Six months after the UK’s Financial Services Authority took on sweeping new enforcement powers, the City’s watchdog has already shown its teeth. But that’s all it’s done – shown them; it hasn’t bitten yet. When the authority assumed its full powers in December 2001 it announced a crackdown on poor corporate disclosure standards. But were these just empty threats or is the UK regulator really cleaning up the markets?
Many industry voices maintain that the UK market was already working pretty well before the arrival of the FSA, so they weren’t really expecting revolutionary change. ‘The market wasn’t dirty before, so there wasn’t much that needed to be cleaned up,’ argues Simon Brocklebank-Fowler, managing partner of financial PR firm Cubitt Consulting in London. And Chris Marsay, group manager of investor relations at the BOC Group, is with him on this: ‘I don’t think the arrival of the FSA has had much impact at all. But that’s not disappointing; it’s just what I expected. To say the market needed cleaning up would be over-dramatic.’
It’s too soon to judge the FSA’s role, let alone its effectiveness. But the very fact that it brings regulation of different market areas together under one umbrella has been welcomed in the City. Simplification and unification are certainly the way to go, most seem to believe, but it will take more than six months for people to decide whether the new authority is making any real difference.
For its part, the FSA certainly wants to be taken seriously. It has warned the City that it will use its disciplinary powers to promote clean and transparent behavior; and it will prosecute any individuals guilty of abusing the market.
This warning gave rise to what Ken Rushton, director of the UK Listing Authority at the FSA, describes as an ‘over-reaction’ in the financial markets. The new rules were said to be part of a campaign to levy fines and take scalps. Although the FSA never denied the existence of such a campaign, it did reassure the financial community that it wouldn’t take enforcement action in cases of inconsequential breaches. Rather, it would prosecute high-profile cases to ensure people knew where it drew the line on market abuse. ‘We are not going to investigate everything,’ confirms Rushton. ‘But I would hate it if people thought they could get away with minor breaches.’
The FSA is most concerned about cases where there is an intention to mislead shareholders. It was recently presented with an opportunity to show this concern. Iceland Group (a supermarket chain now known as the Big Food Group) had breached the listing rules on two occasions between December 2000 and January 2001 and it was censured for this by the FSA in April. The regulator found that the food retailer failed to notify the market, without delay, of price-sensitive information about changes in its trading performance on these occasions; and, in addition, it failed to take reasonable care to ensure that an announcement issued on December 13, 2000 was not misleading. (The misleading announcement was about the benefits of its merger with Booker.) The FSA described these as ‘very serious breaches’.
Given this seriousness, why a mere public censure rather than a real punishment? The answer is that since December the FSA has had full powers to fine companies and individuals for abuse of the listing rules, and to pursue cases of market abuse through civil or criminal proceedings, but any offenses before that date are only censurable. Thus the apparently rather toothless telling-off of Iceland. However, the authority still hopes this will provide an indication of how seriously it takes cases of market manipulation and, as a result, will dissuade others from behaving inappropriately.
Everyone’s on the look-out for scandals such as the selective disclosure transgressions of British Energy and Granada Media soon after the FSA took over the UKLA in 2000. British Energy briefed analysts in the middle of a trading day in September 2000, saying its second half would be worse than expected with a full-year loss and even a dividend cut. Within minutes of the briefing, British Energy’s shares dropped more than 25 percent as the professionals in the know dumped their shares and left those outside the loop nursing big losses.
Also in September 2000, Granada Media’s shares took a pasting after one of the leading media analysts was apparently briefed on worse than expected upcoming results. It wasn’t until the following morning that Granada issued a profits warning.
At the time, the FSA was paralyzed or unwilling to do anything, but now it seems more determined to ensure that companies don’t get away with selective briefings.
Pre and post
Rushton recognizes the distinction, especially in publicity terms, between pre and post-December 2001 cases. ‘There are a number of other cases coming to a conclusion now, but the pre-December ones won’t attract the same attention as the post-December ones.’ Only post-December ones will produce headline-grabbing news of big fines or even imprisonment. But Rushton gives no sense of an FSA champing at the bit to put people behind bars just to bolster its own credibility. And he’s in favor of issuing ‘warning letters’ as a first step in minor cases.
The first test cases are yet to come, notes Marsay, and only after will it be possible to judge the new authority’s effectiveness. Meanwhile, although Rushton says the ‘paranoia’ about a search for the guilty has calmed down, Andrew Hawkins, director general of the UK’s Investor Relations Society, has his doubts. ‘Rumors still persist and it’s believed that the FSA is looking for a scapegoat,’ says Hawkins. He accepts that the FSA is in a cleft stick: ‘If it doesn’t find any cases to prosecute, it’s going to be accused of being ineffective; but if it finds one case, that will be seen as a scalp.’
