On 26 July 2024, the Financial Conduct Authority (FCA) published several Policy Papers designed to strengthen the UK’s capital markets.

Three Consultation Papers (CPs) set out proposed rules for the new Public Offers and Admissions to Trading Regime (POATR), which will replace the existing UK Prospectus Regulation. A Policy Statement (PS) sets out final rules on payment optionality for investment research.

POATR

The three Consultation Papers are:

  • CP24/13: New regime for public offer platforms (CP24/13).
  • CP24/12: Consultation on the new POATRs (CP24/12).
  • CP24/14: Consultation on the derivatives trading obligation and post-trade risk reduction services (CP24/14).

CP24/13

The POATR gives the FCA power to set rules around a new regulated activity of operating as a Public Offer Platform (POP).

The Government has proposed to remove the current requirement for an FCA approved prospectus to be published for offers of transferable securities with a total consideration of more than €8 million. Instead, it will be possible for securities to be offered to the public in reliance upon a number of exemptions, including an exemption for public offers where the total value of the offer exceeds £5 million, subject to that offer being made on a POP. POPs will therefore be used by issuers who seek to make public offers of unlisted securities where the value of the offer exceeds £5 million.

There are currently 27 crowdfunding platforms and 462 corporate finance firms operating in the UK, which may consider taking up the permission to operate a POP.

The proposed new rules and guidance in CP24/13 will create a due diligence and disclosure framework for POP operators and issuers. As set out in CP24/13 the FCA is proposing rules regarding:

  • Due diligence to be performed by platforms when onboarding companies and assessing the securities to be offered.
  • Information and disclosures designed to inform investors of the key features and risks associated with offers of ‘off market’ securities, typically by smaller companies.
  • Liability on POP operators.

The FCA is also applying the Consumer Duty and appropriate authorisation requirements from the Handbook.

As for more bespoke rules specific to operating a POP, the FCA’s proposals focus on three key areas:

  • Information gathering and due diligence carried out by POPs on prospective issuers and the securities being offered.
  • The specific disclosures provided to investors on an issuer and the security being offered.
  • The application of liability and redress in relation to the content of offers facilitated by POPs.

Therefore, POP operators will have a key gatekeeping role in deciding if a public offer should be made to investors.

CP24/12

In CP24/12 the FCA is seeking to address what is calls ‘regulatory failure’ in the form of suboptimal regulatory requirements for admissions to trading on a regulated market, multilateral trading facilities (MTFs) and public offers of securities. The harms caused by this failure were previously set out in HM Treasury’s review of the prospectus regime and in the Secondary Capital Raising Review.

The POATR require that a prospectus provide investors with the necessary information about the securities. Moreover, the liability threshold for admissions to trading and further issuances of securities on regulated markets remains the same as under the prospectus regime, with the exception of Protected Looking Forward Statements (PLFS).

In CP24/12, with regards to when a prospectus may be required, the FCA is proposing:

  • Increasing the threshold for triggering a prospectus for further issuances from 20% of existing share capital to 75% for further issuances.
  • To require an MTF admission prospectus for all initial admissions to trading, and reverse takeovers (with exceptions for existing simplified routes to admission), to encourage offers to retail investors. The FCA has also set out a proposed approach to certain rights and responsibilities attaching to the production of the prospectuses.

In relation to what regulated market prospectuses should contain the FCA proposes:

  • Defining PFLS, to give issuers legal certainty on what information can be deemed PFLS and to ensure investors can identify and assess such content.
  • To supplement existing minimum content requirements for issuers seeking admission of equity securities to a regulated market to include certain specific sustainability disclosures, where these are financially material and relevant. This may be complemented by further guidance.
  • For non-equity securities, to retain the approach of using non-Handbook Technical Note guidance to clarify expectations.
  • To require issuers to disclose whether their debt instruments have been marketed as ‘green’, ‘social’ or ‘sustainable’ or issued under a bond framework or a similar document. Where that is the case, issuers would be prompted to disclose further information on their securities, depending on the type of bond being listed.

CP24/14

In summary, in CP24/14 the FCA is proposing the following changes:

  • Bringing swaps on the US risk-free rate SOFR (Secured Overnight Financing Rate) OIS (overnight index swap) into the scope of the derivatives trading obligation (DTO).
  • Defining the types of post-trade risk reduction (PTRR) services that can be exempted from the DTO.

The FCA also sets out how it intends to use its new power to modify or suspend the DTO to certain transactions under current transitional powers which expire in December 2024.

