United Kingdom | Publication | July 2023
On 13 July 2023 the Financial Conduct Authority (FCA) published two engagement papers in connection with the reform of the UK prospectus regime setting out its initial thinking on how (under the new regime) it might write rules in relation to public offer platforms and primary multilateral trading facilities.
A brief summary of each of the engagement papers is set out below. They form part of the FCA’s engagement process in relation to the new regime as discussed on its website and follow on from the publication in May 2023 of a number of other engagement papers relating to admission to trading on a regulated market, further issuances of equity on regulated markets, protected forward-looking statements, and non-equity securities.
Written responses to the engagement papers are requested by 29 September 2023.
Engagement Paper 5 (EP5): The public offer platform
This relates to the exemption set out in the draft Public Offers and Admissions to Trading Regulations 2023 (POATRs) which will allow offers of relevant securities to be made to the public via a public offer platform (POP). The operation of a POP will be a new regulated activity and therefore subject to FCA authorisation, rules and oversight. EP5 explores and discusses the policy options the FCA has when designing the POP regime and seeks views on what that regime could look like, the policy choices that the FCA faces, and the rationale behind those choices.
The FCA’s overall aim is that the framework created for operators of POPs should ensure that:
The FCA notes that its approach to the regulation of operators will reflect the fact that (based on the current crowdfunding market) offers made via POPs are likely to be largely directed at retail investors. It will also focus on the risk of fraud and how to address the information asymmetry and risks that are inherent where smaller/non-publicly traded companies are seeking to issue securities to potentially less sophisticated issuers, as well as the limited liquidity and transparency post-issuance.
Whilst the FCA has presumed a largely retail investor base, it is interested to hear if some business models may consider undertaking new activity with a focus on companies seeking capital from professional investors, potentially as companies look to scale up beyond “seed” funding.
As a starting point, the FCA is focusing on a proposed regime that will impose requirements in the following areas on operators of POPs:
The FCA’s intention is to focus any new rules on those elements of the operation of a POP that are either not appropriately addressed by existing rules (which could be extended to POPs) or where a specific approach is required in relation to POPs (e.g. by reference to the particular risks associated with the platform’s role).
Engagement Paper 6 (EP6): Primary multilateral trading facilities
The POATRs will provide the FCA with the power to ensure that certain multilateral trading facilities operating as primary markets (Primary MTFs) require issuers to produce an MTF admission prospectus in specified circumstances. Primary MTFs may also voluntarily choose to require publication of an MTF admission prospectus in their rules even if not required to do so by the FCA. (As currently drafted, the POATRs will limit the FCA’s power to require publication of an MTF admission prospectus to those Primary MTFs that allow retail investor participation. However, the FCA’s powers in relation to responsibility for MTF admission prospectuses, withdrawal rights and advertisements will apply to all types of Primary MTFs irrespective of whether they allow retail participation.)
When designing its rules in relation to MTFs, the FCA considers that it should seek to promote broader investor participation and to improve the quality of information that investors receive. Where possible, it intends to preserve the existing regulatory model such that MTF operators will specify the detailed content requirements (although MTF admission prospectuses will be subject to the general “necessary information” requirement set out in the POATRs) and the process for approval/validation of an MTF admission prospectus (as they currently do for their admission documents) subject to the FCA’s normal supervisory oversight of their activities.
EP6 sets out the FCA’s initial considerations regarding:
EP6 also discusses and seeks views on (amongst other things):
(FCA, The public offer platform - Engagement Paper 5, 13.07.2023)
(FCA, Primary multilateral trading facilities - Engagement Paper 6, 13.07.2023)
On 11 July 2023, HM Treasury (HMT) published a near-final version of the Public Offers and Admissions to Trading Regulations 2023 (POATRs) and associated explanatory policy note. This follows on from the publication of earlier illustrative drafts in December 2022 as part of the Edinburgh Reforms.
Key updates made to the POATRs compared to the December 2022 illustrative draft are highlighted in the policy note. These include (amongst other things):
The near-final version of the POATRs is being published for technical checks, such as any significant errors or oversights in the legal drafting which would mean that the regulations would not achieve the desired outcomes explained in the policy note or that would lead to significant unintended consequences. Any technical comments should be provided by 21 August 2023.