We’ve got a case
The FSA’s real test may come in the form of a case recently uncovered in the City. Investors are demanding an investigation into how an entrepreneur known as the Plumber turned a £100,000 private company into a £27 mn public group following a controversial £6 mn spread bet. Spread bets allow investors to bet on share price movements outside the City’s mainstream tax and disclosure regime. Regulators at the FSA are investigating whether company principals can bet on their own company’s shares, and are examining whether this particular series of transactions falls under its civil market abuse regime.
Market regulation focuses on issues of market manipulation, the creation of misleading impressions and the misuse of insider information. ‘There are problems of interpretation of the rules,’ recognizes Rushton. ‘There are still gray areas that need to be clarified to deal with ambiguities.’ These ambiguities are especially evident in the existing listing rules but Rushton expects the imminent ‘wider review’ of the rules, due to start in June, will fine-tune these.
‘The written rules for disclosure have hardly changed under the FSA regime,’ says Marsay. ‘Yet the involvement of the new UK regulatory authority means companies are likely to take extra care over compliance until enforcement standards become clear.’
This ‘extra care’ has sometimes been taken too far, with a number of companies deciding to reduce the volume of information they disclose on the advice of lawyers fearing a breach of regulations. For example, some companies have reduced the number of one-on-one meetings they have with analysts. ‘This isn’t necessarily a bad thing, since the idea is to make sure the same information is distributed to everyone at the same time,’ comments Peter King, a partner at City solicitors Linklaters & Alliance. ‘Beyond that, companies are now more careful about preparing their scripts for presentations,’ he adds.
At least one investor relations manager in Scotland agrees with King, based on the example of his own company: ‘We have changed our method of disclosure. We used to give a pre-briefing to analysts and fund managers but now we just make announcements through the stock exchange. We don’t have any one-on-one meetings; we just arrange group meetings.’ He confirms that he’s looking forward to the wider review of listing rules, which he expects to result in the new regime being simplified and put into ‘plain English.’
The arrival of the FSA on the City scene also meant the end of London’s Friday night drop, bringing some relief for financial PR companies. ‘This is a practice that some PR firms used to do because they were requested to by their clients, but with this regulation they feel protected and can say no without being subject to pressure,’ explains Brocklebank-Fowler.
The drop was an old City tradition which involved public relations officers nipping round the appropriate pubs on a Friday evening to whisper snippets of exclusive news about their clients to financial journalists – for use in the weekend papers on an utterly unattributable basis. Another director of a London communications firm blames the national newspapers for driving the seamy practice and is happy to see the end of it: ‘The Friday night drop meant we had to stay in the office on Friday until late in the evening whereas now we are free to leave at normal hours.’
The FSA took over the role of UK Listing Authority from the London Stock Exchange on May 1, 2000. When this happened, the Treasury asked the FSA to undertake a review of the arrangements for dissemination of price-sensitive information by listed companies and consider alternative methods of distribution. And here is where some revisions to the UK’s listing rules were born. These require all companies to issue their regulatory announcements by submitting them to a regulatory information service.
In this sense, a big change has been the end of the monopoly of the London Stock Exchange’s RNS and the introduction of a more competitive system. Companies such as Business Wire, Newslink, Pims, PR Newswire, Waymaker and Hugin are now also offering their services to listed companies which can choose the provider they consider offers the best technology service at the best price. Although during the first weeks of the new competitive system most listed companies just stuck with RNS, Rushton thinks that will change in time. ‘We were not expecting that companies would change their service providers overnight.’
It’s too soon to judge how well the new dissemination system will work; and, as it has been just six months since the FSA has gained full powers, it’s also too soon to judge how effective the new market watchdog will turn out to be. Will it be toothless or ruthless?
The jury is still out.
Transatlantic union
One of the main goals of the UK Listing Authority’s listing rules is to ensure equal access to information for all market participants. For this reason, it welcomes the opening of analysts’ briefings to include the press and public, even if they’re ‘non-participating audience’ in that they don’t always get to ask questions. Although the practice is not compulsory, the UKLA encourages the development.
The trend follows US practice, since with Regulation Fair Disclosure (Reg FD) US companies have dramatically increased public access to earnings announcements through webcasts and teleconferences.
In both countries the trend against selective disclosure has provoked controversy, particularly among sell-side analysts and large institutional investors. They point out that even though the regulators are trying to encourage companies to disclose more information, in reality companies disclose less because they fear breaking the rules.
For Chris Bates, a partner at London law firm Clifford Chance, the complaint doesn’t hold water. ‘Selective disclosure of information was not legal in many circumstances even before the FSA and the Reg FD,’ he says. Alan Bannister, also a partner at Clifford Chance, elaborates: ‘Private meetings with analysts are not prohibited, neither in the US nor in the UK; they are just dangerous. In these meetings companies should just provide non-price-sensitive information to complete a mosaic of public price-sensitive information. The problem is that the addition of these two kinds of information can create a bigger picture that becomes price-sensitive information.’
