Dissertation Full Draft4

The Prospectus Directive – Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets of Poland and the United Kingdom

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The Prospectus Directive – Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets of Poland and the United Kingdom...............................1 1.0. Introduction.................................................................................................3 Regulated Markets in UK and Poland................................................................5 Stock Exchange Capitalisation and Number of Listed Companies....................5 . Decrease in Capitalisation as a Global Phenomenon.......................................7 The Decision to Enter the Public Regulated Market.........................................9 3.1. Share Capital and the Nature of Shares ......................................................9 Considerations for Raising Share Capital.......................................................10 Cost of Capital ................................................................................................12 The Effect of Regulation.................................................................................13 Other Issues of Regulation..............................................................................15 The Regulatory Agencies of the UK and Poland............................................15 The Financial Services Authority....................................................................16 Polish Financial Services Authority................................................................17 Comparing the Regulators...............................................................................19 Power to Regulate v. Power to Supervise ......................................................20 Transparency and Public Consultations .........................................................21 Conclusions on the Authorities........................................................................24 The Implications of the European Internal Market Legislation.......................25 The Financial Services Action Plan and the Single European Market ............26 The Prospectus Directive.................................................................................28 The Single European Passport..........................................................................28 The European Entry Regime Specific Regulations..........................................29 Personal Responsibility....................................................................................31 Approval Procedure..........................................................................................32 Incorporation by Reference..............................................................................33 Regulatory Competition Issues .......................................................................34 ‘Race to the Top’ v. ‘Race to the Bottom’ ......................................................35 Prospectus Directive and High Harmonisation Rules .....................................37 Further Harmonisation – Level 2 Regulation...................................................38 Directive’s Implementation in Poland and the UK .........................................40 The Impact of the Entry Regime on the Market...............................................43 The Importance of Public Enforcement...........................................................44 Conclusions......................................................................................................46 Bibliography, Cases and Statutes.....................................................................49

1.0. Introduction It is the aim of this essay to compare and discuss the differences in the regulatory regime of the United Kingdom and Poland. I focus my efforts on the markets where

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regulation plays the most significant part, meaning the public regulated markets of listed shares. It is clear that the markets themselves are very different in effect of numerous factors such as history and the legal systems’ characteristics. The role of European regulation in harmonising the regulatory regimes of those two markets has admittedly played an important role in bringing them together in terms of the regulation of entry requirements along with numerous other issues. I start this essay by observing the recent activities on the public regulated markets and the economic developments that allow description of the differences in the markets themselves. The essay’s second part is devoted to analysing the factors that can shape a company’s decision to raise capital via means of the capital markets, with special consideration of the public regulated share markets. I then go on to analysing the characteristics of the financial authorities in the United Kingdom and in Poland. In the second half of this essay I consider the European perspective of public equity markets regulation. First, I describe the European legislation shaping the regulation of admissions to listing in both the UK and Poland. I then go on to discuss the procedure and effects of implementation of the mentioned European legislation into the legal orders of those countries. I close the essay with an assessment of the impact of the most important issues described in the earlier parts.

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Regulated Markets in UK and Poland As of December 2008 the London Stock Exchange listed the shares of 1142 UK companies and 321 international companies on its main market. A sum of 66,472.3 million GBP worth of equity capital was raised through its main market in 2008 alone1.With domestic market capitalisation of the LSE at 1,868,153.0 USD in December 2008, it was the single biggest stock exchange in Europe giving way only to such giants as the New York Stock Exchange, the Tokyo Stock Exchange and NASDAQ in terms of capitalisation and capital flows2. In comparison to the Warsaw Stock Exchange (GPW), the LSE stands as an older and bigger brother.

Stock Exchange Capitalisation and Number of Listed Companies The Warsaw Stock exchange had its capitalisation at a level of 90,815.5 million USD in December 2008. This is relatively small in comparison to the LSE’s 1,868.153 million USD. However, the Warsaw stock exchange is by far the biggest in the region of Eastern Europe. It lists the most companies in its region and has the biggest number of foreign companies listed on its main market3. Although as a symptom of the recent turmoil on the financial markets, all the exchanges in the world have declined in terms of capital flow, and most exchanges have shrunk in terms of the number of companies they list, the Warsaw stock exchange is the only one in its region and one of the few exchanges in Europe that attracted new companies and grew in terms of its main 1

Data source: LSE statistics for 2008, available on: http://www.londonstockexchange.com/NR/rdonlyres/B78A25AE-68C2-42D8-9903FB2C4B1BDF59/0/MainMarketStatistics0812.pdf 2 Derived from World Federation of Exchanges Statistical data, available at: http://www.worldexchanges.org/statistics/ytd-monthly 3 For statistical information until 2003, see J. Socha, Chairman of the Polish Securities and Exchange Commission (now liquidated), World Bank Presentation, available at : info.worldbank.org/etools/docs/library/154716/domestic2003/pdf/socha.ppt

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market listing size by 22% in 2008 in comparison to 2007. The LSE’s number of listed companies during this same period fell by 6%. Effectively Warsaw’s stock exchange managed to attract new companies in a time of crisis, even though its capitalisation levels dropped by 53% in comparison to the previous year4. I find this particular piece of data to be interesting. I hope that some of the issues mentioned below in this essay will provide some explanation of this peculiarity.

A slow down in the economy, lowered the potential benefits from arriving at listed status for companies worldwide, yet many companies chose to join the Warsaw Stock Exchange (GPW), particularly at a time of downturn, willing to bear the costs of compliance in order to reap the lower benefits of being listed. What’s even more intriguing to me is that not only local companies, that treat Poland as their home jurisdiction chose to be listed on the Warsaw Index. From the data available from the World Federation of Exchanges, it may be observed that in 2008 three foreign companies chose to enter the GPW listed market5. From the same data it is visible that the London Stock Exchange’s number of listed companies actually dropped by 6.4% in total and the number of foreign companies listed on the market decreased by one in 2008 in comparison to 2007.

These peculiar results could point to a number of issues. They could be analysed through a number of intellectual means. Tools available to us from the domain of economics and law come to mind immediately as a way of analysing the underlying reasons for such a lack of correlation. I do not believe however that they qualify to be 4

Measured in USD, in comparison to 2007, data derived from www.world-exchanges.org From the information published by www.world-exchanges.org, we see that the number of international listings grew from 23 in January to 26 December. GPW is the official abbreviation for the Warsaw Stock Exchange. Whenever hereunder the abbreviation is used it is to be read as meaning the Warsaw Stock Exchange. 5

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ignored. However the basic number of companies on the Warsaw market is relatively small, the increase both numerical and described in per cent is noteworthy. What adds to the potential noteworthiness is the numerical decrease in the number of listed companies on the LSE, if the number of companies on the LSE grew similarly to Warsaw’s there would be no grounds for deeper investigation. I find that there is a third factor adding to the significance of the findings. This factor is the economic turbulence experienced by economies across the globe since the end of 2007.

. Decrease in Capitalisation as a Global Phenomenon The recent global crisis has had an impact on all the economies of the world, creating a globally negative economic environment. Except for Amman and Tehran, all of the world’s major exchanges have lost a portion of their capitalisation. In this negative environment, there is a multiplication factor added to the significance of a company’s decision to list their equity securities on a regulated public market. The existence of these conditions effectively means that companies are not following the principle of “market timing”. The lack, or the improbability of application, of market timing strategy in entering one market instead of the other, allows leaving out non quantifiable and material issues that could influence the investors’ common drive to choose one equity market over another. The loss of capitalisation by nearly all the world’s exchanges clearly suggests that the equity markets are not “hot” therefore do not constitute an opportunity to be caught by companies looking for extraordinarily cheap capital6.

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M. Barker, J. Wurgler, “Market Timing and Capital Structure”, 57 Journal of Finance (2002), p. 1

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If accepted that the decision to file for listing is not taken upon lightly by companies, especially in times when raising capital can prove difficult. During periods in the economic cycle when market capitalisation is low, it becomes harder for companies to successfully gather capital through entering public markets and issuing equity. If the number of listed companies would be increasing as a stock exchanges capitalisation would increase as well i.e. in general times of prosperity, a comparison of data such as that which I have brought forward, would need to be essentially different.

A large number of factors could influence a company’s decision to enter one capital market and not another or to offer its securities in more than one jurisdiction. Among these factors are the legal environment and the burden of regulation that will be faced by a company whatever option it chooses.

