Written evidence submitted by Plus Markets
Group Plc
1. I am the Director of Regulation of Plus
Markets plc, a Recognised Investment Exchange based in the City
of London operating both primary and secondary market infrastructure.
In addition to operating a Regulated Market for listings, PLUS
maintains the PLUS-quoted market a primary market for unlisted
securities which is the second largest growth market within Europe,
and competes in trading services against traditional Exchanges
and MTFs with 7,500 UK and European securities on its platform.
We operate in a space characterised by rapid evolution of market
regulation, technology and user preferences. As an operator of
market infrastructure with a core franchise of helping companies
raise funds and providing trading and investor services, PLUS
has an understandable interest in the proposals set out in HM
Treasury's consultation "A new approach to financial regulation:
judgement, focus and stability" and are grateful for the
opportunity to make known our views.
EXECUTIVE SUMMARY
2. We are supportive of the need for reform
albeit reform which should go further and not merely be limited
to structural change. The revised regulatory architecture must
be well placed to identify and mitigate prudential and systematic
threats to the integrity of the system. With this in mind, we
concur in that the perspective of a central bank is needed and
the Bank of England should given a more operational role with
both responsibility for financial stability and a full array of
macro-prudential supervisory tools. It is our view that responsibility
for stability and macro-prudential supervision must go hand in
hand with the micro-prudential supervision of individual firms
to enable the Bank to enable deliver on the overarching objective
of financial stability: this aspect of the proposed regulatory
architecture is likely to be well received at an EU level. These
proposed reforms are justified in our estimation on the basis
that the supervision of prudential risk must benefit from better
comprehension and understanding of developments and cyclical imbalances
within the financial system. That said, whilst the Bank of England
is more likely to be in a position to make use of a judgement-focused
supervisory approach, it remains to be seen how well the Bank
will operate in a heavy duty operational and rules based environment.
As an RIE we do not have a sufficiently direct interest in prudential
regulation and will therefore refrain from substantial comment
on the range of macro-prudential tools proposed to be made available
to the Bank of England. However there is a danger that the impact
of the prerogatives afforded the Bank of England may become overbearing
unless its supervision benefits from a robust and workable mechanism
whereby the Bank of England is accountable. At the same time there
are tensions inherent in the proposed regulatory framework not
least when it comes to accountability and cooperation between
respective regulatory authorities.
3. Our chief concern is to ensure that the
significance of market infrastructure is correctly appreciated
and we have identified characteristics of the proposed regulatory
architecture which merit further consideration by HM Treasury.
Future initiatives relating to Exchanges and market operators
are likely to recognise that their proper role in promoting confidence,
transparency, price formation, equal access and liquidity and
in the mitigation of idiosyncratic risks posed by innovated exchange-traded
products are likely to be greater in the scheme of things than
the need to protect consumers. The protection of consumers is
important but it is by no means the dominant factor in play when
it comes to the supervision and regulation of financial markets
and stock exchange activity. At the same time, the UK needs to
understand that the needs of wholesale and retail markets are
different and need to be approached in different ways and whilst
financial stability and the integrity of financial markets ought
to be the sole objective, supervision needs to keep pace with
and not stifle innovation. We have particular concerns over the
proposed future of the UK Listing Authority and also proposed
reforms concerning Recognised Bodies and seek for these proposals
to be withdrawn.
COOPERATION BETWEEN
REGULAOTRY AUTHORITIES
VERSUS IN
-BUILT TENSIONS,
SUPERVISORY OVERLAP
AND RELATIONS
WITH EU REGULATORS
4. We take comfort from the proposals outlined
in the consultation paper relating to the FPC's role in supervising
and monitoring the performance of the PRA and the CPMA. Significant
cooperation between both will prove necessary and to ensure that
their respective agendas are harmonised and calibrated towards
ensuring financial stability. In particular the FPC's power to
give directions may prove particularly useful when it comes to
ensuring that the PRA and CPMA are correctly aligned and that
their respective agendas benefit from the perspective of the central
bank and its monetary policy. The proposals with respect to CEOs
of the PRA and CPMA being members of the FPC and being appointed
to each other's respective Board may go some way to achieving
this and to fostering a culture of cooperation but the two bodies.
