Chapter 8: Securities Exchange Flashcards
What is a listed company?
A listed company is one whose shares have been admitted to the Official List, maintained by the Financial Conduct Authority (FCA) under FSMA 2000 s. 74.
What must a company do after being listed?
Once listed, a company must apply for its shares to be admitted to trading on a regulated market.
What is the largest regulated market for trading listed shares in the UK?
The London Stock Exchange’s (LSE) Main Market is the largest regulated market in the UK where listed shares are traded.
How was the UK financial regulatory regime structured before Brexit?
Before Brexit, most of the UK’s financial services regulations were:
Based on EU legislation.
Implemented through EU directives and regulations.
What key topics does this chapter cover regarding listed companies?
This chapter examines:
The procedure for listing shares.
Regulatory requirements for listed companies.
Types of public issue available to listed companies.
Role of exchanges as secondary markets.
Admission and disclosure standards required of issuers and major shareholders.
What are the alternative trading venues to the LSE’s Main Market?
Apart from the LSE Main Market, companies can trade their shares on:
Euronext London
AQUIS Exchange
(Note: This chapter focuses on the LSE Main Market process for listing and compliance obligations.)
What legal acts facilitated the UK’s withdrawal from the EU in terms of financial regulation?
The UK’s withdrawal was legally structured through:
European Union (Withdrawal) Act 2018 (EUWA 2018) – Provided the framework for Brexit.
European Union (Withdrawal Agreement) Act 2020 (WAA 2020) – Amended EUWA 2018 and finalized Brexit terms.
Statutory Instruments (approx. 50) – Supplemented the withdrawal process by adapting EU laws into UK law.
What is “onshoring” or “domestication” of EU legislation?
The process of replicating EU law into UK domestic legislation.
Required amendments to make the laws operationally effective post-Brexit.
The UK versions of former EU laws are often called “retained legislation.”
How did Brexit change the regulatory supervisory powers over certain financial institutions?
The UK government enacted secondary legislation to:
Transfer supervisory powers from ESMA (European Securities and Markets Authority) to UK regulators.
Reassign regulatory oversight as follows:
The Bank of England (BoE) now oversees non-UK central counterparties (CCPs) and non-UK central securities depositories (CSDs).
The FCA (Financial Conduct Authority) now regulates:
UK & non-UK credit rating agencies.
Trade repositories.
What is the role of the FCA in the UK listing regime?
The Financial Conduct Authority (FCA) is the UK’s competent authority for listing and regulates the admission of securities to official listing under:
FSMA 2000 (Financial Services and Markets Act 2000)
Retained EU legislation, including UK Market Abuse Regulations (UK MAR)
The FCA is responsible for:
Setting listing rules for admitting securities.
Ensuring compliance with continuing obligations of listed companies.
Enforcing rules and taking disciplinary action for breaches.
What was the impact of Brexit on the FCA’s responsibilities?
At the end of the Brexit transition period, the FCA assumed new responsibilities that were previously held by ESMA, specifically in regulating:
UK credit rating agencies.
Trade repositories.
What are the key UK laws and FCA regulations governing listed companies?
The FCA’s primary market functions include:
Formal guidance on listing requirements.
Listing Rules – Requirements for obtaining and maintaining a listing.
Prospectus Regulation Rules – Rules governing prospectus disclosures.
Disclosure Guidance & Transparency Rules (DTR) – Ensures ongoing transparency.
UK Market Abuse Regulations (UK MAR) – Prevents insider trading and market manipulation.
What are the application requirements for listing a company?
A company must submit two separate applications:
Application to the FCA – For securities to be admitted to the Official List.
Application to a regulated market (e.g., LSE) – For the securities to be admitted to trading on a market such as the Main Market.
Are the Listing Rules considered law?
No, the Listing Rules and codes are not technically “law”.
However, a breach of the Listing Rules can result in disciplinary action against the company.
Sanctions for breaches include:
Removal from the Official List, making shares untradeable on an exchange.
Civil prosecution and unlimited fines imposed by the FCA on companies, directors, or individuals.
Where are the rules for listing procedures set out?
The Listing Rules, issued by the FCA, outline:
Procedures for seeking and maintaining a listing.
Continuing obligations of listed companies.
What are the Listing Principles, and why are they important?
The FCA’s Listing Principles apply to all listed companies, with additional principles for premium-listed companies.
Purpose of Listing Principles
Ensure market confidence and fair, orderly markets.
Help listed companies understand their key obligations and responsibilities.
Ensure companies comply with both the spirit and letter of the listing regime.
What are the key laws governing the offer and sale of shares in listed companies?
The offer for sale of shares in listed companies is governed by:
Financial Services and Markets Act 2000 (FSMA 2000).
FCA Listing Rules, which originate from retained EU legislation.
Stock Exchange Rules, which govern trading on the Main Market of the LSE.
What happens if a company breaches the Listing Rules?
Braches of the Listing Rules can result in:
Fines – The FCA has the power to impose unlimited fines on companies, directors, or other individuals.
Removal from the Official List – This means:
The company’s share price is no longer quoted.
Shares become untradeable on the exchange.
Who is allowed to carry out regulated activities?
Under FSMA 2000 s. 19, only authorised or exempt persons can engage in regulated activities.
If an unauthorised person carries out a regulated activity, they commit an offence.
Who supervises the regulatory regime for listed companies?
The Financial Conduct Authority (FCA) is the competent authority responsible for supervising the listing and trading of securities.
Most powers previously held by the Secretary of State under FSMA 2000 have been transferred to the FCA.
What are the Listing Principles, and why are they important?
The FCA Listing Principles ensure that listed companies uphold market confidence and fair trading.
General Listing Principles (apply to all listed companies)
Listing Principle 1 A listed company must establish and maintain adequate procedures, systems, and controls to comply with its obligations.
Listing Principle 2 A listed company must deal with the FCA in an open and co-operative manner.
Premium Listing Principles (apply to premium-listed companies only)
Premium Listing Principle 1 A company must take reasonable steps to ensure that directors understand their responsibilities.
Premium Listing Principle 2 The company must act with integrity towards holders and potential holders of its premium-listed securities.
Premium Listing Principle 3 All equity shares in a class must carry equal voting rights in shareholder votes.
Premium Listing Principle 4 If a company has more than one class of listed securities, voting rights should be proportionate to their relative equity interests.
Premium Listing Principle 5 The company must treat all holders of the same class of shares equally in respect of their rights.
Premium Listing Principle 6 Companies must avoid creating a false market by ensuring that information is disclosed clearly to shareholders and potential investors.
What are regulated activities under FSMA 2000?
Defined under FSMA 2000 ss. 21, 22, and Sch 2.
Includes:
Financial promotion and investment activity.
Giving investment advice.
Investment management.
Securities transactions as a broker-dealer or principal.
Company secretaries must be cautious when assisting employees with share option schemes to avoid giving unintended investment advice.
How does a person or firm become authorised to carry out regulated activities?
Individuals or firms must apply to the FCA for authorisation.
Professional bodies (e.g., solicitors, accountants) can grant authorisation to their members.
What happens if someone carries out a regulated activity without authorisation?
Offence under FSMA 2000 s. 20.
Any agreements made by an unauthorised person may be unenforceable (FSMA 2000 ss. 26–28).
The unauthorised person may be subject to a restitution order, requiring them to compensate affected parties.
What are the differences between Premium and Standard Listings?