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The Decision to Enter the Public Regulated Market

The factors considered by companies upon deciding whether they should enter the public markets are numerous under any jurisdiction. This decision is mostly taken upon deep consideration of strategic long term company plans and more short term based benefit versus cost analysis. In order to arrive with such analysis a company must consider such issues as the cost of compliance with regulation, including the costs of supplying legal, economic and marketing counsel. Understanding the legal obligations of a company ex ante launching a public offering is crucial to this process.

3.1. Share Capital and the Nature of Shares The body of strategic factors to be considered in making the decision will be formed by issues such as the director’s approach to carrying risks, the company’s general ability to bear certain risks, how competitive the company is within its particular market and finally the size of its reserve capital available for bearing the initial costs of entering the market. G. Fuller mentions the issue of a company wishing to gather capital through means of public share offerings as a means of limiting its exposure to debt. Shares, according to a definition given by Farwell J. in Borland’s Trustee v Steel Bros Co Ltd7 “(…) are an interest in a company measured by a sum of money(…)”. So the sum of money invested in a company’s shares by an investor becomes automatically the company’s property. No direct property rights to the invested capital remain with the investor, creating the right to the dividend instead.

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[1901] 1 Ch 279 at 288. Further on the same page: “A share is not a sum of money…, but it is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to the sum of money of a more or less amount.” This definition varies between jurisdictions. It is however sufficient for the purpose of this essay.

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The status of the shareholder and his right to dividend was adequately explained by Lord Macnaghten in Birch v. Cropper: “Every person who becomes a member of a company limited by shares of an equal amount becomes entitled to a proportionate part in the capital of the company and unless it be otherwise provided by the regulations of the company, entitled as a necessary consequence to the same proportionate part in the property of the company, including its uncalled capital”8.

Considerations for Raising Share Capital From the above the conclusion may be drawn that an important factor differencing share capital from debt is that the capital invested in a company through shares does not correspond directly with any of its property and therefore is not insured by it. This factor may constitute a powerful strategic impulse to raise capital through shares if their directors consider the debt capital ratio to exceed their acceptable limit9. The risk of diluting the initial shareholder powers and influence over the company are taken into consideration due to the fact that as shares are launched into the public market, the original shareholders will inevitably lose some of their voting powers as new investors gain shareholder status. Furthermore, accepting new shareholders into the company will contribute to dilution of final paid out dividends if the capital raised will not generate the profits expected by the company when the decision to launch a public offering was made10 .

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(1899) 14 App Cas 525, HL, p. 543 G. Fuller, “The Law and Practice of International Capital Markets”, 2007, p. 8 - 13 10 G. Fuller, “The Law…”, p. 14; Any considerations given above in relation to shares are given only in respect to ordinary shares and not preference shares. Both the right to dividend and the voting rights of preferential shareholders may differ. On the distinctions between the two types of shares see E. Ferran, “Principles of Corporate Financial Law”,2nd edition, 2008, p. 147 - 177 9

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The structure and environment of the capital market itself can influence the decision of entering the capital markets11. During periods of market prosperity and investor enthusiasm, the cost of capital may be lower than during periods of stagnation 12. The element of availability of capital will shape the effective cost and benefit analysis of entering the equity market for companies. Also, during times of general prosperity in a company’s economic environment a company’s historic business results and outlooks will seem more attractive than in a situation where a company has been suffering from the aftermath of a stagnating or deflating economy. A. Sherman brings up an example of a period in the market cycle when equity, or share capital is fairly easy to come by with reference to the market for internet – based companies during the late 1990’s when equity capital was easily accessible through initial public offerings (IPO) and was treated as an exit strategy by some companies 13. However this consideration is more of a short term factor shaping the decision whether a company should seek listed status.

Immediate and inevitable costs of entering the public share markets include the costs of compensating the underwriter, which run at an average percentage rate of 7% of the gross proceeds of the offering. In the U.S. the usual costs of legal counsel are described as around 200,000 USD in smaller offerings and can run up to 500,000 USD in very large offerings according to information provided according to A. Sherman, these sums constitute solely the legal counsel’s compensation and do not cover the hidden legal costs of complying with the standards issued by the appropriate regulating authority14. These hidden costs include a number of issues, such as house 11

A. Bielawska, “Finanse Zagraniczne MSP. Wybrane Problemy”, 2006, p.19. See, A. Sherman et alia, “Raising Capital”, Business Source Premiere, EBSCO Publishing 2003, p.184 -186 13 A. Sherman et alia, “Raising…”, p. 185 14 A. Sherman, “Raising…”, p 190 – 193, However according to G. Lukasik, “Przedsiebiorstwo na Rynku Kapitalowym”, 2007, p 147 the cost of compensating the underwriter in the UK is considerably 12

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cleaning procedures, due diligence, disclosure costs and overall costs of compliance with preclusive regulation. These costs may be only described as similar in the UK, but considerably lower for both domestic and international offerings in Poland.

Cost of Capital One of the capital advantages of entering a regulated share market for companies is reportedly the prestige, and additional publicity a company receives once it has successfully launched shares onto the public market15. This would be especially true in the case of international share offerings that are conducted concurrently on more than one market or that get to be listed altogether on a different stock exchange from its domestic market. International, or cross – border share offerings also create the opportunity for companies to introduce a wider shareholder base to their membership, furthermore offering the opportunity to attract foreign and international institutional investors, stabilising their shareholder base and perhaps attracting strategic investors that could improve the company’s reputation, or operations. However, the setback of entering the international equity markets is the necessity to bear the costs of legal and economic counsel. A large global underwriting house will prove to be more costly for its services in launching shares to international markets. The same is also true for a large and internationally recognisable auditing firm, in comparison to the potentially smaller costs that would be have to be accepted if a smaller domestic firm was chosen. The multiplication effect an international share offering will have on the costs a company must bear in order to successfully comply with the many legal and lower and constitutes 3.8 % and miniscule in Poland, averaging about 0.1%. These data relate however only to domestic offerings that tend to be smaller. In the case of Poland this means that the underwriting house would also be usually a domestic institution that deals with local offerings. International offerings will effectively mean higher costs however still considerably lower than those for the UK or US. 15 E. Ferran, “Principles…”, p.409-416

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practical issues in the process is known as the bundling effect. This effect works as an additional issue that further limits the chance for launching a successful share offering in case of unprepared companies16. Finally, companies may have to change their legal status in order to be legible for their shares to be traded on the public market.

The Effect of Regulation The importance of the role that regulation and the general legal environment play to the cost and benefit ratio of entering public listed stock markets cannot be overestimated. Even when issues such as the need for reorganisation, reform of the articles of association and other internal legal changes are left out, the cost of compliance and the structure of the regulatory environment will play a dominant role in deciding whether and if, than where should a company go public. The Committee on Capital Markets regulation, in one of its interim reports mentioned some issues that could point to the fact that a public regulated market is losing its competitiveness due to regulation. The mentioned Interim Report compares the issues of securities made onto the regulated and unregulated markets on a scale of time to be able to state whether regulation influences companies’ decisions to enter a specific market17. Not being able to get adequate comparative data on the private and public markets of London and Warsaw I have decided to compare the statistical data available on the largely unregulated bond markets of the two countries. It is clear that while the Warsaw bond market is decreasing by ten percent, the London bond market has increased by more than five18. 16

L. Enriques, T. Troger, “Issuer choice in Europe” Cambridge Law Journal 2008, 67(3), p. 521-559; Committee on Capital Markets Regulation, Interim Report 2006, available at: http://www.capmktsreg.org/pdfs/11.30Committee_Interim_ReportREV2.pdf 17

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This is in a period between Januray and December 2008. Data retrieved from: http://www.worldexchanges.org/statistics/ytd-monthly

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The Committee of Capital Markets Regulation sees an increase in the private markets, accompanied with a decrease of the public markets as a sign that a jurisdiction’s regulation increases the cost of raising capital through the public market to above the acceptable level. This effect will cause the public markets in a jurisdiction to lose competitiveness forcing companies to search for capital elsewhere. This issue has been broadly discussed in relation to United States capital markets. For example the Sarbanes Oxley Act has been broadly criticised for lowering the premium related to being present on the US capital markets up until a point that the costs were greater than the benefits, especially for foreign, cross – listed companies 19. The Committee for Capital Markets Regulation describes the costs of compliance with Section 404 of the Sarbanes Oxley Act to be at a level of 4.36 million USD per annum for an average company as in 2004. However the costs are believed to be decreasing in time, the cost of compliance will be working as a deterrent for entry for some companies wishing to raise capital through public markets20.