HMT intends to legislate for the new regime by the end of 2023 (subject to parliamentary time allowing) but notes that the legislation will only fully come into effect after the FCA has made its new rules in this area.
(HMT, The Public Offers and Admissions to Trading Regulations 2023 Policy Note, 11.06.2023)
On 11 July 2023, the Digitisation Taskforce (DT) published its interim report (Interim Report). The DT was established in July 2022 as recommended by the Secondary Capital Raising Review, which identified digitisation of the UK’s shareholding framework as a key reform to enhance the efficiency of capital markets, including eliminating the use of paper share certificates and improvements to the UK’s intermediated share ownership system.
Whilst the primary focus of the DT’s work relates to traded companies, its objectives also include considering whether the arrangements for digitisation can be extended to newly formed private companies and as an optional route for existing private companies.
The Interim Report sets out the work that has been undertaken by the DT so far in relation to its objectives and suggests a number of potential recommendations for the UK government, regulators and market participants. The potential recommendations (and related questions) cover a number of key areas, namely: dematerialisation of paper share certificates; the design of a fully digitised share model; transparency and communication obligations in the intermediation chain; and facilitating access to shareholder rights. The Interim Report also outlines certain areas in which legislative or regulatory changes would be required to implement the potential recommendations.
Dematerialisation of paper share certificates
During its engagement with stakeholders, the DT received overwhelming support from issuers (and all sectors of the industry that support share trading and settlement) for the proposition that the UK should put in place plans to remove paper share certificates as a matter of urgency. Where there were areas of difference, these related primarily to the timing and sequence of individual steps and whether legislation should contemplate a progressive approach or a “big bang”.
The Interim Report identifies three issues to be addressed in relation to sequencing:
The potential recommendations made in relation to removal of paper certificates are summarised below.
Recommendation 1: Legislation should be brought forward, and company articles of association changed, as soon as practicable to stop the issuance of new paper share certificates. The DT sees no reason why legislation should not be brought forward in short order to eliminate the issuance of fresh paper certificates for any purpose at an implementation date in the near term (within six months is suggested) to allow time for shareholder communication on the changes and for shareholders to nominate the destination for future digitised issuance. It notes that, in the absence of a direction for future digitised distributions previously taken in scrip or through a DRIP, issuers could choose to take powers to default such shareholders to take their dividends in cash.
Recommendation 2: The government should bring forward legislation to require dematerialisation of all share certificates at a future date, to be determined as soon as possible, in conjunction with Recommendation 1. The Interim Report notes that timing for dematerialisation of existing paper certificates will depend upon the architecture of the future infrastructure and the time therefore required to communicate with shareholders and to set up the routing to move physical shareholdings to their future digitised destination of record - the DT is seeking views on the appropriate timeline.
Recommendation 3: The government should consult with issuer and investor representatives on the preferred approach to ‘residual’ paper share interests and whether a time limit should be imposed for the identification of untraced UBOs. A major challenge for issuers and their registrars will be deciding how to deal with certificated shareholders for whom current contact details are not held. The DT notes that the number of physical certificates is high, but the percentage shareholding represented by them in most companies is very small and declining. While digitisation, and the publicity around it, would provide a fresh opportunity for issuers to identify currently uncontactable shareholders (and to update records to include electronic means of communication, e-mail addresses or phone numbers for SMS messaging), the DT notes that it is clear many shareholders will remain untraceable. Three possibilities are identified for dealing with this:
Amongst other things, the DT is seeking views on what approach should be taken and whether a time limit should be imposed for identifying untraced UBOs.
Design of a fully digitised share model: Alternative depositary models
The DT notes that there were a variety of views on the architecture of the prospective fully digitised infrastructure and the Interim Report highlights and discusses four models:
The DT is seeking views on a number of questions in this area, including whether people agree with its view that the optimal architecture is for all digitised holdings to be recorded in the CSD and managed/administered through nominees.
Transparency and communication obligations in the intermediation chain between issuers and UBOs
Two core objectives of the DT were to identify immediate and longer term means of improving on the current intermediated system of share ownership to enable investors (as beneficial owners) to better exercise rights associated with shares which intermediaries hold on their behalf and to allow issuers to identify and communicate more easily with such investors, including on secondary capital raisings.
