Public Offers and Admissions to Trading Regulations 2023
Baroness Swinburne
That the Grand Committee do consider the Public Offers and Admissions to Trading Regulations 2023.
Relevant document: 7th Report from the Secondary Legislation Scrutiny Committee
Baroness Swinburne (Con)
My Lords, these regulations are made under powers introduced by the Financial Services and Markets Act 2023, or FiSMA. They form part of the Government’s ambitious programme to deliver a smarter regulatory framework for financial services, replacing assimilated law, formerly known as retained EU law, with an approach to regulation that is tailored to the UK. This instrument has been brought to the attention of the House by the Secondary Legislation Select Committee, which raised this SI but did not raise any specific issues.
The instrument delivers the key recommendation from my noble friend Lord Hill’s landmark UK Listing Review, published in March 2021, that we should fundamentally overhaul the UK’s listing regime, which is largely contained in the EU-derived prospectus regulation. The Government have previously acknowledged my noble friend Lord Hill’s contribution to this agenda, and I do so again. His report and this instrument represent a significant step change for our capital markets, making our listings rules fit for purpose and taking advantage of our ability to rewrite EU rules designed for 28 diverse markets. This instrument is a key step in the Government’s comprehensive and significant work programme to make UK capital markets more efficient and competitive while maintaining high standards. These changes will create a simpler and more effective regime that allows companies to raise funds more quickly and efficiently and provides investors access to better-quality information.
There have been two consultations which form the basis of this legislation: first, a government consultation on the prospectus regime in July 2021, which built on the recommendation from my noble friend Lord Hill; and Dame Elizabeth Gloster’s report of the independent investigation into the FCA’s regulation of London Capital & Finance plc. Both these were widely engaged with by industry, and the Government have previously confirmed our intention to move forward with these proposals, largely as consulted on.
A prospectus is a disclosure document that provides information to investors on a public offer of securities. The current prospectus rules regulation, the Prospectus (Amendment etc.) (EU Exit) Regulations 2019, sets out in prescriptive detail what a company must publish when raising capital on public markets. Many in industry found this regime to be cumbersome and inflexible, and it has been proven to stifle the capital-raising process for many firms. The current EU-derived prospectus regulation regulates both offers of transferable securities to the public and admissions to trading of a company’s securities on a regulated market. As my noble friend Lord Hill astutely observed in his review, treating these two often very separate activities with one prescriptive regime can increase costs for firms and undermine capital raising and investor participation. This instrument therefore creates a new framework for both these activities for the UK. This will be more streamlined, more targeted and make the process of capital raising more efficient and effective.
Underlying all this, it is the Government’s intention that appropriate information be published when companies raise capital on public markets or directly from the public. Under our new framework, therefore, companies raising money on capital markets will be required to publish information that is relevant and useful for investors, while removing unnecessary barriers to such information and unnecessary requirements. It is also the Government’s intention that firms raising money outside capital markets—for example, through crowdfunding platforms—can continue to do so, but in a more targeted, flexible and appropriate way. The regulation achieves this in the following ways.
First, it creates a general prohibition on public offers of securities, followed by a series of exceptions from this prohibition: for example, where the securities are traded on an exchange; or where the offer of securities is to fewer than 150 investors. These exemptions set the scope of the regulatory framework for public offers and mean, in practice, that in many situations firms will not need to produce a full prospectus when raising capital in the UK.
Secondly, this SI establishes a new regime for securities admitted to trading on a regulated market or multilateral trading facility—an MTF—giving markets such as AIM and Aquis Exchange the benefit of these reforms as well. Thirdly, it creates a new regulated activity of operating an electronic system for public offers of certain securities that are offered above £5 million. This will create flexibility for firms using a crowdfunding platform to raise capital, while providing the appropriate level of retail protection.
In line with its responsibility under our domestic financial services framework and as agreed during the passage of FiSMA, the FCA will be given new rule-making responsibilities to set rules that apply directly to firms, such as specifying when a prospectus is required and what a prospectus should contain, and addressing the manner and timing of validation and publication, among other matters.
Following the recommendations in Dame Elizabeth Gloster’s review into the FCA’s regulation of London Capital & Finance plc, this SI also brings non-transferable securities, such as mini-bonds, into scope of the public offers regime. This will ensure better investor protection. In practice, this approach means that offers of these types of investments will need to be made through a public offer platform, such as a crowdfunding platform.
Finally, under the current prospectus regulation, a public offer of unlisted securities of €8 million or above requires a prospectus. This instrument removes this threshold, which was effectively acting as a cap to certain private capital raising in the UK. These changes will allow all firms, small and large, to raise larger amounts of capital more easily and more quickly, helping them to grow, hopefully, in the UK. After these debates conclude, the FCA will soon consult on the detailed rules that will underpin this new regime. HM Treasury has worked closely with industry and the FCA to deliver this instrument.