Above, I outlined some of the issues a company must take under consideration upon entering the public equity market. One of those outlined issues is the regulatory environment a company will face when entering a particular market. The biggest influence must be attributed to the entry regime within a jurisdiction, as this will immediately influence the short term cost – benefit rapport, for any company. If the costs of entering a market are too high in proportion to the potential capital that may be raised on the market due to regulatory costs, a company may choose to enter the equity markets within a different jurisdiction. Below, I focus on describing and 19

K. Litvak, “Sarbanes – Oxley and the Cross Listing Premium”, 105 Michigan Law Review (2007), p. 1857 20 Committee for Capital Markets Regulation, Interim…, p. 4-6

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comparing the regulatory environments of Poland and the United Kingdom that can give the reader an image of where in the system additional compliance costs may rise from.

Other Issues of Regulation Having outlined the importance of the regulatory framework to the effective attractiveness of the jurisdiction to issuers as a whole, I give space to institutional considerations, the role and powers of regulators of capital markets in the two jurisdictions. This issue has an influence not only on the initial costs of entering the market but may influence the timing and the shape in which the public offering or flotation into the listed market will take place.

The Regulatory Agencies of the UK and Poland

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The Financial Services Authority Plans to set up the Financial Services Authority, or the FSA, have been laid out in 1997. The government recognised that the previous regulatory framework set up as part of the “Big Bang” institutional reforms was ineffective and proved costly and lacked transparency21. On the 20th of May 1997 the Chancellor of the Exchequer announced the reform of the financial services regulatory structure. Numerous statutory reforms followed this decision effectively moving the authority formerly given to the dismantled Self Regulatory Organisations into the hands of the newly formed FSA. C. Briault, mentions that effective supervision is dependent on what is regulated and what tools the regulator has to his disposal, in one of his works. The Financial Services Authority placed with the responsibility to regulate a very broad umbrella of activities and markets22. It took over the performance of regulatory functions initially from the Securities and Investments Board or the SIB. As the Board’s legal successor it was also formed as a company limited by guarantee23.

The statutory rules setting up the spectrum of aims and powers for the FSA had to be drafted in a way that would facilitate this broad spectrum of responsibilities on the regulators shoulders. The most important legal act currently in force, regulating the aims, powers and operations of the FSA is the Financial Services and Markets Act 2000 Chapter 8. Part one of the FSMA 2000 sets out the general duties and objectives for the FSA which it must strive to satisfy while taking any actions. According with Section 2 of part one of the FSMA 2000, the FSA must not only always act in a way 21

See, HM Treasury, “Financial Services and Markets Bill: a Consultation Document. Part One. Overview of Financial Regulatory Reform”, 1998a 22 C. Briault, „The Rationale for a Single Financial Regulator”, Financial Services Authority Occasional Paper No. 2, 1999, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=428086 23 Financial Services Authority, “The Financial Services Authority: An Outline”, 1997,p. 5, available at: http://www.fsa.gov.uk/pubs/policy/launch.pdf

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which is compatible with its regulatory objectives, it should consider the options of acting and perform them in the way most appropriate to meeting the regulatory objectives. This may be interpreted that there is little room for potential recklessness in discharge of statutory function and that statutory objectives ought to be the principal aim of any action taken. These statutory objectives are enumerated in S. 1(2) FSMA 2000. They include “market confidence”, “public awareness” and “protection of consumers” and “reduction of financial crime”. Apart from these, Part 6 of the FSMA 2000 gives the FSA the authority to regulate admissions to regulated markets, this part of the act also generally deals with the issue of public offers of securities. More specific rules related to admission and offering securities on the regulated markets may be found in the Prospectus Rules, Listing Rules and Disclosure Rules of the FSA Handbook24. According to the FSA’s annual financial review, its budget for the years 2007/2008 for ongoing regulatory activities amounted to 298.1 million GBP.

Polish Financial Services Authority In Poland’s case a single financial regulator has only been created in 2006 with the passing of the 21st July 2006 Financial Supervision Act25, in which article. 3 describe the PFSA as the single financial regulator26. As in the case of the UK prior to the reform the system of financial supervision was segmented into numerous agencies. 24

The whole Handbook is published in parts on the FSA website here: http://fsahandbook.info/FSA/html/handbook/ Listing Rules: http://fsahandbook.info/FSA/html/handbook/LR Prospectus Rules: http://fsahandbook.info/FSA/html/handbook/PR Disclosure Rules: http://fsahandbook.info/FSA/html/handbook/DTR 25 Financial Supervision Act, Journal of Statutes 2006, number 157, position 1119; All the translations of Polish Acts and Statutes are my own except for where expressly stated. For a brief introduction to the Polish legal system, see P. Rakowski, R. Rybicki, “Features – An Overview of Polish Law”, LLRX.com 2000, available at: http://www.llrx.com/features/polish.htm. Although I strongly disagree with some of the translations of institutional issues, the essay gives a fairly good idea of the Polish legal system post 1997. 26 The Polish name for this body is Komisja Nadzoru Finansowego

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Each of them dealt with a particular aspect of activity on the capital markets. Until the reform of 2006, the admissions of securities to the regulated markets and other regulatory issues related to the regulated capital markets were in the hands of the Polish Securities and Exchange Commission (PSEC), as set out in article 3 of the 29th of July 2005 Act on the Supervision of Capital Markets27.The old Polish Securities and Exchange Commission ultimately stopped its work and was swallowed by the PFSA on 18 September 200628.Neither the previous regulatory body nor the new PFSA have the status of a limited company as the FSA does. Being a central organ of administration, supervised by the Prime Minister, the PFSA’s organization, legal rights and duties, the status of its officials is regulated by Polish administrative law.

The Authority’s funding is provided, not unlike the FSA’s, through the members of the regulated markets29. However the sums it incurs are then added to the central budget and wholly dependent on the final budget drafted for it by the Minister of Finance30. The net sum of capital it receives to perform its functions is also relatively small in comparison to the FSA. The PFSA received 180 million PLN in the year 2008 from the national budget31. The new supervisory authority, similarly to the FSA in the UK, was given a set of objectives, the fulfillment of which is the ultimate aim of its existence. Article 4 of the Financial Supervision Act enumerates these as: “the maintenance of adequate functioning of the capital markets, with special attention to

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Journal of Law 2005, nr. 183, pos. 1537; English translation available here: http://www.kpwig.gov.pl/en/Images/nadzorze_03_03_tcm21-4129.pdf 28 PFSAis an abbreviation for the Polish Financial Services Authority, whenever herein the term is used it is meant to represent the aforementioned Authority. 29 Art. 17 of the Financial Supervision Act 2006. 30 Dziennik Interia, „Rząd tnie budżet Nadzoru Finansowego”, 26 February 2009, available at: http://biznes.interia.pl/raport/kryzys_w_usa/news/rzad-tnie-budzet-nadzoru-finansowego,1255448 31 H. Kochalska, “Rząd Tnie Budżet Nadzoru Finansowego”, Dziennik Finansowy, 5th February 2009, available at: http://www.dziennik.pl/gospodarka/article313078/Rzad_tnie_budzet_nadzoru_finansowego.html

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maintaining safety of trading, protection of investors and other market participants and ensuring that rules of honest trading are followed”32.

Comparing the Regulators A brief comparison is sufficient to notice that these objectives vary from those set out for the FSA in the Financial Services and Markets Act essentially in the wording. The rules set out in s.2 (2) of the FSMA are more general in the way they are constructed and seem to give more space for interpretation. When speaking of “ensuring that the rules of honest trading are followed” in the Polish correspondent of FSMA 2000 Section 2(2) it seems that the rules from the Act have been simply restated so as to leave less space for interpretation. It is my opinion that these objectives for regulators, however varying in wording are expressions of a common position worked out globally through the International Organization of Securities Commissions. The final version of the recommended Objectives and Principles of Securities Regulation and aims has been issued in May 200333. The organization however underlines that many subjects prior to the resolution of 2003 have already been published in other previous resolutions. IOSCO’s recommendation of using a wholesome approach, representing the specific characteristics of each jurisdiction is a mentioned as an important factor to the successful implementation of the Objectives and Principles of Securities Regulation34. The objectives of the FSMA represent the policy of the legislator to give the regulating authority some broad goals which it must strive to achieve. In the

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Article 4 of the Financial Supervision Act 2006. IOSCO, “Objectives and Principles of Securities Regulation”, May 2003,Available at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD154.pdf 34 IOSCO, “Objectives…”, p. 10 33

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articles following s. 2(2), the FSMA goes on to adding greater specificity as to how the general duties of the authority ought to be carried out35.