Recommendation 4: Intermediaries should have an obligation, as a condition of participation in the clearing and settlement system, to put in place common technology that enables them to respond to UBO requests from issuers within a very short timeframe. The Interim Report notes that two-way communication depends not only on issuers knowing who their registered shareholders are, but also (in an intermediated chain) knowing who their UBOs are. The DT believes issuers should have the right to navigate the intermediation chain to identify UBOs. It seeks views on a number of areas in the context of Recommendation 4, including service levels and “fair usage” of the process. The DT has also considered who should have access to share ownership information in a digitised system – its conclusion is that only issuers should have the ability to access information beyond the level of the share register, but it is seeking views on this and on whether there should be any restrictions on how issuers can use such information.
Facilitating access to shareholder rights
The Interim Report makes a number of proposed recommendations in relation to access to shareholder rights as well as discontinuing cheque payments. It also proposes that company law should be changed to make digital distribution of documents the default option, with shareholders having to actively opt in to receiving physical copies (including reform of the current Companies Act provisions for website communications which still require notifications to be made by paper/post if the shareholder has not requested electronic communications).
Recommendation 5: Intermediaries offering shareholder services should be fully transparent about whether and the extent to which clients can access their rights as shareholders, as well as any charges imposed for that service. The Interim Report notes that there should be no distinction in access to rights between shareholders who are directly registered and those who hold via intermediaries. However, the DT does not believe it is necessary to mandate an obligation on every intermediary to offer UBOs the ability to exercise such rights as long as they are transparent that this is their service proposition.
Recommendation 6: Where intermediaries offer access to shareholder rights, the baseline service should facilitate the ability to vote, with confirmation that the vote has been recorded, and provide an efficient and reliable two-way communication and messaging channel, through intermediaries, between the issuer and the UBOs. The Interim Report sets out the baseline service level that the DT believes should be offered where a UBO opts for a service proposition which facilitates expression of their rights.
Recommendation 7: Following digitisation of certificated shareholdings the industry should move, with legislative support, to discontinue cheque payments and mandate direct payment to the UBO’s nominated bank account. Once every shareholder is represented by a digital entry via a nominee, the DT believes it should be easier to mandate the default option for dividend and other distributions to be via direct deposit in the UBO’s bank account (which it believes would be to the benefit of all parties given that individuals change their email addresses and their bank account less frequently than their physical address).
Next steps
Feedback on the Interim Report and on the questions posed is requested by 25 September 2023. After the feedback has been considered, the DT plans to go into more detail on the practical steps needed and the related timescale for implementation.
It also suggests that it would be helpful to explore how DLT might be deployed in the future, including how DLT may be used to maintain registers of private market securities’ interests and for tokenisation of funds, including debt instruments, in part to expand market access to a wider range of financial instruments to retail investors at lower cost.
A follow up report taking account of comments received, and setting out the final recommendations, will be issued within six months of the closing date for feedback.
On 11 July 2023, HM Treasury published a consultation paper on the first financial market infrastructure sandbox, referred to as the Digital Securities Sandbox (DSS).
For further information see our Global Regulation Tomorrow blogpost here.
On 11 July 2023, HM Treasury published a Policy Paper ‘Building a Smarter Financial Services Regulatory Framework for the UK: HM Treasury’s Plan for Delivery’.
For further information see our Global Regulation Tomorrow blogpost here.
On 10 July 2023, HM Treasury published the outcome of the Independent Research Review, which was announced on 9 December 2022 as part of the Edinburgh Reforms and launched on 9 March 2023. The purpose of the review was to consider levels of financial services investment research in the UK and its contribution to UK capital markets competitiveness, as part of the government’s broader work to increase the attractiveness of the UK as a location for large and small companies to raise capital.
For further information see our Global Regulation Tomorrow blogpost here.
On 10 July 2023, the Insolvency Service announced the launch of a new online information hub aimed at providing support to company directors. The hub, specifically designed for directors of micro, small and medium-size limited companies, hosts guidance and information on a range of business themes commonly faced by companies and aims to help company directors to push their business forward by being more aware of potential pitfalls.
Topics covered on the hub are as follows:
Publication
EU Member States may allow companies from countries that have not concluded an agreement guaranteeing equal and reciprocal access to public procurement (public procurement agreement) with the EU to participate in public tenders, provided there is no EU act excluding the relevant country.
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