However, the PRA and CPMA are likely to have very different cultures
with the likelihood that a number of tensions inherent in this
architecture may exist. The potential for competing agendas is
acute given the different cultures but added to the tensions inherent
in the proposed regulatory architecture on a national level, there
also exists the possibility for competition in agenda and remit
as between the domestic regulatory authorities and the new supra-European
regulators due to be brought into being next year. Duplication
of output and dialogue are likely to be troubling features requiring
a lot of regulatory engagement as between regulatory bodies and
participants in the financial services system on a number of levels.
It could be that HM Treasury's proposed regulatory architecture
is influenced by considerations of European oversight and in particular
the demarcation of responsibility between the European Banking
Authority and the European Securities and Markets Authority. Whilst
there is evidently a well perceived need for national regulatory
authorities to engage and cooperate with these supra-European
supervisors, a replication of this divide on a national level
poses potentially very serious difficulties surrounding the engagement
of individual firms with the PRA and the CPMA.
5. The impact will be felt by Exchanges
and market operators, leading to a position where Exchanges and
market operators providing both trading and clearing services
will be supervised by both the PRA and the CPMA (dual supervision).
This concern is especially pertinent at the present time given
that the London Stock Exchange is believed to be in discussions
with a number of banks with a view to establishing and operating
a clearing house.[6]
There is an increasing trend within the EU of Exchanges moving
into the provision of clearing services (Euronext and NYSE LIFFE
for example). The EU is proposing to develop regulatory initiatives
designed to mitigate risk with the involvement of both Exchanges
and clearing facilities as it perceives both as useful mechanisms
to dampen the risk within the financial system associated with
the trading of derivative securities OTC.[7]
Although the considered response to these initiatives appears
to have dissuaded the EU from making use of exchange infrastructure
in this way,[8]
there are obvious synergies and approaches involving both Exchanges
and clearing facilities. Nevertheless, central counterparties
providing clearing services will be supervised by the PRA whilst
Exchanges and market operators will be supervised by the CPMA
in the new regulatory landscape. The effect of HM Treasury's proposals
are far reaching though and it should be recognised that even
CCPs solely providing clearing services may be supervised by the
CPMA as regards conduct of business. Dual supervision involves
additional burden, cost and resource for a broad range of different
business models and there exists the possibility of intrusive
conflicting supervisory agendas impacting a single firm.
SUPERVISION OF
EXCHANGES AND
MARKET OPERATORS
BY THE
CPMA AND REGULATORY
AGENDA FOR
EQUITY MARKETS
6. It remains to be seen how the PRA will
be resourced to discharge its micro-prudential supervisory responsibility
and ensure that its front line supervisory functions are equipped
to undertake a judgements-focused supervisory approach as opposed
to utilising a "check-box" approach. This danger is
of particular concern when it comes to the CPMA based on our experience
of the FSA. The make-up of the CPMA needs to be adequate to take
responsibility for supervision of firms' conduct of business and
for policy concerning the conduct of business and markets infrastructure,
as operationally distinct from its consumer protection function.
That poor standards of behaviour and risks to consumer protection
often involve securities traded on Exchanges and other market
infrastructure is not sufficient justification in our view for
the CPMA supervising market infrastructure in addition to those
firms that are in the business of trading securities. In order
to justify the CPMA supervising Exchanges and market operators,
the CPMA will need to be resourced and well positioned to formulate
and progress key policy initiatives relating to markets that recognise
their proper role in promoting access to markets, confidence,
transparency, price formation and liquidity.
7. In terms of firms' conduct of business
and the relationship between the regulation of conduct of business
and financial markets, retail activity and investment are significant
both in terms of maintaining markets as viable venues for capital
raising and in terms of facilitating secondary market liquidity.