To sum up, this SI replaces the EU’s prospectus regulation with a more appropriate framework for companies to raise capital from the public in the UK. These tailored changes will make the capital-raising process far more agile for UK companies while providing investors with good-quality, accessible information. The new regime will remove the often burdensome elements of its predecessor, which was designed for 28 markets. It will deliver the key recommendation of the listing review from my noble friend Lord Hill, in turn boosting the UK as a destination for listings.
In particular, the new prospectus regime marks a significant step in improving the competitiveness of UK capital markets, helping to make London a more attractive destination to list, while allowing investors to be better informed. It sits alongside a wide-ranging programme of capital market reforms that the Government are taking forward, as part of the Edinburgh and Mansion House reforms. I beg to move.
Baroness Kramer (LD)
My Lords, I welcome the noble Baroness, Lady Swinburne, who has stepped in at the last minute today. We send our wishes that the noble Baroness, Lady Vere, recovers from her illness swiftly.
We were supportive of the Hill recommendations for changes to the prospectus regime, so we do not oppose this SI, but I will express a fair dose of anxiety. I want to register a concern at the power shift away from Parliament to the FCA. At present, the FCA acts with little accountability or oversight. The House will have a new committee, the financial services regulators committee, which I suspect will need to be very diligent as it looks at the FCA’s actions in this area. The FCA will now set the rules for admission to trading on regulated markets, on MTFs operating primary markets and what will now be classed as public offer platforms. Only the broad concept of a prospectus will remain in legislation. I ask the Minister to explain the additional resources that will be given to the FCA to police what are, frankly, difficult and complex waters.
I also ask the Minister to explain the compensation mechanism where there is misleading or incorrect information in a prospectus or in any other required document. I am particularly keen to know what happens if a company with a false prospectus or alternative document falls into bankruptcy, and whether the FCA or a court could remove investors’ rights of private redress, if a scheme of arrangement is implemented. I am deriving this from concerns that exist around the Woodford investors and the Link Fund scheme, which will overtake that organisation and appears to threaten the investors’ rights of recourse to either the Financial Ombudsman Service or the Financial Services Compensation Scheme. I am not quite sure how all this works around investors through these various platforms, but I am concerned that, somewhere, the compensation must be protected and not compromised. Perhaps the Minister will help me understand that part of the process.
Can the Minister expand a little more on the protections in place for offers of securities made through the renamed public offer platforms? As she said, they are essentially crowdfunding platforms. Typically, crowdfunding platforms have been caveat emptor, and I am trying to understand what protections will now be in place, especially as the requirement for a prospectus for offers over £8 million is being erased. In fact, the pool of companies that can use crowdfunding is now dramatically increased and involves many much bigger players. I fully recognise that we need to find a way to encourage investment in both start-ups and scale-ups if we are to grow the UK economy, but nothing will kill a market faster than a series of scams, especially when the victims turn out to be ordinary people. It is primarily ordinary people who make use of crowdfunding platforms—people who have not been in a position to either understand or evaluate the risks that they are taking.
I notice—the Minister referred to this—that mini-bond issues will now be required to use the public offer platforms. Frankly, that very fact illustrates the FCA’s propensity for closing the stable doors long after the horse has bolted. I understand that this may deal with the mini-bond problem, but what about the problems we do not yet recognise? How will they be captured? Under this new regime, will new scams now have far more room for manoeuvre?
This statutory instrument depends heavily on the FCA’s commitment to consumer protection, but it has been noticeable that the FCA rejected the introduction of a duty of care and opted for a customer duty. Framed largely as a box-ticking exercise, it is less comprehensive than a duty of care and, most importantly, the consumer duty arrangement permits no right of private action, which is perhaps the primary protection that most consumers have when a scam acts on them and they are victimised. Do the Government expect the FCA to apply to protection in this market the same customer duty approach, which is narrow, constrained and very much cuts off a right of private action?
I realise that the Government are determined to persuade ordinary people to take far more risk with their money, and these changes are part of that process. I have no problem with people taking risk, where they have sufficient funds for their own needs and sufficient expertise to understand the risk that they are undertaking. But, frankly, as I read through this SI, I find very little that looks as though it is directed at people with both resources and expertise; it seems to encompass people who may well have neither. We all know that, when they are first marketed, risky ventures look extremely good. It is only after time that people find out the pitfalls.
I am trying to get from the Government some sense of whether, when we pass this SI, we will lose control over the protections that will be in place. Will we have any way to challenge the adequacy of those protections? How will we be assured that, given the much greater flexibility and opportunity being offered, we will not lose necessary transparency and protection?