The FCA notes that the SOFR OIS market is the largest interest rate swap market globally and that trading in SOFR OIS is already subject to the swap trading mandate in the US. The FCA has found that there are significant volumes within the UK nexus that would support increased transparency from requiring SOFR OIS to be traded in trading venues and has identified the harm that arises from this lack of pre-trade transparency in SOFR OIS. For example, there are higher costs for trading SOFR OIS. Also, the lack of liquidity and transparency of pre-trade information also impacts negatively on investors’ ability to make informed decisions about the optimal portfolio and ability to manage interest rate risks effectively.

The FCA proposes to add OIS derivatives referencing SOFR to the DTO. It proposes to impose the DTO for SOFR OIS to trade start types spot-starting and IMM (next 2 IMM dates) with tenors of 1, 2, 3, 4, 5, 6, 7, 10, 12, 15, 20 and 30 years. According to the FCA’s analysis, these are sufficiently liquid.

The FCA is currently consulting in CP23/32 on changes to the transparency regime for bonds and derivatives. It is proposing to include SOFR OIS as a category 1 instrument under the new transparency regime and this would mean pre and post trade transparency of trades, unless the trade is above the Large-In-Scale threshold. The FCA states that this would mean that transparency in affected contracts, including SOFR OIS, are likely to benefit from its transparency proposals.

PTRR services (PTRRS) are provided by third party service providers to market participants to assist them in reducing risks. There are three types of PTRRS commonly used in the market: portfolio compression, portfolio rebalancing and basis risk optimisation.

The Financial Services and Markets Act 2023 (FSMA) gives the FCA the power to disapply obligations to activities, persons and transactions executed in connection with a risk reduction service. It proposes to exercise its power to disapply the DTO to a wider range of post-trade risk reduction services. A “risk reduction service” is defined in FSMA 2023 as a service provided to two or more counterparties in derivatives transactions to reduce non-market risks. FSMA 2023 also restricts PTRRS to those that result in transactions that do not contribute to the price discovery process.

In CP24/14, FCA proposes to maintain the existing exemptions for trades conducted as part of portfolio compression and proposes to expand the exemptions to trades conducted as part of portfolio rebalancing and basis risk optimisation. The FCA sets out the characteristics that risk reduction services would need to satisfy for trades used to conduct them to be eligible for exemption. It also proposes to require providers of PTRRS to comply with disclosure and notifications obligations.

Following the UK’s departure from the EU, the FCA has been using its temporary transitional powers (TTP) to modify the application of the DTO. In CP24/14 it sets out how it intends to use the power inserted into Article 28a UK MiFIR by FSMA 2023 to suspend or modify the DTO. The FCA proposes to exercise this power in a similar way to the TTP, as it feels that the conditions that supported the use of the TTP continue to be relevant.

Next steps

The deadline for comments on CP24/14 is 30 September 2024.

The deadline for comments on CP24/13 and CP24/12 is 18 October 2024.

Payment optionality for investment research

In PS24/9: Payment optionality for investment research the FCA sets out final rules for a new option to pay for investment research and sets out its feedback to its earlier consultation in CP24/7.

The new option will exist alongside those already available, i.e. payments for research from a firm’s own resources and payment for research from a research payment account for specific clients. The FCA is not seeking changing the existing rules on these other payment options.

The FCA notes that whilst there was strong support for the new joint payment option there were concerns regarding the precise specification of certain of the guardrails which has prompted the regulator to make certain changes to its original proposals. A summary of these changes is found in para 1.23.

A summary list of the key requirements introduced by the new rules are found in paras 1.19 to 1.22.

Next steps

The changes to the research rules will come into force on 1 August 2024.

The FCA notes that it is aware that the changes it is making in PS24/9 should also apply to fund managers, including UCITS managers and alternative investment fund managers under COBS 18. The changes it is introducing to the list of acceptable minor non-monetary benefits in COBS 2.3A and the addition of payment optionality in COBS 2.3B are not at this stage mirrored in changes to COBS 18 Annex 1 relevant to:

  • UCITS management companies.
  • Full-scope UK Alternative Investment Fund Managers (AIFMs).
  • Small authorised UK AIFMs and residual Collective Investment Scheme operators.

The FCA plans to set out the necessary rule changes to achieve this alignment in a future consultation in the autumn. The regulator’s intention is to make the same option available in substance, and it will over the coming period consider technical aspects of how best to achieve this in practice.