Government announces ambitious post-Brexit reforms to UK capital markets regulation
Following Brexit, the UK is looking to capitalise on its newfound regulatory independence in financial services to reform the rules for listing companies in the UK and the regulation of wholesale capital markets. On 1 March 2022, the Government published the outcomes of its consultations on the UK Prospectus Regime Review and the Wholesale Markets Review. The proposed changes are designed to reduce red tape and help make London a more desirable destination for IPOs - as well as creating a stronger financial services sector that is open, green, competitive and technologically advanced.
UK wholesale capital markets have been subject to the EU’s Markets in Financial Instruments Directive (MiFID) rules since 2018, whilst the ability to float companies and raise capital in the UK has been governed by the EU Prospectus Regulation since 2017.
The changes to the UK Prospectus Regime are aimed at simplifying the regulation so that it is more agile and effective, as well as facilitating wider participation in the ownership of companies and improving the quality of information investors receive. The Financial Conduct Authority (FCA) will be given enhanced rule-making responsibilities covering matters that currently sit in the Prospectus Regulation; for example, it will be able to specify if and when a prospectus is required for admission to trading on Regulated Markets, and whether– and if so, in which circumstances – prospectuses must be reviewed and approved by the FCA prior to their publication.
The proposed reforms to MiFID should give firms greater choice about where they can trade and allow them to get the best price for investors. The fixed income and derivatives, and part of the pre-trade, transparency regimes will also be delegated to the FCA. It will be given the tools it needs to ensure that a single data feed from across several trading venues - a consolidated tape (CT) – emerges in the industry (an ambition long held by the EU). A CT will combine market data from multiple areas, giving investors a clear source of information whilst cutting costs and complexity for firms. Other changes include removing unnecessary regulatory burdens for investments firms performing client order functions on own account as Systematic Internalisers, as well as delegating the commodities position limits regime to trading venues to ensure that market activity is not unnecessarily restricted but that markets still function efficiently.
Ground-breaking and welcome reforms?
There is widespread support for the reform of the UK prospectus regime and these changes should help to optimise the capital raising process to list on UK markets and its attractiveness to investors. These extensive regulatory and systemic reforms will give the FCA broad discretion. It remains to be seen quite how the FCA will go forward, balancing the government's desire to encourage retail investment on the one hand, with the need to adequately protect investors on the other.