Power to Regulate v. Power to Supervise To the most important differences that are visible in the legal framework setting out the institutional framework of the capital markets’ regulators is that under the Polish system, the regulatory authority is not provided with the opportunity of issuing regulatory handbooks and was not given the function of issuing regulations in relation to capital markets. The Polish Committee was only given the right to grant entry to capital markets for securities and institutional participants once they satisfied certain statutory benchmarks. These benchmarks have been set however solely in statutes and the PFSA was not given the opportunity to influence them.

The Committee is however capable of making official statements as to how a certain piece of legislation is understood by its officials, this adds an important factor of stability to understanding the system as the Committee’s statement inure its own officials as to how they are to understand a certain piece of legislation 36. The Committee is not however given the power of making rules that can be on their own treated as regulation37. Not being able to issue regulation in the sense that the UK 35

S. 2(3) mentions some issues the authority must have regard to in the discharge of its duties and s.2(4) enumerates the functions the FSA has. Sections 3-6 contain descriptions of what the legislators means in relation to each of the regulatory objectives. 36 See. Art. 7 Financial Supervision Act 2006 37 This is due to the Polish Constitutional order. The Polish Constitution strictly enumerates the state’s organs capable of issuing executive legal rules in art. 87(1). The Committee not being part of that enumeration could only be given supervisory and administrative functions. It may does however issue specific rules in relation to the banking sectors activities due to a special resolution granted of banking law. See: P. Pelc “Co Wolno Komisji Nadzoru Finansowego?”,Portal Gazety Ubezpieczeniowej 2007, available at: http://www.gu.com.pl/index.php? option=com_content&task=view&id=22579&Itemid=307

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Financial Services Authority is given the same opportunity may have a number of influences on the PFSA. First and most importantly, that the entrance regime to the regulated stock markets will be based on hierarchically superior legal acts which are less malleable and responsive to dynamic events. This can mean that on one side the issuers are faced with a certain level of certainty on the other that the PFSA cannot influence regulation in the same dynamic sense that is possible to the FSA. On the other hand, a brief comparison of the institutional frameworks shaping the regulators’ governance may ultimately have a huge influence on the markets themselves.

Transparency and Public Consultations There is one more difference that is visible in the ways the two regulators I am trying to compare operate. However this issue is not a strong formal part of the institutional framework shaping the institutional framework of regulatory institutions of Poland and the UK, in my opinion has a large influence on the dynamics of regulation in each of the two countries. Both the Authorities have education, consultation and dissemination of information mentioned as parts of their missions and goals 38. However the FSA seems to put more of an emphasis on the openness and transparency of its activities towards the open public. The PFSA does not mention transparency as one of its objectives in any of its published papers, whereas the FSA mentions the transparency objective to its policies in numerous publications. Secondly, the PFSA does not rely on public participation in shaping its policies. It can be argued that this is not necessary, since the PFSA does not have the capability of 38

For the PFSA see website: http://www.knf.gov.pl/en/About_the_PFSA/Tasks_and_objectives/index.html For an outline of the FSA’s open policy towards discharging its functions and goals see: The Financial Services Authority, “The Open Approach to Regulation”, 1998, available at: http://www.fsa.gov.uk/pubs/policy/P08.pdf

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issuing regulations. However having the statutory capability of initiating the legislative process and being a consultative body on its own (to the President of the Council of Ministers and to the Council of ministers of its own), considerably large areas may be identified where consultation with different experts could be beneficial to the regulatory environment of which the regulator is part of39. Instead the PFSA focuses on its own expertise and on the information it gathers through different administrative means. The flow of knowledge and expertise in the case of the PFSA in only single way as the Authority is charged with educating and raising awareness, however has no formal access to expertise that is available to it outside of the official system of public administration. The only access points for information to the PFSA is through formal means of disclosure from the regulated markets and industries, which then the regulator can compile into statistical and macroeconomic data analyse on its own and then publish in the form of reports from the regulated markets. The only means through which experts, academics, and members of think tanks from the financial sector may access members of the Authority is informal, through academic conferences, seminars and other functions. These however do not carry the trait of transparency and cannot be treated as substitute for a formal consultation process.

In comparison with the FSA’s position as not only an organisation that publishes its own reports and its own research it is also capable of listening to opinions and ideas from the environment its goal it is to regulate. The only source of expertise and consultation available to the regulators is the availability of consultations from the European Central Bank. Under article 25.1 of the Statute of the European System of 39

See: The Financial Services Authority, „The Open…” p.4. Also the FSA was given the statutory duty to consult and to promote public awareness. These duties were formulated under s.4 and s. 8 of Part I of the FSMA 2000. Under the Polish Act the Authority is only placed with the responsibility to promote public awareness and to educate the public about the capital markets under article 7 (3) of the Financial Supervision Act 2006.

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Central Banks, the European Central Bank is obliged and given the right and duty to advise national institutions on issues related to prudential supervision of financial institutions40. This right however relates solely to issues related to the implementation of Community legislation, therefore can be argued as limited in scope.

It could be argued that the FSA’s position as an organisation independent from the industry it is to supervise is compromised by placing the burden of the statutory duty to consult the industry on new regulation. I would disagree with such statements as creation of formal consultative procedures has the clear effect that the regulator is no longer doomed to analyse the capital markets solely from one standpoint allowing its officers access to formal channels of highly sophisticated and potentially useful information that can prove influential on regulation. This positive flow of information can be used as a positive influence on the dynamism of development of adequate regulation by the Authority.

There are other factors within the structures of the UK and Polish regulatory Authorities and how they were organised that point to differences in the regulatory environment. The structure of the funding of the two regulators is one of those. The funding for the FSA is provided through the markets it regulates. The fees it raises from regulated firms and bodies constitute the Authority’s income41. The FSA’s regulatory budget will therefore need to be constructed with the expected fees in mind, keeping the regulatory costs to a minimum by improving organisational effectiveness and that the regulations it introduces will have a good ratio of costs to benefits. The PFSA’s wholly centrally budgeted funding structure doesn’t leave any 40

Article 25.1 of the Statute of the European System of Central Banks, Official Journal of the European Communities No C 191/68, available at: http://www.ecb.int/ecb/legal/pdf/en_protocol_18.pdf 41 Financial Services Authority, „Financial …”, p. 10

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space for incentives that could influence the performance of the Authority42.However both the Authorities are politically accountable as the FSA’s officers are responsible to the Treasury Minister43

Conclusions on the Authorities Above I have tried to describe the formal institutional framework of financial supervision in the United Kingdom and in Poland. From the issues I have described it becomes clear that the regulating authorities are shaped differently and have different powers, even though their goals and objectives are more or less the same. The Financial Services Authority is given bigger powers in relation to shaping the entry regime into the public stock market. The PFSA has a range of powers limited mostly to giving administrative decisions in relation to those markets. Also its abilities of gathering information and consultations are greatly limited in comparison to those of the FSA. Finally the budget of the PFSA is limited and designed by administrative organs and the Authority doesn’t have a clear influence over its final shape. However, according to the Financial Supervision Act 2006 the organ’s budget is mostly based on funds raised from regulated firms i.e. license payments and administrative fees. These however go through the central budget and the final responsibility of drafting the Auhtority’s budget lies with the Minister of Treasury. These factors, can stand for making the FSA a more dynamic and responsive institution that is able to supervise the public stock market more efficiently than its Polish equivalent that has been 42

J. Szewczak in “KNF zaspała czy jest po prostu bezradna?” available at: http://www.bankier.pl/wiadomosc/KNF-zaspala-czy-jest-po-prostu-bezradna-1911372.html ;The author criticizes the PFSA for not following the occurrences on the market, seeming to be unable to respond to and observe new developments of financial markets. In the eyes of the author the Authority’s structure and the availability of independent information are the main elements leading to a general lack of dynamism. 43 FSA statement on accountability: http://www.fsa.gov.uk/Pages/About/Who/Accountability/Relations/index.shtml

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constructed along a stiffer institutional framework, copied off blueprints for designing organs of central administration. The PFSA will ultimately be more isolated from the market it is to regulate. Influencing the material regulation will be more difficult and lengthy as the Authority has no direct power to do so.