Premium Listing
Availability: Equity shares of commercial companies, closed-ended investment funds, and open-ended investment companies
Regulatory Requirements: Must comply with extra investor protections and governance requirements
Investor Protection: Higher (“super-equivalent”) standards
Purpose: Enhances investor confidence and maintains LSE’s reputation as a premier capital market
Standard Listing:
Availability: All issuers of securities, including bonds and derivatives
Regulatory Requirements: Complies with minimum UK and international requirements
Investor Protection: Lower regulatory requirements
Purpose: More flexible entry requirements
What are the eligibility requirements for listing on the UK stock market?
The eligibility requirements apply to all applicants seeking listing and admission to trading of their shares.
Once admitted, many of these requirements must be adhered to on an ongoing basis.
The requirements are outlined in:
LR 2 – General listing requirements for all applicants.
LR 6 – Additional requirements for Premium Listings.
LR 14 – Additional requirements for Standard Listings.
Why are Premium Listings subject to additional requirements?
To increase investor protection.
To enhance confidence in the UK financial markets.
These extra requirements are known as “super-equivalent” obligations, as they exceed the minimum international standards.
What is the difference between a Premium and a Standard Listing?
Premium Listing
Regulatory Requirements: Stricter governance and transparency rules
Investor Protection: Higher (“super-equivalent”)
Purpose: Attract long-term institutional investors
Adviser Requirement: Sponsor required
Standard Listing
Regulatory Requirements: minimum UK/EU compliance requirements
Investor Protection: Lower regulatory requirements
Purpose: More flexible entry requirements
Adviser Requirement: No adviser required
Premium Listing
Stricter governance and transparency rules.
Higher (“super-equivalent”) investor protection standards.
Attracts long-term institutional investors.
Requires an FCA-approved sponsor.
Standard Listing
Minimum UK/EU compliance requirements.
More flexible entry requirements.
Suitable for companies wanting simpler regulatory oversight.
No requirement for an adviser or sponsor.
What are the key eligibility criteria for both Premium and Standard Listings?
General Requirements (Both Premium & Standard Listings)
Shares must be fully paid and freely transferable (LR 2.2.4R).
Minimum market capitalisation of £700,000 (LR 2.2.7R(1)).
Prospectus or listing particulars must be FCA-approved (LR 2.2.10R, FSMA s.85).
At least 25% of shares must be available for public trading (free float) (LR 6.14.2R, LR 14.2.2(3)R).
Additional Premium Listing Requirements
At least 75% of the business must have a historic revenue-earning record (LR 6.2.1R).
Company must carry on an independent business (LR 6.4.1R).
Issuer must have operational control over its business (LR 6.6.1R).
A clean working capital statement is required (LR 6.7.1R).
Pre-emption rights must be provided to shareholders (LR 6.9.2R).
Warrants/options must not exceed 20% of issued share capital (LR 6.8.1R).
A sponsor is required (LR 8.2.1R(1)).
Additional Standard Listing Requirements
No trading record requirement.
No pre-emption rights required.
No restriction on warrants/options issued.
No sponsor or adviser required.
What are the requirements for financial disclosures in the listing process?
Companies must provide at least 3 years of audited financial statements.
Financial statements must be:
Independently audited.
Unmodified (no significant issues raised by auditors).
Cover a period ending no more than 6 months before the prospectus date.
Premium-listed companies must also show that at least 75% of their business is revenue-generating over this period.
What is a “Free Float Requirement,” and why is it important?
Free float refers to the percentage of shares available for public investors to trade.
Both Premium and Standard Listings require at least 25% of shares to be publicly available (LR 6.14.2R, LR 14.2.2(3)R).
Importance: Ensures liquidity and price stability in the market.
What are the key eligibility criteria for Premium Listings?
Premium Listing
Transferability of Shares Shares must be fully paid and freely transferable (LR 2.2.4R)
Market Capitalisation Minimum £700,000 expected at listing (**LR 2.2.7R(1) **)
Prospectus Requirement Prospectus or listing particulars must be FCA-approved (LR 2.2.10R, LR 3.3.2R, FSMA s.85)
Financial Information - Must have published/ filed accounts for at least 3 years ending no more than 6 months before the prospectus date. - Accounts must be independently audited with an unmodified audit opinion (LR 6.2.1R(1)).
Trading Record Requirement At least 75% of the issuer’s business must have a historic revenue-earning record for the required audited period (LR 6.2.1R).
Independent Business Issuer must operate an independent business as its main activity (LR 6.4.1R).
Controlling Shareholder If there is a controlling shareholder, the issuer must: - Demonstrate independent business operations (LR 6.4.1R). - Have a controlling shareholder agreement (LR 9.2.2AD).
Operational Control Issuer must demonstrate operational control over its business (LR 6.6.1R).
Working Capital Statement A clean working capital statement is required (LR 6.7.1R).
Pre-emption Rights Shareholders must have pre-emption rights (LR 6.9.2R).
Warrants & Options Warrants/options to subscribe for shares must not exceed 20% of issued share capital (excluding employee schemes) (LR 6.8.1R).
Free Float Requirement At least 25% of shares must be available to public investors (LR 6.14.2R).
Adviser Requirement A Sponsor is required (LR 8.2.1R(1)).
What are the key eligibility criteria for Standard Listings?
Standard Listing
Transferability of Shares Shares must be fully paid and freely transferable (LR 2.2.4R)
Market Capitalisation Minimum £700,000 expected at listing (**LR 2.2.7R(1) **)
Prospectus Requirement Prospectus or listing particulars must be FCA-approved (LR 2.2.10R, LR 3.3.2R, FSMA s.85)
Financial Information - Must provide audited financial information for the last 3 financial years (or the period the issuer has been in operation). - Must disclose an audit report for each year (PRR 2.2, section 18, UK Regulation 2019/980).
Trading Record Requirement No trading record requirement.
Independent Business If there is a controlling shareholder, the issuer must: - Demonstrate independent business operations (LR 9.2.2AB, LR 9.2.2AD). - Have a controlling shareholder agreement.
Operational Control Issuer must demonstrate operational control over its business (LR 9.2.2IR).
Working Capital Statement A working capital statement is required (PRR 3.1, Annex III).
Pre-emption Rights No pre-emption rights required.
Warrants & Options No restriction on the number of warrants/options issued.
Free Float Requirement At least 25% of shares must be available to public investors (LR 14.2.2(3)R).
Adviser Requirement No adviser required.
Why do Premium Listings have stricter rules than Standard Listings?
Premium Listings are designed for large, stable, high-quality companies.
The higher regulatory requirements (“super-equivalent”) provide stronger investor protection.
They ensure compliance with corporate governance standards, making UK markets attractive to global investors.
What are the requirements for financial disclosures in the listing process?
Companies must provide at least 3 years of audited financial statements.
Financial statements must be:
Independently audited.
Unmodified (no significant issues raised by auditors).
Cover a period ending no more than 6 months before the prospectus date.
Premium-listed companies must also show that at least 75% of their business is revenue-generating over this period.
What are the key differences in governance requirements for Premium vs. Standard Listings?
Premium Listing
Pre-emption Rights Required
Working Capital Statement Clean statement required
Warrants & Options Cap Max 20% of share capital (excluding employee schemes)
Sponsor/Adviser Requirement Sponsor required
Standard Listing
Pre-emption Rights Not required
Working Capital Statement Regular statement required
Warrants & Options Cap No cap
Sponsor/Adviser Requirement No adviser required
Key Takeaways for Exam Preparation
All listings require a minimum £700,000 market capitalisation and free transferability of shares.
Premium Listings have stricter rules than Standard Listings, including trading history and governance requirements.
At least 25% of shares must be available for public trading (“free float requirement”).
