The FSA has warned all parties and shareholders in the propsoed Deutsche Borse takeover of the London Stock Exchange to consider the deal carefully as it could in the long-term affect the regulation of UK shares.
It is a rare occurence for the FSA to issuing any comment on a takeover deal, but a statement has been issued setting out all the key issues to take into account.
Callum McCarthy, chairman of the Financial Services Authority says while the FSA has no regard for the nationality of ‘entities’ it regulates – as was seen in the Banco Santander purchase of Abbey – it is advising parties of all the changes such a deal could eventually have implications for the wider UK regulatory system if the parent group decides in later years to locate the LSE as an EU “passported” entity.
"It cannot be certain that in the long term the new entity would choose to maintain its activities as an entity located and regulated in the UK. The services of the LSE could be provided from another EU Member State as a Recognised Investment Exchange (RIE) "passported" activity - that is through the provision of trading screens in the UK and with securities admitted to trading on a market operated from elsewhere. Such a move, were it to occur, would potentially have significant implications for various aspects of the wider regulatory regime,” says McCarthy.
"It is therefore worth stakeholders raising the question of how any bidder will address these issues. There are a number of ways in which stakeholders may be reassured about the longer term durability of the arrangements including, as some have suggested, having the parent company or "topco" located in the UK with its primary listing on the LSE.
"Those stakeholders who have an interest in the future of European financial markets will want to consider the issues presented here carefully," adds McCarthy.
In particular, the FSA chairman points out were the LSE to be regulated in another EU Member State, application of the listing regime and corporate governance requirements might ended up altered, depending on the rules of the parent group’s country of origin, as the FSA states current UK listing requirements go beyond what is actually required under EU directives.
Similarly, were the LSE to be managed from another country than the UK, it could see the FSA effectively demoted as the lead authority in any market abuse investigation of the stocks on the LSE’s passported markets, and could relegate the FSA to assisting overseas regulators and complexity to data gathering added to enforcement procedures, as any decision on whether to investigate a company - if it is thought a firm or individual has failed to follow regulatory requirements – would be the decision of the LSE owner’s home regulator.
"AIM, the LSE's market for smaller, growing companies, could also be operated as a passported market from another Member State. The regulatory authority of that Member State would then be responsible for the continuation of a regulatory regime which has been designed to be less burdensome to small companies and which is generally recognised as assisting AIM in becoming the most successful market of its type in Europe,” continues the statement.
All of this discussion is of course speculative as it is unknown whether the Deutsche Borse would choose to manage and regulate the LSE in Germany, however, the FSA believes LSE shareholders as well as brokering the deal and any firms who might be involved in LSE listing should consider not just the usual issues of a takeover but the impact this may have on the UK financial services industry as a whole.
"This is not a decision for regulators, but a decision for the exchange - taking into account the views of its stakeholders. In this context, it is not a question of the ownership of the exchange but the short and longer term intentions for its operations, corporate governance arrangements and the wider regulatory regime that needs to be considered,” suggests the FSA.IFAonline
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