News
Unenforceable, inadequate and increasingly complex
Investors still able to build 8% stakes without disclosure
The FSA has now published its Consultation Paper on Disclosure of Contracts for Difference ("CfDs"). The Investor Relations Society ("IR Society"), representing the interests of listed companies in the UK, believes that neither of the proposed options delivers the necessary certainty, clarity and simplicity that a blanket unification of disclosure rules would do.
The IR Society will be responding in full to the Consultation Paper, and encouraging its members to do so on their own behalf as well. In a recent survey, 96% of respondents supported the amendment of existing disclosure rules to include CfD positions.
Commenting on the consultation, Peregrine Riviere, Chairman of the IR Society, said:
"If companies are to be allowed to engage with major investors effectively, they need to be able to identify them easily. CfDs are a valid, tax efficient investment tool, but their non-disclosure creates information blind spots in the market; as their popularity continues to grow, this effect will only become more exaggerated."
It is clear from the text of the Consultation Paper that the FSA favours Option 2 – a complex, unworkable solution that will be impossible to police. This apparent bias is supported by a one-sided and unscientific cost/benefit analysis. The IR Society believes that any regulated market participant's risk management tools will already flag major shareholding notification requirements, with no material systems development required.
Riviere continued:
“The safe harbour provisions under Option 2 are worthless: CfD holders will still be able to vary their terms to influence significant voting rights with no prior disclosure. Even under Option 3, an investor could still hold an economic interest of up to 8% without any disclosure obligation.
"We are intrigued that the estimated costs of Option 2 are negligible, but that Option 3 will cost market participants £20-50m to implement – based on a statistically irrelevant sample of three respondents. Using the FSA’s own estimates, we calculate that each incremental disclosure announcement will cost CfD holders over £1,500: does this sound like a credible analysis?"
"The change in the Takeover Panel's disclosure rules two years ago, which aligned disclosure of CfD positions with equity holdings, was a simple and cost-effective measure: amending DTR 5 to incorporate CfDs would be equally so."
For further information contact:
The Investor Relations Society
Peregrine Riviere – Chairman 07909 907 193
Michael Mitchell – General Manager 020 7379 1763
Notes for editors:
Background to the FSA’s consultation paper
On 12 November, The Financial Services Authority (FSA) issued a consultation paper on the disclosure of Contracts for Difference (CfDs). The consultation document follows a period of analysis and discussion arising from the responsibility for the major shareholder disclosure regime moving from the jurisdiction of the Department of Trade and Industry through the 2005 Companies Act, to the FSA through Chapter 5 of the Disclosure and Transparency Rules (DTR 5).
At this time, January 2007, the FSA chose not to include CfDs as part of the disclosure regime, but identified three potential market failures from their exclusion which they have since looked at in greater detail. The market failures identified are as follows:
inefficient pricing in the equity market as a result of information asymmetries;
the risk of stealth takeovers by predatory investors using CfDs to bypass the major shareholder notification requirements; and
weakened market confidence due to the lack of transparency about the identity of investors with undisclosed economic interests.
On this basis, the FSA has decided that a ‘do nothing’ option, Option 1, is not acceptable and are, therefore, consulting on Options 2 and 3.
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Option 2 |
Strengthen the existing regime by deeming CfDs to have access to voting rights unless stringent safe harbour requirements are met, namely:
Interests in CfDs that do not meet the safe harbour would be aggregated with shares and other instruments which provide access to voting rights, and the combined total would be disclosable above a threshold of 3%. In recognition of the fact that an issuer may want to know of a significant CfD position, even if it currently meets the legal requirements of the safe harbour, Option 2 will in addition provide a mechanism for issuers, with similar effect to s793 of the Companies Act 2006, to ‘flush out’ holders of economic interests above 5% in a targeting and precise way – this threshold would operate separately to that for interests with voting rights. |
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Option 3 |
This alternative approach is to introduce a regime that would require the disclosure of all economic interests above a 5% threshold held through CfDs and other derivatives. This threshold would operate separately from the threshold for shares and qualifying instruments. There would be no aggregation across the two sets of instruments. |
The IR Society
The Investor Relations Society represents members working for public companies to develop effective two way communication with the markets and create a level playing field for all investors. It has 600 members drawn both from the UK and overseas, including the majority of the FTSE 100 and much of the FTSE 250.
The survey
The survey was conducted by Richard Davies Investor Relations (RD:IR) on behalf of The Investor Relations Society in September 2007, covering 70 of the UK top listed companies. 96% of respondents agreed with the question “Do you think that DTR5 should be amended to include the disclosure of CFDs? “
Calculation of incremental costs per disclosure announcement
The FSA cites a figure of 2,773 Major Shareholder Notification announcements between January and August 2006. From this we assume an annualised figure of 4,160 (2,773 x 12 months/8 months). The FSA estimates that a 20% increase in disclosures would amount to additional costs to CfD holders of £1.3m a year. So £1.3m/(20% x 4,160) = £1,563.
Published: 21 November, 2007