The Implications of the European Internal Market Legislation

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The Financial Services Action Plan and the Single European Market Both the United Kingdom and Poland are members of the European Union. However, having joined at different times both the states were legally bound to accept the aquis communautaire in its broadest meaning into their legal systems 44. In the UK’s case of accession the initial burden of the volume of European Community regulation to be implemented was much smaller due to the timing of the UK’s accession in 1973. It was a great feat regardless of the size of legislation that had to be implemented into the legal order, due to numerous legal issues of the UK’s Constitutional law system. The challenge was taken upon through numerous legislative endeavours such as the 1972 European Communities Act45. Post – Communist Poland faced an even larger mountain both legal and political issues to overcome before its successful accession in 2004.

During the European Commission’s summit in Cardiff in 1998, the representatives of member states have agreed that the development and harmonisation of European capital markets is a vital issue to the Lisbon Strategy and therefore to the existence of a highly competitive, modern and prosperous single market of financial services within the European Community. After the summit the Commission issued a communication in 1998 on “Financial Services Building a Framework for Action”46. This Communication stated that integrating the financial services markets arising from the potential such integration will have on increasing the number of capital allocations options for investors. It also strongly supported the integration of equity 44

See, M. Maresceau, “Pre -accession”, in M. Cremona (ed.), “The Enlargement of The European Union”, Oxford Univesity Press 2003, p. 9 – 40. 45 Newman, Karl. “Legal problems for British Accession To the European Community”, in G. Wilkes (ed.), “Britain's failure to enter the European Community, 1961-63 : The Enlargement Negotiations and Crises in European, Atlantic and Commonwealth relations”, p. 46 (The 1998 Communication), COM(1998)625

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capital markets recognising that it would easier access to capital on a European wide scale would allow small and medium sized companies, thus increasing economic growth and employment. The Lamfalussy Report of 2001 played a large role in the integration of capital markets regulation across the European Union. Having strongly pointed out the inadequacies of the European level regulation and the EC legislative procedures, the report went on to propose reforms that could strengthen the institutional processes within the EC, allowing for better support of integration of the European capital markets. The report pointed out the gaps in the regulatory framework that were inhibiting the full integration of securities markets throughout Europe47.

The Financial Services Action Plan has been introduced as a plan for implementing these ideas into the European legislation on financial markets. The main idea behind the FSAP was to set out measures to be undertaken by 2005 with the aim to “fill out gaps and remove the remaining barriers to the single Market across the EU as a whole”48. The FSAP consisted of 42 issues and legislative measures that had to be undertaken for its completion. According to the tenth report prepared by the European Commission on the FSAP, 93% or thirty nine of the forty two FSAP measures have been successfully implemented49. Some of the most important measures described in the FSAP have been relevant to establishing a common entry regime to the regulated public stock markets and to the informational duties of companies whose shares are listed on European stock exchanges. Steps to introduce similar measures for

47

N. Moloney, “EC Securities Regulation”, 2008, 2nd Edition, p. 21-22 HM Treasury, The Financial Services Action Plan, Bank of England, “The EU Financial Services Action Plan: A Guide”,2003, available at: http://www.fsa.gov.uk/pubs/other/fsap_guide.pdf 49 European Commission, “Financial Services, Turning the Corner. Preparing the challenge of the next phase of European capital market integration ” 48

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unregulated markets were deemed unnecessary as those were rightfully recognised as well integrated and international in essence50.

The Prospectus Directive Directive 2003/71/EC of the European Parliament and the Council of 4th November 2003 on the prospectus to be published when securities are offered to the public, or admitted to trading, is one of the most important legal acts mentioned in the FSAP under its strategic aim of creating a single wholesale market of securities. The goal of the Directive was to create a single point of entry into the European capital markets, enabling issuers to raise capital in Europe without suffering the burden of unnecessary burdens. Also the Directive was to create a climate of legal certainty within the market so that security trades would be safe from unnecessary risks51. The Directive went about satisfying these goals through introducing a system of disclosure standards, applicable throughout all the Member States in relation to the public offer of securities.

The Single European Passport One of the most important aspects of the Directive was its introduction of the single “European passport”. The single passport approach realises the goal of eliminating unnecessary barriers to the gathering of capital from European capital markets, creating a single point of entry for issuers registered in one of the Member State jurisdictions52. The single passport institution allowed for the existence of a single 50

K. Pilecka “Financial Services Action Plan – stan realizacji i wplyw na ksztalt Europejskiego rynku finansowego ”, Bank i Kredyt January 2005, p. 25 - 35 also in relation to the integration of bond markets see: HM Treasury, the FSA and Bank of England, “The EU Financial…” , surpra note 46, p. 4 51 See, HM Treasury, the FSA and Bank of England “The EU Financial…”, p. 6 52 H. Schopmann, W. Hemetsberger, D. Schwander, C. Wengler, “European Banking and Financial Services Law”, European Association of Public Banks, Second edition, 2006, p. 53 - 55

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European entry regime, for the regulated public markets. As a consequence, issuers wishing to offer their securities to the regulated markets within the European Union need only to satisfy the regulatory needs in a single jurisdiction. Once their application for registration is complete in one of these states they are able to issue their securities onto any of the Member States’ public markets. In the case of publicly traded shares this would take the form of cross - listing. The Directive uses the term “home Member State”, article 2(m) (i-iii) give a definition of what is to be understood under this term in relation to different categories of issuers. Community issuers, who choose to issue securities domestically, will have to conform to the entry requirements and apply for registration with the regulator of the Member State where their registered office is located. Choice of registration is offered to those issuers who chose to issue non - equity securities with denomination per unit at more than € 1,000. They may choose their home member state according to where their registered office is located, where the securities are to be admitted to trading or offered to the public. For those issuers incorporated in non – Member jurisdictions, the “home Member State” jurisdiction will be that within the EU, where they choose to offer their securities for the first time. Once they have chosen the Home State jurisdiction for their securities, they will have to apply for approval from the Home State regulator. Once they have satisfied all the regulatory conditions as prescribed by Home State law, they then will be able to offer, or cross – list securities in any of the EC markets.

The European Entry Regime Specific Regulations The Directive constitutes provisions regulating the form and procedure for filing a prospectus in regard to a public offering of securities. It gives clear and decisive definitions to issues such as what constitutes a public offering of securities, thereby 29

clearing out the possibility of differing understanding of the term across Member States. For the first time in the history of European regulation, there has been a single definition of what constitutes an effective public offering of securities to the public. The definition given by the Directive is as follows: “a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities”53. The existence of this definition is particularly important to the future of the directive as leaving this issue to the discretion of Member State legislators could effectively mean that the Directive would be applicable in different situations across the European Community thereby defeating its basic aim54. In addition to the above, the Directive also regulates the rest of the admission to regulated markets process. The Directive also contains important regulation in regards to prospectuses themselves, the process of filing for approval, publishing and drawing up of prospectuses.

The Directive clearly states that no public offer of securities on the regulated markets can be performed without prior publication of a prospectus, or without being subject to exemptions provided for in the Directive itself55. It clearly states the general provisions and rules for drawing up a prospectus and gives guidelines as to how long it retains validity56.

53

See art. 2(1)(d) Directive 2003/71/EC Art. 1(1) Directive 2003/71/EC 55 Article 3 and 4 Directive 2003/71/EC 56 Art.5 and 9 Directive 2003/71/EC 54

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Personal Responsibility Issues of defining minimum scope of responsibility for the contents of the prospectus have also found address in the Directive. It is notable that the Directive does not however place any exemptions on the criminal responsibility and the objective or subjective side of its application. This issue may remain irrelevant for issuers acting in bona fide and without any intent of committing fraud57. However the issue of what constitutes the criminal offence of fraud may still remain a consideration under different jurisdictions for some issuers. There is a typical minimum – maximum mechanism applied in article 6 of The Directive as once it prescribes the minimum scope of personal civil responsibility for information published in a prospectus, it also limits the possible extent of responsibility for information. This is achieved in art. 6(2) stating that however Member States shall be compelled to attribute at least the minimum scope of responsibility prescribed by the Directive, they cannot however extend the objective reach of responsibility from the merit of the prospectus itself onto what has been published by the issuer in the prospectus’ summary.

The

Directive contains prescriptions for regulators on to how proceed with applications for entering public markets. The Directive goes so far as to set out a deadline for handling registration filings. For draft prospectuses the limit is ten days, for initial public offerings the time limit is extended to twenty days58. The Directive also lays out the conditions for authorisation of omissions of required information from prospectuses59. The abovementioned rule regulating responsibility for information published in a prospectus, in my opinion, performs the role of limiting the possibility of regulatory competition occurring among Member States legislations, thereby limiting the 57

R. Pretorious, J. Ferreira, “The implementation of the new Prospectus Directive in the United Kingdom”, Journal of International banking Law and Regulation 56, 2005, p. 8 58 P. Boury, R. Panasar “The Prospectus Directive – Creating a single European passport”, Global Counsel Paper Series, 2004, available at: www.practicallaw.com/A40700 59 Art. 8 Directive 2003/71/EC

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possibility of forum shopping by issuers, especially those from outside the Single Market. Limiting the scope for potential differences as to whom responsibility may be attached for the information published in a prospectus between member jurisdictions ultimately has the effect that this factor will stay out of the scope of consideration for those among issuers who are searching for the most favourable jurisdiction in terms of the scope of responsibility.