Premium-listed companies must have a sponsor, while Standard-listed companies do not.
Premium Listings require pre-emption rights for shareholders; Standard Listings do not.
Only Premium Listings have a cap on warrants/options (20% of share capital).
Premium Listings require a clean working capital statement, while Standard Listings do not.
What is the listing process for a company seeking admission to the Official List?
The listing process involves multiple preliminary discussions with the FCA and can take weeks or months before final approval.
The final listing application must be submitted 48 hours before the proposed listing date.
However, draft versions (especially the prospectus or listing particulars) are usually reviewed and discussed with the FCA over an extended period.
What documents must be submitted for a formal listing application?
A formal listing application is made to the FCA’s Issuer Management Team at least two business days before the application date (LR 3.3.2R) and must include:
Mandatory documents for all applications:
Application for Admission of Securities to the Official List.
Prospectus or listing particulars approved by the FCA.
Circular published in connection with the application (if applicable).
Supplemental prospectus or listing particulars (if applicable).
Written confirmation of the number of shares to be allotted.
RIS announcement (if no prospectus or listing particulars are required), detailing the number of shares issued and the circumstances of their issue.
Additional documents required on the application hearing date (if relevant):
Shareholder statement (if a new class of shares is being listed for the first time).
Completed pricing statement (for certain types of share issues, e.g., placing, open offer, vendor consideration placing, or issue out of treasury).
What happens once the FCA approves the listing application?
Once all documents are approved, Listing Rule requirements are met, and fees are paid, the FCA will:
Announce its decision via a market announcement.
Admission to listing becomes effective at that time.
What are the different methods of issuing securities to the public?
There are several ways a company can issue securities (shares or bonds) to the public.
- Capitalisation Issues (Bonus Issues)
The company issues fully paid shares to existing shareholders for free.
Funded by capitalising company reserves.
Used when the share price has risen too high, reducing share liquidity. - Exchanges and Conversions
New securities replace old ones, usually due to:
Mergers, takeovers, or restructuring.
Debt-to-equity conversions (e.g., bondholders receive shares). - Exercise of Options or Warrants
Investors with options or warrants have the right to buy new shares at a fixed price.
These rights expire after a certain period if not exercised. - Intermediaries Offers
Shares are sold to financial intermediaries, who then allocate them to private clients (retail investors). - Introductions
A company lists existing shares for the first time without issuing new shares.
No new capital is raised. - Offers for Sale or Subscription
Offer for Sale: The company first sells shares to an issuing house, which then offers them to the public.
Offer for Subscription: Investors subscribe directly to the company, which issues new shares. - Open Offers
Similar to a rights issue, but the rights cannot be traded.
Existing shareholders are given the opportunity to buy new shares at a discount. - Placings
The company sells shares to institutional investors via a stockbroker or issuing house.
Typically used for faster fundraising with lower regulatory requirements. - Rights Issues
New shares are offered to existing shareholders in proportion to their holdings.
Shareholders can trade their rights to buy shares in the open market.
The issue is often underwritten to ensure the company raises the required capital. - Vendor Consideration Issues
Instead of paying cash for an acquisition, the company issues shares to the vendor.
Used in mergers and acquisitions to preserve company cash reserves. - Other Issues
Includes shares issued under employee share schemes or other special circumstances. - Underwriting (Not a Public Issue, but a Common Practice)
Companies enter underwriting agreements to ensure a minimum number of shares are sold.
Underwriters commit to purchasing unsold shares in return for a fee (usually 3% to 7% of the issue price).
Helps reduce risk in large share issues.
Why do companies use underwriting for share issues?
Ensures that all shares offered are sold.
Reduces the risk that the company fails to raise the necessary capital.
Underwriters sell any shares they acquire on the open market later.
Why does a company need advisers when considering a listing?
Companies considering a listing must or should appoint various advisers to ensure compliance, manage investor relations, and oversee legal and financial aspects.
Key Takeaways for Exam Preparation
The final listing application must be submitted to the FCA at least 48 hours before the listing date, but discussions can last months.
A complete listing application must include a prospectus, an application form, and details of shares to be issued.
Once approved, admission becomes effective immediately after the FCA’s announcement.
There are multiple ways for companies to issue shares, including capitalisation issues, rights issues, open offers, and placings.
Underwriting ensures a minimum number of shares are sold, reducing risk for the issuing company.
What does a Corporate Broker do?
Acts as a bridge between the company and investors after listing.
Provides market insights and investor feedback to management.
Many brokers have analysts who publish research reports on the company.
Helps market the shares to institutional investors during fundraising (book-building process).
Some firms act as both sponsor and broker, but this can create conflicts if price-sensitive information is shared between the two roles.
What is the role of a Sponsor in the listing process?
A sponsor is mandatory for all premium-listed companies and required for certain standard-listed company transactions (LR 8.2.1R, 8.2.1AR).
The sponsor acts as the primary link between the company, the FCA, and the LSE.
They ensure the company complies with listing requirements and helps navigate regulatory issues.
What is the role of Financial PR Consultants?
Help raise and maintain the company’s public profile before and after the listing.
Manage investor relations and media interactions.
Ensure all company statements comply with FSMA 2000 and UKLA disclosure rules.
Play a key role in the fundraising and book-building phases.
What is “book-building,” and how does it work?
Book-building is the process of gathering non-binding investment commitments before setting the final share price.
It helps determine demand for shares and guides pricing decisions.
Investors provide indications of interest without knowing the final price.
What role do Lawyers play in the listing process?
Two law firms are usually involved:
One advising the company.
One advising the sponsor.
Company lawyers lead the drafting of listing documents.
Responsible for verification – checking all factual statements in prospectuses.
Directors have personal liability for any false or misleading statements in listing documents.
What is the role of the Reporting Accountant?
Usually separate from the company’s auditor but may come from the same firm.
Reviews the company’s financial history, internal controls, and accounting systems.
Provides reports for investors and sponsors.
What are the different types of reports prepared by the Reporting Accountant?
Long Form Report
A detailed analysis of the company’s financial performance, management, and risks.
Not published, but used by directors and the sponsor to draft the prospectus.
Short Form Report
A summary version of the Long Form Report.
Included in the prospectus for investors.
Working Capital Report
Covers the company’s cash flow and funding needs for 12–24 months post-listing.
Ensures the company has sufficient capital for operations after listing.
Important for investor confidence but excess cash reserves can reduce share price.
What is the role of Share Registrars?
Ensure the company complies with CREST electronic trading standards.
Maintain the register of shareholders.
Prepare mailing lists for investor communications and company announcements.
Process dividends and other shareholder payments.
What is “Verification,” and why is it important?
A painstaking process of checking factual statements in listing documents.
Ensures that information provided to investors is accurate and reliable.
Requires searching company archives for agreements, reports, and supporting documents.
Protects directors from liability under financial regulations.
Why is it important for a company to have a strong advisory team?
Ensures compliance with FCA and LSE regulations.
Helps successfully market the shares to investors.
Reduces legal and financial risks.
Provides strategic guidance for a smooth listing process.
What are some additional advisers a company might need?
Surveyors – Value properties and assets.
Security Printers – Print share certificates and secure documentation.
Insurance Brokers – Manage corporate risk and liability.
Trademark and Patent Attorneys – Protect intellectual property rights.
Key Takeaways for Exam Preparation
Sponsors are mandatory for Premium Listings and required for some Standard Listing transactions.
Corporate brokers help market shares, interact with investors, and manage book-building.
Financial PR consultants play a vital role in maintaining investor confidence.
