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.