Approval Procedure A similar mechanism seems to have been applied in article 13 of the Directive which limits the maximum length of regulators’ approval procedures for IPO prospectus filings to 20 days. The directive refrains from prescribing the depth and methodology of review performed by regulators, however restricting the period of time that can be spent on review. In my opinion this rule has the practical implication of effective harmonisation of approval and review procedures among the many Member States’ regulators. Refraining from setting standards in methodology, this rule achieves a great deal in practical harmonisation for issuers, limiting the possibility of regulators ‘undercutting their own wings’ in competitive terms. Lengthy approval procedures in one Member State could constitute a burden to issuers, ushering those issuers to apply for registration in a Member State where approval procedures are take less time. The time factor of approval procedures can seriously increase the costs of raising capital by extending the time period for which the issuer will have to compensate the services provided by legal and economic counsel. It is noteworthy that the Directive does not mention or regulate the depth or formal issues related to the procedure itself leaving those to particular Member States.

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Incorporation by Reference The Directive also introduces a number of new solutions that were previously unknown to some Member State legal systems. First the Directive allows for, and compels Member States to allow, the incorporation by reference of some information that was previously published and authorised by competent authorities of the Home state60. Article 12 of the Directive introduced another procedural facilitation for issuers, through allowing prospectuses to be registered in the form of multiple documents depending on the choice of the issuer. In whatever option the issuer might choose the prospectus will have to be composed of three parts: •

A Summary

•

A Registration Document

•

A Securities Note

The Directive had to achieve the goal of harmonisation at a level that would not be reachable if action was undertaken by individual states in any form. Its goal was also to achieve greater market efficiency, thus increasing welfare after accounting for the overall costs of implementation61. To do so the Directive displaced the old regime based on mutual recognition and minimum harmonisation. Instead it introduced the above mentioned system of central regulation of capital markets, with implementation on national levels in all the Member States. The system introduced by the directive had to take into account the issues of regulatory competition and its possible effects on the SEM.

60

Art. 11 Directive 2003/71/EC G. Ferrarini, “Capital Markets in the Age of the Euro: Cross - border Transactions, Listed Companies and Regulation”, 2002, p. 249 61

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Regulatory Competition Issues S. Woolcock gives a list of preconditions whose existence can effectively lead to regulatory competition. The single passport regime, provides a single entry point to all the capital markets of the European Community, providing issuers with a liberal regime as to the forum which they may choose for operating. The other requirements for regulatory competition to exist within the SEM include transparency and ease with which different sets of regulations are comparable for issuers. The transparency of these rules allows for different jurisdictions to be easily surveyed effectively leading to the third condition. That being the ease with which the impact of regulatory policy can be assessed in terms of the issuers goals. As I mentioned above, when considering the different factors that affect an issuer’s decision to enter the regulated equity 34

markets, the cost that compliance costs of regulation can play a vital role on the company’s effective decision62.

The impact with which varying costs that regulatory compliance costs may influence a company’s decisions has been clearly illustrated in the Centros case63. In this case the European Court of Justice faced a case where a company chose to register its main office only pro forma in a different jurisdiction, only to set up a branch of their company, using the freedom of establishment rule of articles 52 and 58 of the Treaty of Rome, to conduct business in what was de facto its home jurisdiction 64. This case clearly illustrates the potential that regulatory competition carries.

Differences in entry requirements, accompanied by the single passport rule could especially influence companies from outside the European Community. The Prospectus Directive allows them to choose their own Home State jurisdiction. As mentioned above, for the purpose of the Directive, the Home State jurisdiction will be for those entities that upon which they will choose to offer their securities for the first tie within the SEM.

‘Race to the Top’ v. ‘Race to the Bottom’ If regulatory competition would not be minimised by the Prospectus Directive through limiting its potential to rules where there is little transparency and

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S. Woolcock, “Competition Among Rules in the Single European Market”, in “International Regulatory Competition and Coordination. Perspectives on Economic Regulation in Europe and the United States”, ed. By W. Bratton et al., 1996, p. 289 - 321 63 Centros Ltd v Erhvervs- og Selskabsstyrelsen (C-212/97), ECJ, 9th March 1999, [2000] Ch. 446 64 For a more detailed consideration of the case see: E. Wyymersch “Centros: A Landmark Decision in European Company Law”, Ghent University Financial Institute Working Paper 99-15, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=190431

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comparability available between Member State Jurisdictions, issuers from outside the SEM could gain a potentially powerful competitive advantage. Being able to choose their Home State jurisdiction through simply identifying the one with the least regulation within the European Community and offering their shares to the public there for the first time they would gain access single passport access to all the Member States’ markets65. Such a situation could cause competitive inconsistencies among the Member States’ capital markets. If the aim of regulation is to prevent sub – optimal regulatory levels of regulation within the SEM, the rules governing the entry regime to the capital market have to be homogenous at a high level. This can only be achieved on a European scale through a number of rules inhibiting the possibility of a ‘race to the bottom’ among Member State regulators66.

On the other hand the Directive seems to heed to the numerous voices of the scientific community that convey the point that regulators being left to their own merits will tend to favour over – regulation.

Regulators, being creatures of their local

jurisdictions will tend to focus on the fulfilling their statutory objectives under their domestic law, rather than commit themselves to a strategy of under regulation. According to S. Davidoff, regulatory competition can take place in the form of a specific race to the top, where regulators rather focus on satisfying their statutory goals instead of accepting a regulatory strategy that would make their domestic market more competitive67. This phenomenon is particularly observable in the United States, where the aftermath of the Sarbanes Oxley Act has raised listing costs for domestic and foreign companies, that more and more often choose to refrain from 65

The single passport is given upon issuing of a certificate by the Home State regulator, drawn up in accordance with art. 18 of Directive 2003/71/EC, stating that approval for a prospectus has been granted by the competent authority. 66 S. Woolcock, “Competition …”, p. 289 - 293 67 S. Davidoff “Regulating Listings on a Global Market”, 86 North Carolina Law Review, 2007, p.89 154

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listing on the US stock exchanges, choosing to offer their securities in Europe and Asia instead68.

In either case, the existence of a predisposition towards regulatory competition among Member States in regulating the listing regime and entry requirements would defy the definite goal of the Prospectus Directive being the protection of investors on a pan – European scale. Both the hypotheses of predicting the directions of regulatory competition seem to have been accounted for in some parts in the Prospectus Directive. An example of this is the issue of the prescribed minimum and maximum scopes of responsibility for the information published in a prospectus69.

Prospectus Directive and High Harmonisation Rules Another very explicit example of European legislators that the European Securities markets are prone to the effects of regulatory competition is the very fact that the Prospectus Directive constitutes of mostly specific rules that do not leave space for varying implementation between jurisdictions70. Furthermore, the Directive itself provides in articles 5(5), 7, 10(4), 11(3), 14(8), 15(7), that the Directive will be followed by more specific European legislation. The very existence of specific regulation forming the European - wide regime of entering the public regulated markets by companies is noteworthy. This is because of the rule of subsidiarity. The principle is expressed in numerous places within the monolith of the first pillar of

68

L. Zingales, “Is the US Capital Market Losing its Competitive Edge?”, ECGI – Working Paper No. 192/2007, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1028701 69 Art. 11 of Directive 2003/71/EC 70 For a comparison of the implementation of the Prospectus Directive in the United Kingdom and in Poland see the next chapter.

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European law71. The most basic concern of the principle is the derogation of powers on issuing specific regulation to the Member States when the preconditions predefined do not occur72. In the case of the Prospectus Directive with its aim as described by the FSAP being the creation of a single European regime of raising capital through the means of the SEM the principle of subsidiarity would be inapplicable due to the above mentioned issues related to regulatory competition. This point is further reinforced by the specific regulation anticipated in the articles of the Directive mentioned above73. These articles provide for the resolution of directly applicable specific rules regulating the format, method of publication, form of advertisement of a prospectus as well as the specific information that is to be present in a prospectus by the Commission of European Communities. These specific rules took the form of Commission Regulation (EC) No. 809/200474.