Lawyers handle verification, ensuring directors avoid liability for false statements.
Reporting accountants provide key financial reports, including long-form, short-form, and working capital reports.
Share registrars manage electronic trading compliance and shareholder records.
What are the UK Prospectus Regulations, and how did they originate?
The Prospectus Rules were originally derived from European legislation under the Prospectus Directive.
The Prospectus Regulations 2005 (SI 2005/1433) required EU member states to create rules on content, approval, and publication of prospectuses.
In the UK, the FCA was delegated responsibility for enforcing these rules.
On 21 July 2019, the Prospectus Regulation Rules (PRR) replaced the old Prospectus Rules through the FCA Prospectus Regulation Rules Instrument 2019 (FCA 2019/80).
Following Brexit, the EU Prospectus Regulation was “onshored” into UK law with some amendments and is now referred to as the UK Prospectus Regulations.
When is a prospectus required under UK law?
A prospectus must be prepared, approved by the FCA, and published in two situations:
1️⃣ Public Offer of Securities (PRR Art 3.1)
When securities are offered to the public in the UK.
2️⃣ Admission of Securities to a UK Regulated Market (PRR Art 3.3)
When securities are admitted to trading on a regulated market (e.g., LSE Main Market).
What constitutes an “offer to the public” under the UK Prospectus Regulation?
An offer to the public is defined as any communication that:
Provides sufficient details about the securities.
Sets out the terms of the offer.
Allows investors to decide whether to buy or subscribe.
Applies to both private and public companies.
Can be made in any form and by any means (e.g., online, newspapers, intermediaries).
What are the key exemptions from the prospectus requirement?
Certain transactions do not require a prospectus under UK law.
Exemptions that apply to both public offers and regulated market listings:
Shares issued in substitution for existing shares.
Takeovers, mergers, or divisions.
Scrip dividends (shares issued in place of cash dividends).
Employee share offers.
Exemptions specific to public offers:
Offers to fewer than 150 investors (excluding “qualified investors”) in the UK within 12 months.
Offers made only to qualified investors (e.g., institutional investors, large companies).
Minimum investment per investor of at least €100,000 (or equivalent).
Securities with a denomination of at least €100,000.
Offers where total consideration over 12 months is under €8 million.
Offers through a financial intermediary in specific circumstances.
Exemptions specific to regulated market listings:
Total issuance of new securities is under 20% of the existing listed securities.
Conversion or exchange of securities where less than 20% of issued securities are affected.
Fully paid securities of the same class as already listed securities.
Securities already traded on another UK regulated market for at least 18 months.
What is the process for FCA approval of a prospectus?
A draft prospectus must be submitted to the FCA for approval (PRR 3.1.1 UK).
Timelines for submission:
1. If the company does not have listed shares and has never had a prospectus approved by the FCA:
At least 20 working days before the intended approval date.
Must include Form A, relevant fees, and draft supporting documents (PRR 3.1.2 UK).
2. If the company already has listed shares and has had a prospectus approved:
At least 10 working days before the intended approval date.
Must include Form A, relevant fees, and draft supporting documents.
Final versions of documents must be submitted before midday on the approval date.
What are the content requirements for a prospectus?
A prospectus can be prepared as either:
A Single Document – The most common format.
A Three-Part Prospectus, which includes:
Registration Document – Details about the company (issuer).
Securities Note – Information about the securities being offered.
Summary Document – Key information in a concise format.
Contents of a Single Document Prospectus (PRR 2.2)
Table of contents.
Summary (must comply with Article 7 of Regulation (EU) 2017/1129).
Risk factors (Article 16 of Regulation (EU) 2017/1129).
Detailed issuer and security information.
Registration Document (for Equity Securities)
Section 1: Persons responsible, third-party reports, and FCA approval.
Section 2: Statutory auditors.
Section 3: Risk factors.
Section 4: Information about the issuer.
Section 5: Business overview.
Section 6: Organisational structure.
Section 7: Operating and financial review.
Section 8: Capital resources.
Section 9: Regulatory environment.
Section 10: Trend information.
Section 11: Profit forecasts or estimates.
Section 12: Management and supervisory bodies.
Section 13: Remuneration and benefits.
Section 14: Board practices.
Section 15: Employees.
Section 16: Major shareholders.
Section 17: Related party transactions.
Section 18: Financial statements and position.
Section 19: Additional information.
Section 20: Material contracts.
Section 21: Documents available for inspection.
Key Takeaways for Exam Preparation
A prospectus is required when securities are publicly offered or admitted to a UK regulated market.
There are numerous exemptions from the prospectus requirement for small offerings, institutional investors, and limited securities issuances.
Prospectuses can be structured as a single document or a three-part prospectus.
The contents of a prospectus are extensive, covering financials, governance, and risk factors.
The FCA approval process varies depending on whether the company has previously had a prospectus approved.
Final versions of all documents must be submitted by midday on the approval date.
What are the eligibility criteria for admission to trading on the LSE?
- The application must cover all securities in that class
A company applying for admission must include all issued and proposed securities of the same class. - Compliance with other regulators and stock exchanges
The company must comply with any securities regulators or other stock exchanges where its securities are admitted. - Securities must be freely negotiable
All transferable securities must be freely tradable without restrictions. - Securities must be capable of being traded fairly and efficiently
The LSE will assess whether securities can be traded in a fair, orderly, and efficient manner. - The LSE has the right to refuse admission
Admission may be denied if:
The applicant’s situation may harm market integrity.
The applicant does not or will not comply with LSE standards.
The LSE imposes special conditions that the applicant fails to meet. - Companies must confirm compliance with the LSE’s market requirements
A company must confirm that it meets the eligibility criteria and requirements of the market it is applying to.
What role does the London Stock Exchange (LSE) play as a secondary market?
The LSE serves as a primary market by allowing companies to raise capital through IPOs and share issuance.
Once shares are issued, the LSE provides a secondary market where investors can buy and sell shares efficiently.
A liquid and efficient secondary market is essential because:
Investors can realise their investment whenever they choose.
This increases investor confidence, making the primary market more attractive.
Trading on the LSE is governed by: LSE rules and regulations & Conduct of business rules from the FCA.
What are the main equity trading systems operated by the LSE?
The LSE offers multiple trading services, catering to different types of securities and market liquidity levels.
1. SETS (Stock Exchange Electronic Trading Service)
LSE’s premier electronic trading platform.
Order-driven system with electronic trading and market maker liquidity.
Ensures guaranteed two-way prices.
Used for highly liquid stocks, including FTSE 100 and FTSE 250 securities.
- SEAQ (Stock Exchange Automated Quotation system)
Non-electronically executable quotation service.
Used mainly for fixed-income securities (bonds and gilts).
Market makers quote prices manually. - SETS Intra-day Auction
Midday price-forming auction mechanism.
Facilitates trading of large orders that might otherwise disrupt the market. - SETSqx (Stock Exchange Electronic Trading Service – Quotes and Crosses)
Designed for less liquid securities that don’t qualify for SETS.
Supports five daily electronic auctions at:
08:00, 09:00, 11:00, 14:00, and 16:35.
Continuous market making alongside auctions. - EQS (Equity Quote Service)
Market-making service for non-London listed equity securities.
Includes trading for international and alternative equity securities. - IOB (International Order Book)
A dedicated Depositary Receipt trading service.
Connects global investors in one time zone.
Primarily used for emerging market stocks listed as Depositary Receipts (DRs).
Key Takeaways for Exam Preparation
The LSE acts as both a primary and secondary market, facilitating IPOs and continuous trading.
SETS is the LSE’s main electronic trading system for liquid stocks.