CESR has quite rightly perceived that volumes of trading in equities
and wholesale bargain sizes are diminishing since the introduction
of MiFID in late 2007.[9]
In this environment and in the context of reduced appetite for
investment, retail activity and retail trades become of greater
significance as do their interaction and combination with wholesale
activity and investment. This needs to be recognised by the CPMA
whose agenda and approach should appreciate the significance of
retail activity rather than being skewed towards acting in a fashion
that tends against it for consumer protection reasons. This is
especially true with regard to the regulation of retail client
advisory business in that whilst the CPMA should be an incisive
tool to hold to account and prevent unethical behaviour on the
part of financial services professions it should not pursue an
overbearing approach when it comes to regulating the conduct of
advisory business. The significance of markets as mechanisms for
raising capital and for fuelling economic growth and recovery
needs to be borne in mind. The proposed removal of the UK Listing
Authority from the CPMA to reside with the Department for Business,
Innovation and Skills rather runs the risk of the regulation of
firm's conduct of business not benefiting from this awareness
and perspective.
8. Foreseeable regulatory initiatives for
Exchanges and market operators in the medium term (predominantly
originating from the EU) include the CESR Review of MiFID and
the likely impending EU directive amending MiFID,[10]
the extension of the pre- and post- transparency obligation, the
implementation of proposals to counter the adverse effects of
fragmentation of liquidity, micro-structural issues concerning
high frequency trading, sponsored and unsponsored Direct Market
Access, trading platform stability, also pricing, best execution,
the trading of OTC derivatives on-exchange, short selling, the
review of the Prospectus Directive[11]
and listing and disclosure requirements for UCITS, and the recognition
of foreign non-IFRS issuer financial reporting. The CPMA needs
to be sufficiently dexterous to be able to take into account the
evolution of markets infrastructure, trading practices and user
need in the formulation of regulatory policy and approach to EU
representation, and legislation. The CPMA must additionally have
regard to the distinct needs of the wholesale and retail markets
in addition to those of consumers.
THE UK LISTING
AUTHORITY
9. It is our view that the CPMA's credibility
may be hampered ab initio by the removal of the UK Listing
Authority from the CPMA to reside under the Department for Business,
Innovation and Skills. We foresee particular difficulties when
it comes to UK representation and engagement with the new European
Securities and Markets Authority because the CPMA will not have
responsibility for the Listing function. Most of the central plans
underpinning the UK's Listing framework have their origin in European
legislation and the UK is exposed to the possibility of regulatory
intervention from the EU that undermines the pedigree of listing
on the UK's Official List and threaten the UK's competitiveness—witness
the evolution of the recently introduced Standard Segment. The
Listing function is of considerable importance in maintaining
the UK as a credible and competitive destination for listings
and therefore needs to be ensconced within the CPMA and benefit
from the CPMA's accountability and its norms for interacting with
the financial services industry, the EU and the European Securities
and Markets Authority. It also should be recognised that there
is also cross-over with the consumer protection brief given that
within the Listing Rules there are specific rules legislating
for consumer protection such as those relating to closed ended
investment companies, investment trusts, REITs and UCITS. The
interests of consumers and investors are paramount when it comes
to framing rules and policy relating to prospectuses, class transactions,
circulars, disclosure, transparency and financial reporting: seen
in this way, there is more of a synergy between primary markets
and the CPMA's remit for the regulation of conduct of business
and consumer protection as compared to the CPMA's role in the
regulation and development of secondary market infrastructure.
Why then separate the UK Listing Authority from the CPMA? Deprived
of the listing function, it becomes harder in our view to justify
responsibility for the supervision of Exchanges and market operators
falling within the CPMA's purview. If the proposals in the consultation
are to be legislated into being without substantial alteration,
our recommendation would nevertheless be that the UK Listing Authority
should remain with the CPMA.
10. With regard to the proposed merger of
the UK Listing Authority with the Financial Reporting Council
(FRC), the FRC has a role in promoting confidence in capital markets.