Further Harmonisation – Level 2 Regulation The Regulation75 is a Level 2 regulation as specified by the Lamfalussy procedure. It provides highly technical and specific requirements towards the informative duties that any prospectus is required to contain in order to provide the regulator in order for approval to be granted. Its main concept, apart from implementing the abovementioned delegations provided for in Directive 2003/71/EC, revolves around instituting a ‘building blocks’ concept applicable to the formation of information to be 71

Namely in, article 5 of the ECT in conjunction with art. 2 (b) and the 12th recital in the EUT preamble. 72 The preconditions are defined under art. 5 of the ECT. These preconditions are first, the area where regulation is to be issued is not exclusively in the competence of the Community, secondly the objectives of regulation cannot be sufficiently handled by the Member States acting on their own and third, the aimed objective can be more efficiently handled by the Community. 73 articles 5(5), 7, 10(4), 11(3), 14(8), 15(7) of Directive 2003/71/EC 74 Text of the regulation as it was published in the Official Journal of the European Union [2004] L149/1 is available here: http://ec.europa.eu/internal_market/securities/docs/prospectus/reg-2004809/reg-2004-809_en.pdf 75 EC Regulation No. 809/2004, hereunder called ‘the Regulation’

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provided in a prospectus. It was amended in 2006 to provide for regulations of third country accounting standards76 and in 2007 with regulations addressing the treatment of complex financial history of companies77. The amending provisions added further detail.

E. Ferran argues that the provisions found in the Directive and in the Level 2 Regulation have been designed mostly to counter the effects that the previous regime had on the capital market. Due to the material ramifications of this paper I cannot go into describing the detail specifications that were in force prior to the installation of the Directive and the Level 2 Regulation. In my opinion it is enough to say that the previous system was based on ‘mutual recognition’ of entry requirements among Member States, rather than a ‘single passport’ approach demonstrated by the Directive. It is clear from analysing the discussed articles of the Prospectus Directive and from the general spirit of the Regulation that the identifiable spirit of these remedies is the creation of a single, strict and specific system of European rules for entering the regulated equity markets.

The above analysis of the technical regime on entering the regulated markets in Europe creates the impression that it is a coherent system that enforces a ‘one size fits all’ set of regulations over all the regulated securities markets in Europe78. On grounds of my earlier discussion, I find that some of the basic principles of the Directive and the very existence of the Level 2 specific Regulation shows evidence that it was 76

Commission Regulation (EC) No 1787/2006 European Union Official Journal [2006] L337/17 Commission Regulation (EC) No 211/2007 European Union Official Journal [2007] L61/24 78 The ‘one size fits all’ model of regulation was criticised by the London Stock Exchange on the grounds that the new regime would undermine the UK secondary markets and limit investors access to non- EU equity products, in London Stock Exchange, “Comments from the London Stock Exchange on Proposed Prospectus Directive”, available at: http://www.londonstockexchange.com/NR/rdonlyres/A6B9CF00-E0BE-4899-A6E571EC95A7317E/0/0108PDatt.doc 77

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designed with the aim of discouraging regulatory competition between Member States79.

However the problem I formulated in the beginning of this paper remains. The fact that the regime regulating the entry requirements for companies into the regulated equity markets is a detailed and coherent system of rules seems to suggest that it is not the ‘law in books’ that constitutes a factor to the statistical differences in numbers of domestic and foreign companies applying to listing in the UK and Poland. The fact is that the specific disclosure requirements applicable to companies applying to list in either the UK and in Poland derive mostly form the Level 2 Regulation and the more specific institutions of the Prospectus Directive. Before any final conclusions can be reached regarding the triviality of European regulation on the capital markets I find it compelling to analyse the method, form and effects of implementing the Prospectus Directive into the jurisdictions of Poland and the UK.

Directive’s Implementation in Poland and the UK The Directive expressly provided the deadline for implementation in all of Member States. This date was set to be the 1st of July 2005 by article 29 of the Directive. In the UK, it has been anticipated that the implementation of the Prospectus Directive into the legal order will take considerable legislative efforts after the Directive was first published80. The official final report on the effect on regulation the Directive had does not however list many issues and generally treats the changes made to the listing 79

The International Capital Markets Association, “Letter to the Commission on the Review of the Prospectus Directive” from the 8th of April 2008, clearly states that one of the previous regime’s flaws was its lack of strength in implementing unilateral regulation among Member States. The ICMA calls for further strengthening of the Prospectus Directive’s regime and implementing more specific rules into the Directive when it will be amended. 80 R. Pretorius, J. Ferreira, “The Implementation…”, p. 1

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requirements as fairly small and limited in scope. There have been changes implemented into the Financial Services and Markets Act 2000 section VI to facilitate for the Directive. These changes include amending the powers and responsibilities of the FSA, the automatic effect of the Directive’s regulation, amendments made to the FSA’s Rulebook and guidance and the adoption of the CESR recommendations by the FSA81. Both the primary and secondary amendments to UK regulation implementing the changes brought by the Directive have been formulated in Statutory Instrument 1433, brought forward by HM Treasury82. In the case of Poland, the legislative steps that were to be undertaken for implementation of the Prospectus Directive into the legal order were delayed. Effectively the legislation necessary for the successful implementation of the Directive was not drawn up in time to meet the deadline provided by the Directive itself. This delay may have been caused by a number of issues. The law firm ‘Gessel’, in one of its briefing reports attributed this delay to the burden of legislative measures that had to be undertaken due to implementation of other pieces of European legislation related to capital markets regulation and internal reforms that were taken place adjacently to those in the Polish Parliament83. The appropriate legislation implementing the Directive has been passed by Parliament on the 29th July 2005. Nearly a month after the Directive was to be implemented into the legal order. This period was extended even more due to the vacatio legis period practiced in Poland, demarking the period the day when a bill is passed by Parliament and when the legislation officially comes into life. This created a certain number of difficulties for the Polish regulator. In order to create a climate of legal certainty the 81

S. Revell, T. Jones, M. Kalderon, “The Prospectus Directive and its Implementation in the UK”, Freshfields, Bruckhauser and Deringer Briefing Paper Series, available at: http://www.freshfields.com/publications/pdfs/practices/9790.pdf ; 82 SI 2005/1433, available here: http://www.opsi.gov.uk/si/si2005/20051433.htm ; explanatory note by HM Treasury Department, available here: http://www.hm-treasury.gov.uk/d/20050525_EM_to_PD.pdf 83 Kancelaria Prawna ‘Gessel’, “Najnowsze Zmiany na Polskim Rynku Kapitalowym”, 2005, available at: http://www.iir.pl/konf/loga/W0328/w0328_informacja_dotyczaca_zmian_prawnych.pdf

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(no longer existent) regulator PSEC, issued a report in which it cited the possibility created by the Constitution of Poland for the direct application of Community law in the Polish legal order84. The article allows for the legal fiction to be applied that when “an international agreement ratified upon prior consent granted by statute shall have precedence over statutes if such an agreement cannot be reconciled with the provisions of such statutes”85. This solution was also made possible by the aquis communautaire. However no such provision exists in any of the first pillar Treaties, there is body of case law developed by the European Court of Justice that provides a wholesome approach to the problem.

The rule derived from Van Gend en Loos86 says that citizens may call upon the rules imposed by the European Communities even without direct implementation of those into the national legal order of the Member states. In Defrenne v. SABENA87 the ECJ pointed to the vertical effect that the principle of direct effect has on the legislation of the Member States. A secondary effect of this ruling is that the Member States, through their organs, must observe the regulation issued by European Communities and ensure their application into their legal orders. The PSEC acted in anticipation of the necessity to provide for the direct application of the rules provided in the Prospectus Directive, by announcing a change in regulation prior to the actual implementation into the national legal order88. The legislation constituting the actual 84

KPWiG, “Zarys publicznego oferowania papierów wartosciowych po 1 lipca br. w sytuacji braku nowych regulacji implementujacych dyrektywe 2003/71/EC”, Report, 2005, available at: http://aries.kpwig.gov.pl/pdf/prosp_zmiany.pdf 85 Article 91(2) of the Constitution of Poland, available at: http://www.sejm.gov.pl/prawo/konst/angielski/kon1.htm 86 ECJ 05.02.1963 C-26/62, [1970] C.M.L.R. 1 87 [1976] ECR 455 C – 43/75, see S. Weatherill, “Cases and Materials on EU Law”, 8th Edition, 2008, p. 113 – 114 available at: http://books.google.co.uk/books? id=uoib8qONIsC&pg=PA113&lpg=PA113&dq=defrenne+v. +SABENA+Case+41/74&source=bl&ots=BoFMVRXMd5&sig=36JyMONNmVkMJ9UXcHwecVxft k0&hl=en&ei=bYkWSvHEEJWUjAfzjJj2DA&sa=X&oi=book_result&ct=result&resnum=4#PPA114, M1 88 KPWiG, “Zarys…”, p. 2 - 5

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final implementation of the Directive into the Polish legal order took the form of the Act on Public Offer89. The mentioned Act constituted a final and nearly direct implementation of the Prospectus Directive into the Polish legal order. Materially neither of the systems chose to implement varying solutions in their implementation of the Directive. In the UK also the HM Treasury, in a report on the impact the Directive had on the regulatory environment of the UK, agrees that the principle of high level of harmonisation intrinsic to the rules of the Directive precludes any variation in the form of implementation into the legal order90.