SETSqx and SEAQ cater to less liquid securities and fixed-income struments.
The LSE offers five key trading systems, including IOB for Depositary receipts.
A strong secondary market improves capital-raising prospects for companies.
Why is the LSE’s secondary market important?
Allows investors to trade shares after issuance, making markets more liquid.
Enhances investor confidence in IPOs and new share issues.
Provides efficient price discovery, ensuring fair market pricing.
Supports institutional and retail investor participation.
What are the Admission and Disclosure Standards for companies listed on the LSE’s Main Market?
Companies listed on the LSE’s Main Market must comply with the LSE’s Admission and Disclosure Standards.
These standards mirror the general disclosure obligations in the CA’s Listing Rules.
Compliance with the Listing Rules generally ensures compliance with LSE standards.
The LSE introduced these standards to support market supervision and enforce transparency.
What is the role of the LSE Company Services Team in the admission process?
Processes applications for admission to trading.
Manages ongoing relationships with listed companies.
Does NOT review draft prospectuses, listing particulars, or circulars (this is handled by the FCA).
What are the settlement requirements for admission to trading?
Securities must be eligible for electronic settlement.
This ensures that securities can be transferred electronically through systems like CREST.
What are the communication requirements for listed companies?
Companies must provide contact details for an individual responsible for liaising with the LSE.
A company can appoint a designated representative to handle communication.
Issuers must ensure that all information provided to the LSE is:
Accurate, complete, and not misleading.
Open and honest in all dealings with the LSE.
Key Takeaways for Exam Preparation
Companies must comply with the LSE’s Admission and Disclosure Standards to maintain transparency and fair trading.
Compliance with the FCA’s Listing Rules generally ensures compliance with LSE standards.
The LSE can refuse admission if a company does not meet market integrity requirements.
Securities must be freely tradable and eligible for electronic settlement.
Companies must appoint a contact person for LSE communications and ensure that all disclosures are accurate.
Why are these Admission and Disclosure Standards important?
They support market transparency and investor confidence.
They ensure that all securities admitted to trading meet fair and orderly trading requirements.
They help prevent market abuse and misleading disclosures.
What are the key disclosure obligations for listed companies?
All listed companies must have adequate procedures, systems, and controls to ensure compliance with disclosure rules. (Listing Principle 1)
Premium-listed companies have additional disclosure responsibilities, including the duty to avoid creating or continuing a false market in their securities. (Premium Listing Principle 6)
Disclosure obligations are set out in:
UK Market Abuse Regulations (UK MAR 16–19).
Disclosure and Transparency Rules (DTR) 4 & 6.
What is the purpose of the UK Disclosure and Transparency Rules?
Ensure that investors have timely and accurate information.
Prevent market manipulation and insider trading.
Promote market integrity and investor confidence.
What is “inside information,” and how must it be handled?
Inside information is non-public information that could significantly affect a company’s share price.
Under UK MAR 17, listed companies must:
Publish inside information via a Regulatory Information Service (RIS) as soon as possible.
Keep publicly disclosed inside information on their website for at least five years.
Companies should establish a framework to control inside information, which includes:
Restricting access to inside information to only those who need it.
Implementing clear written procedures, systems, and policies for handling inside information.
Training employees on inside information policies.
What are the best practices for handling disclosure obligations?
Maintain a Disclosure Manual – A guide outlining disclosure responsibilities and processes.
Use a checklist to identify inside information – Helps ensure compliance with UK MAR requirements.
Establish a Disclosure Committee – Responsible for:
Reviewing whether information qualifies as inside information.
Deciding when and how to disclose information.
Ensuring consistency in disclosure decisions.
Approving announcements to the market.
If disclosure is delayed, ensure proper justification and record-keeping.
Why is the listing process time-consuming and costly?
The listing process often takes more than a year due to:
Extensive documentation and compliance requirements.
Significant due diligence and regulatory approvals.
If the listing process is stopped late in the process:
It wastes executive time and company resources.
The company may incur significant financial costs without completing the listing.
What are the risks associated with failing to comply with disclosure obligations?
Market Abuse Penalties – Failure to disclose inside information promptly can lead to FCA enforcement actions.
Loss of investor confidence – Investors may question the company’s transparency.
Share price volatility – Delayed or inaccurate disclosures can cause price swings.
Key Takeaways for Exam Preparation
Listed companies must comply with UK MAR and DTR rules to ensure market transparency.
Inside information must be disclosed via RIS immediately and kept available for at least five years.
Companies should have a Disclosure Manual, a checklist for identifying inside information, and a Disclosure Committee.
Failure to comply with disclosure rules can result in FCA penalties and loss of investor trust.
The listing process is complex, lengthy, and costly, requiring careful planning and resource allocation.
What are the requirements for an auditor’s report in a listed company?
The auditor’s report must include additional auditable sections (LR 9.8.10R), covering:
The directors’ going concern statement (LR 9.8.6R(3)).
Corporate governance provisions from the 2018 Governance Code (provisions 6 and 24–29) (LR 9.8.6R(6)).
Compliance with DTR 7.2.2, 7.2.3, and 7.2.7 regarding corporate governance disclosures.
What are the two market functions provided by the LSE?
Primary market to raise capital; and
secondary market for investor to buy and sell shares.
Why are applications to both the FCA and LSE required to list on the Main Market?
Application for listings is made to the UKLA. Admission to trading on the main market is made to the LSE. The main market, although teh largest, is not the only market where listed shares can be admitted and traded.
What are the key sources of financial reporting and disclosure obligations for listed companies?
Listed companies must comply with obligations from multiple sources, including:
Companies Act 2006 (CA2006).
Listing Rules (LR).
Disclosure and Transparency Rules (DTR).
Market Abuse Regulations (MAR).
What are the requirements for financial reporting?
Accounting Reference Date
If a company changes its accounting reference date, it must make a Regulatory Information Service (RIS) announcement as soon as possible (LR 9.6.20R).
Annual Financial Statements
Listed companies must publish their annual financial statements within four months of the financial year-end (DTR 4.1.3R).
Annual reports must be freely available for at least 10 years from the original publication date (DTR 4.1.4R).
Publication of Financial Statements
Annual reports must be:
Made available on the company’s website until the next annual report is published (CA2006 s. 430).
Filed with the FCA via the National Storage Mechanism (NSM).
Announced via an RIS, with details on where the financial statements can be viewed (LR 9.6.1R, LR 9.6.3R).
Half-Year Financial Statements
Interim (half-yearly) reports must be published within three months of the period-end.
What are the requirements for a Directors’ Remuneration Report?
Directors are legally required to prepare a remuneration report (CA2006 s. 420).
This requirement applies to all directors immediately before the period for filing the accounts.
Failure to prepare a remuneration report is a criminal offence, punishable by a fine.
Contents of the Remuneration Report
The report must include auditable information as required by the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.
Auditable parts of the report include:
Directors’ total remuneration, share options, and long-term incentive schemes.
Pensions and compensation for loss of office.
Approval of the Remuneration Report
A resolution to approve the remuneration report must be put forward at the AGM.
The vote is advisory – if shareholders reject it, directors’ pay is still valid (CA2006 s. 439).
Listed companies must file their remuneration report with Companies House along with the auditor’s report on its auditable parts (CA2006 s. 447).
What are the requirements for a Directors’ Report in a listed company?
Directors must disclose details of any acquisition of the company’s own shares in their report.
What are the obligations when an auditor resigns from a listed company?
Resigning auditors must file a statement of circumstances explaining their resignation, even if there are no issues to report (CA2006 s. 519).