The FRC plays a part in monitoring and ensuring that that corporate
governance is sound, that financial reporting is of sufficient
quality and more particularly, that the narrative of directors'
reports properly reflects and accounts for the risks and uncertainties
specific to a particular business. Of particular concern in relation
to smaller companies is the appropriateness of sensitivity analysis
and the impact of certain sensitivities on working capital and
the FRC's role in these areas is supportive of improving the quality
of behaviour on capital markets. There is some overlap here with
the remit of the UK Listing Authority, however such a merger if
carried into effect would greatly expand the function of the Listing
Authority and take it into other areas. The Listing Authority's
present remit expands beyond issuers applying for inclusion or
included in the Official List (given the effect of the Prospectus
Directive) however there is significant doubt in our mind as to
reason for the merger proposal which needs to be carefully examined
and the rationale for the changes made out. In particular, there
is a danger that to merge the UK Listing Authority with the new
companies regulator will prove too burdensome to issuers listed
or seeking to list on the Official List and will undermine London's
competitiveness. There is little to suggest that merging the FRC
and the UK Listing Authority would enhance their respective functions.
RATIONALISATION OF
AUTHORISATION UNDER
PART 4 FSMA 2000 AND
RECOGNITION UNDER
PART 18
11. The EU has discerned increasing unease
with Multilateral Trading Facilities ("MTFs") which
are subject to less stringent regulatory requirements than Regulated
Markets at the present time. With this in mind, CESR is proposing
changes to ensure that the requirements for MTFs are made more
stringent to align the requirements more closely to those to which
operators of Regulated Markets are subject.[12]
As the operator of a Regulated Market subject to more burdensome
requirements PLUS is supportive of the arrangements with respect
to firms authorised by the UK as operators of MTFs being looked
at and made more robust. Regulatory requirements to which a Recognised
Body or authorised firm are subject should be determined by reference
to the activities carried out rather than the regulatory status
of the operator. That said, we would resist an attempt to remove
or erode the status accorded Recognised Bodies in the regulatory
system, not least because this would be out of step with the European
Union which recognises the distinction between operators of Regulated
Markets and MTFs. The distinction and status of a Recognised Investment
Exchange remains valid given that as operators of Regulated Markets,
they bear responsibility for primary markets and compete as listing
destinations against their counterparts within the EU. The organisational
and regulatory requirements and resources are different compared
to those required to maintain pure secondary market infrastructure.
This is the case to a greater extent in that both of the UK's
RIE equity markets, the London Stock Exchange plc and PLUS Markets
plc also operate exchange-regulated primary markets (AIM and the
PLUS-quoted market), therefore the regulatory requirements and
risks associated with these market infrastructures are wholly
different compared to those authorised firms operating as MTFs
which are pure trading facilities for trading securities listed
on EU exchanges. Looked at in this way, there is every reason
to maintain separate regimes. RIEs bear a unique position within
the regulatory landscape because of their role in the price formation
process as operators of primary markets. RIEs are quasi-regulatory
bodies and benefit from this status in superintending the activities
of exchange member firms and from the statutory information sharing
gateways and prerogatives afforded them. To seek to remove or
erode the status of a Recognised Body would be counterproductive
and HM Treasury needs to make out a case for conflating the two
regimes as there is little evidence to suggest that the different
requirements are problematic. As the operator of a Regulated Market
we fully concur with the need to accept a higher degree of regulatory
burden and the requirements in Part 18 as a Recognised Investment
Exchange.
21 September 2010
6 Reported by City AM on 20 September 2010. Back
7
Committee of European Securities Regulators ("CESR")
consultation paper, Standardisation and exchange trading of
OTC derivatives July 2010. Back
8
See the Proposal for a Regulation of the European Parliament and
of the Council on OTC derivatives, central counterparties and
trade repositories COM (2010) 484/5. Back
9
Committee of European Securities Regulators ("CESR")
consultation paper, Technical Advice for the European Commission
in the Context of the MiFID Review-Equity Markets April 2010. Back
10
Markets in Financial Instruments Directive 2004/39/EC. Back
11
EU Prospectus Directive 2003/71/EC. Back
12
Committee of European Securities Regulators ("CESR")
consultation paper, Technical Advice for the European Commission
in the Context of the MiFID Review-Equity Markets April 2010. Back
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