Lord Livermore (Lab)
My Lords, I am very grateful to the Minister for introducing this SI, which we support, at such short notice. I note that the new prospectus regime is not due to come into effect until 2025. In the meantime, the UK’s public markets will continue to be at a competitive disadvantage. Given that the recent Financial Services and Markets Act contained a new competitiveness objective, does the Minister believe that swifter progress could be made on prospectus reform to support the UK’s international competitiveness?
The Explanatory Memorandum accompanying this SI notes that, in relation to regulated markets,
“the FCA will be given enhanced rulemaking responsibilities”—
for example, to set out when a prospectus is required or what it should contain. The EM also notes that the new regime will not come into effect until the FCA has made these new rules. Can the Minister clarify what progress the FCA has so far made and whether she is confident that this will not introduce any further delay to the new prospectus regime taking effect?
Finally, in the Treasury’s initial review of the prospectus regime, the Government committed to introducing a new regime of regulatory deference for offers into the UK of securities listed on certain designated overseas stock markets. The review was published almost two years ago, yet this SI does not introduce that deference mechanism for prospectuses. Can the Minister confirm whether such a regime remains under consideration and, if so, when and how it might be delivered?
Baroness Swinburne (Con)
My Lords, this will be quite fluid; I hope that some more papers will come my way as I start to speak and go through this. In closing, and in response to your Lordships’ remarks, this SI represents an important step in replacing assimilated law. I am really pleased that both noble Lords support the approach to regulation for financial services. We have the ability to tailor this to the UK in what I hope will be a coherent and logical way that will be conducive to UK economic growth in the long run, all of which we all collectively support. This instrument will be an important milestone in providing that improved competitiveness in our capital markets and, we hope, make some of that raising of capital in the UK easier and simpler.
I will turn to some of the very specific questions that noble Lords raised. There is some similarity and overlap between them. On the broad question of whether there is sufficient scrutiny of the new powers that the FCA is being given, those powers were given under the Financial Services and Markets Act. That discussion was had last year and pre-dates my time in this House, unfortunately. The reality is that those powers were given, and I think it is right. I understand the concerns that noble Lords and industry have regarding that unelected regulator having the full powers that it does. However, oversight by parliamentarians is really important. Now that the UK has left the EU, the Government intend to move the UK’s domestic model of financial services regulation so that financial services regulators—not just the FCA—make the detailed regulatory requirements within a framework set by government and Parliament.
It is right that the regulators should take much of the burden of responsibility for making those new rules. However, they need to come back to Parliament regularly with all the details that they are proposing. In fact, one of my noble friend Lord Hill’s key arguments was that the current prospectus regime is overly rigid and inflexible. It sets out very prescriptive rules in primary legislation, which means that when new methods of raising financing come along, the regulators were unable to adapt to them. They were unable to approve something if it was not prescribed in the first level of regulation.
This new burden will involve more work for the FCA and other regulators in due course. Indeed, the FCA has the ability and responsibility to levy the relevant fees to deliver its full responsibilities. I was asked whether it would be given more resources; if it needs more resources, it will raise them through its fees structure. We therefore feel that it is perfectly capable of dealing with the added rules that it will have to prepare. This House will no doubt scrutinise all these rules thoroughly; I am sure that the financial services regulatory committee will do its job thoroughly. I hope that the other place will also play its part in doing so, but I know that your Lordships’ House will do so.
With regard to redress under the scheme of arrangement, there are obviously compensation mechanisms built into this new set of prospectus rules and framework, and these will be protected. We will write with regard to the bankruptcy element of this. I do not have it in my briefing pack, but I will certainly get the noble Baroness, Lady Kramer, a specific answer on that. The noble Baroness is right that the public offer platforms have been caveat emptor up until now. The reality is that they are a very legitimate way of raising funds for businesses in this country. But when they are raising significant amounts of money, it is right that they have the same relative oversight that any other platform would have, whether it is an MTF or an exchange that would be raising capital. This will bring them under the scope of the regulatory framework, as far as the regulators are concerned.
With regard to the delays and the fact that will be in place only by 2025, I totally appreciate that these things take a long time but part of the scrutiny process for the regulators and their new powers is that they have to go through thorough consultation periods for every set of rules that they propose. They will indeed be doing that, and we therefore expect this to be by the first half of 2025.
On deference, the Government have published the outcome of their conclusion on the reforms to the prospectus regime and committed, in line with the stakeholder feedback, to prioritise the reforms taken forward in this SI. This note is supposed to be about deference and I am still trying to read it. I will write to the noble Lord, Lord Livermore, as I am not sure this will answer the question that he put to me with regard to that overseas deference mechanism. I will respond to that further. In the meantime, I apologise if this response was not as thorough as it needed to be.