The statement must be deposited at the company’s registered office and filed with Companies House.
If the company is subject to major audit regulations, it must notify the Financial Reporting Council (FRC) and include:
The auditor’s statement of circumstances (if they report any concerns).
If the auditor does not raise concerns, the company must explain why the audit appointment ended (CA2006 s. 523(2)).
What are the disclosure requirements for dividends?
If directors approve a dividend or other distribution, the company must make an RIS announcement as soon as possible, including:
Net amount payable per share.
Payment date.
Record date (the date shareholders must be on the register to receive the dividend).
Tax treatment (e.g., foreign income dividend elections and income tax rates) (LR 9.7A.2R).
What rights do shareholders have regarding audit concerns?
Shareholders holding at least 5% of voting rights OR at least 100 shareholders with a minimum £100 nominal holding each can:
Require the company to publish a statement about the audit on its website.
Raise audit concerns for discussion at the next AGM (CA2006 s. 527(1)).
Key Takeaways for Exam Preparation
Listed companies must publish annual financial statements within four months of year-end and retain them for 10 years.
Dividend payments must be disclosed via an RIS announcement with full payment details.
Directors’ remuneration reports must be filed with Companies House, and an advisory shareholder vote is required.
Auditors resigning from a listed company must file a statement explaining their departure.
Shareholders holding 5% of voting rights can demand an audit-related statement to be published before an AGM.
Companies must provide a summary Strategic Report but must send full accounts upon request.
What is UK MAR, and how does it regulate the disclosure of inside information?
UK Market Abuse Regulations (UK MAR) regulate market abuse, information disclosure, and insider trading.
UK MAR was originally an EU regulation but was onshored and amended post-Brexit.
UK MAR applies alongside Disclosure and Transparency Rules (DTR):
DTR 4 & 6 apply to shares listed on a Recognised Investment Exchange (RIE).
DTR 5 applies to shares on both RIEs and prescribed markets.
What constitutional changes must be disclosed to the market?
Listed companies must notify the market of significant constitutional or corporate changes, including:
Appointment, resignation, or removal of directors or auditors.
Change of company name.
Change of accounting reference date.
Results of shareholder resolutions at general meetings.
Material changes to the company’s trading prospects.
Corrections or updates to market expectations if different from prior guidance.
What are the requirements for issuing new securities in a listed company?
Whenever a listed company issues more securities, the new securities must be listed and admitted to trading.
Companies with frequent share issuances (e.g., those with employee share schemes) can use a block listing to simplify administration.
Block Listing Process
A pool of shares is pre-listed and admitted to trading.
Companies submit block listing returns every six months, detailing how many shares have been issued from the pool.
How must inside information be disclosed?
Inside information must be published via a Regulatory Information Service (RIS) as soon as possible (UK MAR 17(1)).
Companies must retain published inside information on their website for at least five years.
Inside Information Disclosure Can Be Delayed If (MAR 17(4)):
Immediate disclosure would harm the company’s legitimate interests.
Delayed disclosure would not mislead investors.
The information remains confidential until disclosed.
If disclosure is delayed, the company must:
Notify the FCA immediately after the information is disclosed.
Provide an explanation for the delay if requested by the FCA.
Definition of Inside Information (UK MAR 7(1))
Precise and non-public information.
Relates directly or indirectly to the company.
Could significantly affect the share price.
A reasonable investor would consider it important in making an investment decision.
If inside information is shared selectively, public disclosure must follow:
Planned disclosures: Information must be published simultaneously.
Accidental disclosures: Information must be published as soon as possible (UK MAR 17(8)).
What are the obligations for managing inside information?
Companies must implement controls to limit access to inside information.
A framework should be established to restrict access only to those who need it.
Companies must maintain insider lists (UK MAR 18):
Deal-specific (event-based) insider lists.
Permanent insider lists (for individuals assumed to always have inside information).
Requirements for Insider Lists:
Must be in electronic form and comply with UK MAR regulations.
Must be retained for at least five years.
Must be available for FCA inspection upon request.
Must include:
Identity of each insider.
Reason for inclusion.
Date and time they accessed the information.
Date the insider list was created.
Updates to Insider Lists Must Include:
Changes to inclusion reasons.
Dates new insiders are added.
Dates insiders are removed from the list.
Insiders must acknowledge their duties in writing, confirming they:
Understand their legal and regulatory obligations.
Are aware of insider dealing and disclosure penalties.
What is the role of a Disclosure Committee?
Not mandatory but highly recommended.
Manages decisions on disclosure and delayed disclosure.
Ensures that disclosure decisions are:
Made consistently.
Follow a structured process.
Comply with FCA and UK MAR regulations.
If disclosure is delayed, the company must:
Appoint responsible individuals to make the decision.
Monitor confidentiality during the delay period.
Ensure a record of the decision is maintained.
What are the requirements for summary financial information?
Listed companies may send a Strategic Report and supplementary material to shareholders instead of full accounts.
However, any shareholder who receives summary financials can request a full copy of the statutory accounts (CA2006 s. 426).
The Strategic Report must include:
Earnings per share (EPS) (LR 9.8.13R).
Other key financial disclosures under CA2006 s. 426A.
Key Takeaways for Exam Preparation
New securities must be listed and admitted to trading; block listings simplify frequent share issuances.
Companies must disclose significant constitutional changes, including director changes and trading updates.
Inside information must be disclosed immediately via RIS unless a delay is justified under UK MAR.
Companies must maintain insider lists, ensuring proper access control and FCA compliance.
A Disclosure Committee helps manage compliance with market abuse and disclosure rules.
Who is a PDMR (Person Discharging Managerial Responsibilities)?
A PDMR is a person in an issuer who meets one of the following criteria (MAR 1(13) & (25)):
A member of the administrative, management, or supervisory body of the company.
A senior executive (not a director) who:
Has regular access to inside information.
Has the power to make managerial decisions affecting the company’s future development and business prospects.
PDMRs are determined based on their role and responsibilities, not just their contractual position (DTR 3.1.2A).
All directors are automatically PDMRs, but PDMRs may also include senior executives who are not directors.
Who is a PCA (Person Closely Associated) with a PDMR?
A PCA is anyone who has a close relationship with a PDMR (MAR 3(1)(26)):
Individuals:
Spouse or partner (recognized under national law).
Dependent children.
Relatives who have lived in the same household for at least one year.
Legal Entities:
Any company, trust, or partnership managed by the PDMR or PCA.
Entities controlled directly or indirectly by the PDMR or PCA.
Entities established for the benefit of a PDMR or PCA.
Entities whose economic interests are substantially the same as a PDMR or PCA.
What are the disclosure obligations for PDMRs and PCAs?
PDMRs must notify both the FCA and the company of share transactions they or their PCAs undertake (MAR 19(1)).
Notification deadlines:
PDMRs or PCAs must report transactions within three business days.
The company must disclose the transaction via RIS within two working days of receiving the notification (MAR 19(3)).
Companies must notify their PDMRs in writing about their obligations (MAR 19(5)).
PDMRs must notify their PCAs in writing and keep a record of the notification (MAR 19(5)).
Threshold for notification:
Transactions must be disclosed once the total exceeds €5,000 in a calendar year.
Transactions below €5,000 can be disclosed voluntarily (MAR 19(8)).
FCA Notification:
PDMRs must submit disclosures using the prescribed FCA template (MAR 19(6)).
Can be submitted online via the FCA’s Market Oversight Portal.
What are the rules on closed periods for PDMRs?
PDMRs cannot trade in company securities during closed periods (MAR 19(11)).
