionate ratcheting up of the work required of sponsors (and the need to implement overly burdensome controls, particularly around record keeping), the FCA has produced a new draft technical note for consultation. This explains the

FCA’s approach to its supervisory reviews of sponsors, including why and how the FCA performs reviews, its approach to providing feedback and what the FCA expects in response. 

The FCA has also amended its sponsor declarations to make clear that the declaration is provided by the sponsor firm and not an individual.

(FCA, Primary Market Bulletin No. 50, 11.07.2024)

Law Commission: Scoping paper on Decentralised Autonomous Organisations published

On 11 July 2024, the Law Commission published a scoping paper on decentralised autonomous organisations (DAOs) which considers how DAOs can be characterised and identifies current issues around DAOs to inform any future law reform or innovations. 

Publication of the scoping paper follows a Government request to the Law Commission to undertake a scoping study on DAOs, and in particular to: 

• explain what a DAO is, and how a DAO might be categorised in law; and 
• identify the main options for legal reforms or innovations that might be required to existing company law and other legislation in England and Wales to clarify the status of DAOs and facilitate their uptake. 

The Law Commission has not been asked, at this stage, to make formal recommendations for law reform but the scoping paper follows discussions with stakeholders and responses to a call for evidence launched in November 2022. 

Among other things, the scoping paper identifies some of the implications of different structures used by DAOs and identifies situations in which stakeholders involved with such arrangements may be exposed to risk, to raise awareness and encourage participants to consider their exposure.  

The scoping paper also identifies areas where further work might be useful to accommodate DAOs, if this were thought desirable, and to ensure that their activities are within the reach of the regulatory regime. These include:  

• There is no current need to develop a DAO-specific legal entity for England and Wales
• The Companies Act 2006 should be reviewed to determine whether reform is needed to facilitate the increased use of technology at a governance level where appropriate. The law of other business organisations such as limited liability partnerships should also be reviewed with the same aim.
• Further work could be undertaken to determine whether the introduction of a limited liability not-for-profit association with flexible governance options would be a useful and attractive vehicle for organisations in England and Wales, including non-profit DAOs. 
• Proceeding with the Law Commission’s planned review of trust law under the law of England and Wales. This will consider – in general terms rather than in the DAO context specifically – the arguments for and against the introduction of more flexible trust and trust-like structures in England and Wales.
• The Government should consider a review of anti-money laundering regulation in England and Wales to consider whether the same policy objectives can be achieved in a manner more compatible with the use of distributed ledger and other technology.  

The Law Commission has published a summary of the scoping paper with the scoping paper itself.

(Law Commission, Decentralised Autonomous Organisations (DAOs), 11.07.2024)