The Impact of the Entry Regime on the Market The discussion in the above paragraph clearly points out the fact that not only there was very little space for differences in implementation of the Directive’s rules, there was also very little variation in the actual method of implementation and its results. These findings allow for some initial conclusions to be made. It can be said that the European regime regulating entry into the official listings markets is highly homogenous and based on high harmonisation rules and the implementation of those rules in Poland and UK can be described as congruent. This statement however ultimately fails to give an explanation of the focal problem of this paper. Since there is a single entry regime for the market of listed equity securities, the impact of regulation ought to be the same in both the UK and in Poland. However the data quoted in the beginning of this paper suggests this is otherwise.

89

The Act on Public Offering, the Conditions of Entering Securities into the Organised System of Trading and Public Companies, 29th July 2005, Journal of Statutes Nr. 184, Pos. 1539 90 HM Treasury, “Final Regulatory Impact Assessment”, available at: http://www.hmtreasury.gov.uk/d/20050519_Final_RIA.pdf

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The results of the analysis made in the previous chapter, suggest that considerations of different factors than just the formal regulation must be taken into account in order to provide an answer for why does the Polish market seem to attract more listings than London. The approach of analysing the ‘law in books’ accepted in the biggest part of this essay provided only a partial answer to the basic problems discussed in this paper. L. Enriques has encountered a similar problem when analysing the impact of EC Company Law directives on the corporate governance of European companies91. He identifies the rules in the Prospectus Directive as enabling92. This is of course true only for cross – border IPOs and flotations that take place on the EU market. The author notably points attention in the direction of economic considerations of companies when undertaking the decision of entering the regulated markets. In times of decreasing capitalisation and increased competition among issuers for the limited funds available from investors these considerations gain in importance as they effectively can make or break any share offering.

The Importance of Public Enforcement La Porta et al. have published a study in which they find correlation between the development of equity capital markets and rules regulating stock exchanges, entering the market and trading93. The authors have analysed different approaches to the law and regulation of securities, confronting them with statistical evidence. The evidence gathered by the authors seems to constitute firm support of a number of points. Working on a group of 49 countries’ securities market regulations they have assessed 91

L. Enriques, “EC Company Law Directives and Regulations: How Trivial Are They?”, 27 University of Pennysylvania Journal of International Economic Law, 2006, p. 1- 78 92 L. Enriques, “EC Company…”, p. 32 - 33 93 R. La Porta, F. Lopez de silanes, A. Schleifer, “What Works in Securites Laws”, 2006, available at: http://mba.tuck.dartmouth.edu/pages/faculty/rafael.laporta/working_papers/WhatWorksInSecuritiesLa ws/securities06112004complete.pdf

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the strength of their disclosure regulations and the potential responsibility for omissions in a prospectus. They have then assessed the strength of public enforcement of securities markets regulation in that same group of jurisdictions94. Their findings conclude that however the independence and structure of public enforcement does not contribute to the development of securities markets and is in fact detrimental to their development95.

I find it appropriate at this point to consider some of the issues mentioned above again and create a probable set of issues that potentially influenced some companies to choose to list on the Warsaw Stock exchange rather than in London.

E. Ferran identifies the differences in Member States’ legislation of public enforcement, including the varying models around which regulators are constructed their varying powers and ways of operation as one of the factors that shape European securities markets today96. She follows in her argumentation the points brought forward by CESR, underlining that harmonisation of securities regulators law is necessary for creation of an efficient SEM97. In previous chapters of this paper, I have brought forward specific points in the shape of public enforcement legislation in Poland and in the UK. The differences in the regulators’ powers, procedures, experiences I have described with reference to Poland and the UK further reaffirm these statements as true. The differences in budgets, limits on access of information and the dynamics of operations of the said regulators only further underline this point. It is clear to me that the Polish regulator has limited powers and means of asserting 94

Public enforcement understood as the powers of a regulator, its authority, independence, structure, capability to issue subpoenas, non-criminal and criminal sanctions etc. see: R. La Porta et al. “What…”, p. 11 - 13 95 R. La Porta, “What…”, p. 23 - 24 96 E. Ferran, “Building an EU Securities Market”, 2005, p. 222 97 Committee of European Securities Regulators, Standard No. 1, p. 4

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those powers at its disposal. Furthermore, in face of a single entry regime, constituting the disclosure standards across Europe, and the Prospectus Directives’ twenty day limit on approval procedures, the Polish regulator can be clearly described as a less efficient regulator than the FSA, which is dealing with the same issues within the same time limit. This issue in my opinion constitutes a powerful consideration for companies especially for those from outside the European Community that get to choose their Home State jurisdiction. These considerations can noticeably limit the costs of raising capital on the Warsaw Stock exchange in comparison with the costs offered by London. On the backdrop of an identical approval procedure, and identical time limits, Polish underwriters offer their services at lower rates than those in London. More importantly the market size offered by the Warsaw Stock Exchange is considerably smaller than that in London, meaning that the issuer will compete with a smaller number of companies for the investors’ capital.

Conclusions Above in this paper I have described numerous aspects of the regulatory regime of Poland and the UK. I have discussed the considerations made by companies, influencing their decisions to enter share markets, and the factors that can push companies towards forum shopping. I have focused my efforts on describing some aspects of the regulatory environments in Poland and the UK to broadly assess the reasons for the differences in behaviour of capital markets in those countries in 2008. I have chosen not to consider some issues of private law, such as the investor protection regimes and responsibility for market abuse, not because of the fact that they are not noteworthy but rather due to the limitations imposed on this type of work. I have identified differences in parts of the regulatory environment of the two 46

countries. At the initial point of my research I have anticipated those differences to span across a broader range of issues. This fact however adds to the gravity of the issues explained and identified. In conclusion, there have been considerable efforts made by the European Communities aimed at improving harmonisation of the regulatory environment of Europe in relation to entry on regulated equity markets. These efforts have proven effective from a ‘law in books’ perspective. This does not mean that legal harmonisation would lead to the emergence of a single ‘European Stock Exchange’. The multiplicity of European exchanges provides a competitive market, allowing for issuer choice and more effective resource allocation. With London remaining the dominant Stock Exchange of the region does not mean that other regional exchanges have no right to exist. Exchanges such as the GOW provide a valuable asset for issuers allowing for different options for gathering capital. The Single European market and the single passport principle can encourage diversity. The GPW will most likely will never be able to compete with the LSE market on equal grounds. Differences in the two systems along with practical factors continue to play an important role in the practical functioning of their markets.

The Lisbon Strategy and the Financial Services Action Plan of the European Community have had a profound legislative and regulatory impact on the regulation of the capital markets of Europe. A number of highly harmonised rules have been created to enable the emergence of a new Single European Market in financial services. Statistical data however suggest that the public regulated stock markets in some countries seem to have gone on their way without noticing these harmonised rules. The LSE remains the biggest single market for listed companies in Europe. This paper couldn’t try to give a total description of all the factors that have shaped the

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markets of those countries, simply due to how compound they are. However similar the material regulatory regime functioning in those countries, there remain differences both practical and formal that lead me to believe that in some aspects the two regulatory environments remain very different. Poland is and in my opinion will remain a country where the initial costs of entering the listed markets will be relatively small, due to relative weakness of the regulator and the inherent characteristics of its economy. In relation to this, the UK market is and will most likely remain a class of its own, with an active regulator and relatively greater initial costs of gathering capital. This means that metaphorically the Polish GPW could be treated as a geographical alternative investment market, where although the disclosure requirements remain the same, the relative costs are lower.

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