A closed period is the 30 days before the announcement of:
Annual financial results.
Half-year financial results.
Preliminary full-year results count as an announcement if they contain all key financial details.
Trading before quarterly results or trading updates is not automatically prohibited but could be considered insider dealing.
What are the major shareholder disclosure requirements?
The purpose of DTR 5 is to disclose who controls voting rights in a listed company.
Major shareholders must notify the company when their holdings reach, exceed, or fall below specific thresholds.
Disclosure thresholds:
UK issuers: 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%, and each 1% thereafter.
Non-UK issuers: 5%, 10%, 15%, 20%, 25%, 30%, 50%, and 75%.
Thresholds can be passed due to:
Buying or selling shares.
Issuer events (e.g., capital reductions, new share issues).
Types of holdings that require disclosure (DTR 5.1.1R – 5.3.1R):
Direct or indirect shareholdings with attached voting rights.
Financial instruments giving the right to acquire shares with voting rights.
Other financial instruments with an economic effect similar to holding shares.
Obligation to aggregate holdings:
If a person holds shares directly and indirectly or via different financial instruments, they must aggregate them to determine if they exceed disclosure thresholds (DTR 5.1.2R).
Holdings must also be aggregated with controlled undertakings.
When disclosure must be made:
The shareholder must notify the company within two trading days (four days for non-UK issuers) (DTR 5.8.3R).
Companies must notify the market via RIS without delay.
Disclosure format:
Shareholders must use the FCA’s TR-1 form (available on the FCA website) for disclosure.
Electronic filing with the FCA is required if the shares are admitted to trading on a UK regulated market (DTR 5.9.1R).
Exemptions from disclosure obligations (DTR 5.1.3R):
Shares held for clearing and settlement within a settlement cycle.
Shares held by a custodian or nominee who can only vote under written instructions.
Market maker holdings below 10%.
Credit institutions or investment firms holding shares in a trading book under 5%.
Shares held as collateral where the collateral taker has not declared an intention to vote.
What information must be disclosed in major shareholder notifications?
DTR 5.8.1R requires the notification to include:
The shareholder’s resulting voting rights percentage.
The chain of controlled undertakings holding the shares (if applicable).
The date when the threshold was reached or crossed.
The identity of the shareholder and any person who controls the voting rights.
Listed companies must disclose their total voting rights at the end of each calendar month if there have been any changes (DTR 5.6.1R).
Which of the following transactions will trigger a notification obligation under DTR?
a Sale of shares taking a holding from 5.9% to 5.1%.
b Purchase of shares taking holding from 3.9% to 4.1%.
c Company purchasing and cancelling shares held by shareholder A resulting in shareholder B’s holding increasing from 2.9% to 3.0%.
d Sale of shares taking a holding from 5.1% to 4.9%.
b Purchase of shares taking holding from 3.9% to 4.1%.
c Company purchasing and cancelling shares held by shareholder A resulting in shareholder B’s holding increasing from 2.9% to 3.0%.
d Sale of shares taking a holding from 5.1% to 4.9%.
What is the UK Corporate Governance Code?
The UK Corporate Governance Code (the “Governance Code”) is a guide to best practice in corporate governance.
It applies to listed companies but is not mandatory.
Companies must either comply with the Code or explain why they have deviated from it (“comply or explain” approach).
The Code was last updated in July 2018 to focus on principles-based governance rather than a “box-ticking” approach.
What is the “Comply or Explain” approach?
Listed companies must either:
Comply with the Code’s principles and provisions.
Explain any departures from the Code, providing:
Justification for the deviation.
Alternative governance measures adopted - The approach ensures flexibility, acknowledging that different companies may have different governance needs due to:
Size.
Shareholder mix.
Industry sector.
Reporting under “Comply or Explain”:
Companies must ensure high-quality reporting when:
Demonstrating how they implement the Code’s principles.
Explaining why they do not comply with certain provisions.
Key Takeaways for Exam Preparation
PDMRs include directors and senior executives with access to inside information.
PCAs include spouses, dependent children, close relatives, and controlled entities.
PDMRs and PCAs must report share transactions over €5,000 within three business days.
Companies must disclose PDMR transactions to the market within two business days.
PDMRs cannot trade in company shares during closed periods (30 days before financial reports).
Major shareholders must notify when they reach or cross specific voting rights thresholds (3% for UK issuers).
Disclosure obligations apply to direct holdings, financial instruments, and voting agreements.
Notifications must be made to the issuer and FCA using Form TR-1.
What are the key principles of the 2018 UK Corporate Governance Code?
The 2018 update significantly revised and condensed the Code, focusing on long-term sustainable success.
Key principles include:
Board leadership and company purpose – Ensuring a strong, effective board that promotes long-term value.
Division of responsibilities – Clearly defining roles of executives, non-executives, and the chair.
Composition, succession, and evaluation – Ensuring a diverse and effective board with regular performance reviews.
Audit, risk, and internal control – Maintaining strong financial reporting, risk management, and internal controls.
Remuneration – Ensuring fair and transparent executive pay policies.
What guidance has the FRC published to assist directors in applying the Governance Code?
Guidance on Board Effectiveness (July 2018)
Helps boards apply governance principles effectively.
Guidance on Audit Committees (April 2016)
Outlines best practices for audit committees.
Audit Tenders: Notes on Best Practice (February 2017)
Provides guidelines for selecting auditors in a competitive process.
Guidance on Risk Management, Internal Control and Related Financial and Business Reporting (September 2014)
Helps companies manage risks and ensure effective internal controls.
Guidance on the Strategic Report (July 2018, with supplemental guidance in May 2020)
Provides best practices for preparing a company’s Strategic Report.
Corporate Culture and the Role of Boards (July 2016)
Emphasises the role of corporate culture in governance.
AGMs: An Opportunity for Change (October 2020)
Suggests ways to improve Annual General Meetings (AGMs).
Improving the Quality of “Comply or Explain” Reporting (February 2021)
Encourages more meaningful explanations when companies deviate from the Code.
Key Takeaways for Exam Preparation
The UK Corporate Governance Code is a principles-based framework promoting best practice in corporate governance.
Listed companies must comply or explain why they have deviated from the Code’s provisions.
The 2018 update streamlined the Code to focus on long-term sustainable success.
The FRC has issued multiple guidance documents to assist boards in governance practices.
Effective governance ensures accountability, enhances investor confidence, and promotes ethical leadership.
What is the purpose of apply or explain?
It is recognised that although the code represents best practices in the field of corporate governance one size does not fit all and companies should be able to depart from teh code provisions but should explain why that approach is appropriate.
Why is the UK Corporate Governance Code important?
Ensures accountability – Boards are responsible for long-term corporate success.
Enhances investor confidence – Transparent governance practices attract institutional investors.
Supports market integrity – Helps maintain a fair and stable financial system.
Encourages responsible leadership – Ensures directors act in the best interests of the company and stakeholders.
What is the UK Stewardship Code?
The UK Stewardship Code (“Stewardship Code”) was introduced by the Financial Reporting Council (FRC) in July 2010 to enhance engagement between institutional investors and investee companies.
The latest update was in 2020.
The aim is to improve long-term, risk-adjusted returns for shareholders through responsible investment practices.
Who does the UK Stewardship Code apply to?
The Stewardship Code applies to three key groups:
Asset Owners – Organisations that own investment assets, including:
Pension schemes.
Insurers.
Foundations and endowments.
Local government pension pools.
Sovereign wealth funds.
Asset Managers – Firms that manage investments for UK clients or invest in UK assets.
Service Providers – Entities that support asset owners and managers in exercising stewardship, including:
Investment consultants.
Proxy advisors.
Data and research providers.
How does the UK Stewardship Code operate?
The Stewardship Code follows a “Comply or Explain” approach, similar to the UK Corporate Governance Code.
This recognises that best practices vary depending on the nature and size of an institution.
Signatories must apply or explain their adherence to the Code’s principles.
The Code is divided into two sets of principles:
12 principles for asset owners and asset managers.
6 principles for service providers.
What are the disclosure obligations for signatories of the Stewardship Code?
Signatories must publish a Stewardship Statement on their website that:
Explains how they apply each principle of the Stewardship Code.
Discloses the specific information required by the Code’s guidance.
Justifies any non-compliance with the principles.
If a signatory does not fully apply the Code:
They must explain why and disclose which elements they have not applied.
Why is the UK Stewardship Code important?
Encourages responsible investment – Ensures institutional investors play an active role in corporate governance.
Enhances corporate accountability – Investors help hold directors accountable for long-term success.
Aligns interests – Helps align shareholder and corporate objectives for sustainable growth.
Improves transparency – Public stewardship statements provide clarity for clients and stakeholders.
What are the responsibilities of institutional investors under the Stewardship Code?
Monitoring investee companies – Institutional investors must actively engage with the companies they invest in.
Guiding strategic planning – Major shareholders must help shape corporate strategy.
Holding directors accountable – Investors must hold executives responsible for their performance and governance.
Ensuring good corporate governance – Effective stewardship requires both company management and shareholder oversight.
What are the FCA’s requirements for UK asset managers regarding the Stewardship Code?
The FCA’s Conduct of Business Rules require UK asset managers to:
Publish a statement of commitment to the Stewardship Code.
Explain why they do not comply if they choose not to follow the Code.
These compliance statements help:
Investee companies understand investor expectations.
Asset owners evaluate and select asset managers.
Asset managers align with client expectations.
Key Takeaways for Exam Preparation
The UK Stewardship Code was introduced in 2010 to promote responsible investment and institutional investor engagement.
It applies to asset owners, asset managers, and service providers.
The Code operates on a “comply or explain” basis, allowing flexibility in implementation.
Institutional investors must actively monitor, engage with, and hold investee companies accountable.
UK asset managers must publish a stewardship statement or explain non-compliance under FCA rules.
Signatories must disclose how they apply the Code’s principles or justify deviations.
What is insider dealing?
Insider dealing is a criminal offence under Part V of the Criminal Justice Act 1993 (CJA1993).
It involves using price-sensitive, non-public information to trade securities for personal gain or to help others gain unfairly.
The law covers all securities (shares, debentures, derivatives, etc.) traded on a regulated market.
What are the three insider dealing offences under CJA1993?
CJA1993, Section 52, defines three main insider dealing offences:
Dealing in securities while in possession of inside information.
Encouraging another person to deal while in possession of inside information.
Disclosing inside information other than in the proper performance of an office, employment, or profession.
Who can be guilty of insider dealing?
Anyone with access to inside information – not just company employees.
Spouses of directors (if they use inside information).
Friends, family, or third parties who receive inside information and act on it
What qualifies as inside information?
The inside information must:
Be specific and relate to the company’s securities.
Not be public knowledge.
Significantly affect the share price if made public (CJA1993 s. 56).
Transactions covered under the law:
Trades on a regulated market (e.g., London Stock Exchange).
Deals through professional intermediaries.
Private deals (not involving a regulated market) are usually not covered.
“Significant effect on price” is not precisely defined in law, making enforcement complex.
What is the Proceeds of Crime Act 2002 (POCA 2002)?
POCA 2002 is a law aimed at confiscating criminally obtained assets.
It ensures criminals cannot use illegally acquired wealth and allows the authorities to recover assets for legitimate owners.
The key sections relevant to businesses are in Part 7, which deals with money laundering.
What are the legal defences against insider dealing under CJA1993?
CJA1993, Section 53, outlines defences against insider dealing charges:
The accused did not expect to make a profit based on the information.
The accused believed the other party also had the same inside information.
The accused would have traded anyway, even without the inside information.
Companies issue detailed guidance to help directors and senior executives avoid breaching insider dealing laws.
What constitutes money laundering under POCA 2002?
A person commits money laundering if they:
Conceal, disguise, convert, or transfer criminal property.
Enter into an arrangement to help someone keep or use criminal property.
Acquire, use, or possess criminal property.
Money laundering does not require a conviction for the original crime – authorities can still seize assets.
What are the obligations of businesses under POCA 2002?
Certain regulated businesses (e.g., banks, accountants, legal services, money transfer firms) must:
Have procedures to detect suspicious activity.
Train employees to identify and report money laundering.
Appoint a Money Laundering Reporting Officer (MLRO).
Employees must report any suspicions to the MLRO, who decides whether to report to authorities.
“Tipping off” is illegal – businesses cannot alert clients/customers that a report has been made.
Case Study: Walid Choucair & UBS Insider Dealing (2019)
Choucair and Abdel-Malek (a UBS senior compliance officer) were convicted of insider dealing:
Abdel-Malek passed inside information to Choucair.
Choucair made £1.4 million in illegal profits.
Both used pay-as-you-go mobile phones to avoid detection.
FCA’s legal action & penalties:
Choucair was sentenced to 3 years in prison.
A confiscation order of £3.89 million was imposed.
Legal costs of £403,552 were ordered to be paid.
What is the dematerialisation of transferable securities?
Dematerialisation refers to the elimination of paper share certificates, with all shares being held in electronic form.
This was introduced by the Central Securities Depositaries Regulations (CSDR) 2014, an EU directive.
CSDR Article 3(1) required all shares in listed companies to be electronic by 2023.
What is the current status of dematerialisation in the UK?
Following Brexit, the UK government paused implementation of the dematerialisation process.
In June 2020, the UK government confirmed that it would not implement the full settlement regime under CSDR.
However, CSDR Article 3(1) has been retained, while the implementation date (Article 76(2)) has been removed.
Uncertainty remains about whether UK-incorporated companies are still subject to Article 3(1), as it applies to issuers “established in the Union” (a term not clearly defined).
What was the UK Listing Review?
In November 2020, Lord Hill was appointed to review the UK Listing Regime.
The UK Listing Review Report was published in March 2021 and made 14 recommendations:
7 recommendations directed to the Financial Conduct Authority (FCA).
6 recommendations directed to HM Treasury (HMT).
1 recommendation directed to the Department for Business, Energy & Industrial Strategy (BEIS).
What were the key recommendations of the UK Listing Review?
For HM Treasury (HMT):
Consultation on revising the UK prospectus regime to improve capital-raising by UK companies.
For BEIS:
Consider the use of technology to improve investor involvement in corporate actions.
Review the outcome of the Law Commission’s study on intermediated securities.
For the FCA:
Various reforms to enhance the UK’s competitiveness as a global financial hub.
Why is the UK government reviewing the listing regime?
The UK is seeking to remain competitive in financial markets after Brexit.
Reforms aim to:
Attract more companies to list in London.
Improve access to capital for UK businesses.
Enhance investor participation through technology.
Key Takeaways for Exam Preparation
Dematerialisation refers to the shift from paper share certificates to electronic-only securities.
The UK paused implementation of dematerialisation post-Brexit, leading to uncertainty about its future.
The UK Listing Review (2021) aimed to improve the UK’s financial market competitiveness.
HM Treasury, FCA, and BEIS are considering changes to enhance capital-raising and investor engagement.
