EC: modernisation of directive 2004/109/EC on the harmonisation of transparency requirements

Comments from ACCA to the European Commission, August 2010.

General Comments

ACCA welcomes the Commission’s desire to improve the regulation of financial markets with a view to improving access to financial information for investors while reducing the burden on issuers, particularly for small and medium sized issuers of securities. ACCA has previously indicated its belief that the availability of reliable and transparent information for stakeholders in small businesses is vital to encourage investment in and trade with such entities. The creation of a reliable and accessible pool of cross border information for investors would facilitate and foster such activities through increased transparency, bringing the goal of a true single European market closer to realisation. 

The attractiveness of regulated markets for small listed companies and possible options to address in the Transparency Directive problems related to those small listed companies

Q1  Do the Transparency Directive obligations for issuers (eg disclosure of annual and half-yearly financial reports, quarterly information etc) impact on the decisions of small listed companies to be listed in or to exit regulated markets? 

We do not believe that the Directive’s requirements, in themselves, act as a barrier to entry to the capital markets. 

At its most basic, any requirement to publish information imposes a burden on the businesses to which it applies. The Directive has indeed increased reporting obligations and tightened reporting deadlines. Where accession to a listed market applies particular requirements which are more onerous than those required of businesses not listed, then this will act, to a greater or lesser extent, as a barrier to entry. However, these costs and barriers can be justified on policy grounds. Investors benefit not only from the knowledge they acquire about the subject matter covered by the Transparency Directive, but can also indirectly derive comfort from the ability of the issuer to operate the necessary processes to comply with the Directive. Compliance with the rules of the listed market is the price paid by issuers for access to the pool of liquidity provided by investors in that market.

The attractiveness of listed markets to small issuers will be influenced by a number of factors – what level of investment they will be able to access via the chosen market, and whether the costs of accessing that finance are worthwhile. To a certain extent, the value of the market will actually be enhanced by the difficulty of entering it. The distinction in the UK between the 'junior' AIM market and the 'senior' London Stock Exchange is based in part on the differing requirements imposed on issuers in the two markets (which is reflected also in the differing application of the Transparency Directive to the two markets).

Q2   Which are the most important costs for small listed companies associated to compliance with the Transparency Directive (eg the cost of preparing the accounts, audit costs, legal costs, cost of making public information etc)?

The main stumbling block to smaller enterprises seeking a listing, whether primary or secondary, on the senior market in the UK is simply one of cost. A number of businesses have in recent years actually chosen to delist from the LSE and relist on AIM. However, this is as much to do with the tax benefits to investors and related availability of funding as it is to do with the regulatory requirements per se. Nonetheless, the imposition of a further tranche of regulation, albeit one aimed at reducing the burden on smaller issuers, would in the first instance increase costs. To be justified, the long term reduction in the administrative burden on such issuers would have to outweigh the initial direct costs and the long term indirect costs in terms of reduced transparency in that sector of the listed market, which would in turn be expected to reduce the level of capital prepared to invest in that market.

With this in mind, a reduction in the burden on smaller issuers would need to address specific areas of known difficulty. Applying different rules on the basis of some measure of size simply because differentiation underpins the 'think small first' principle may not be helpful. So for example the relaxation of requirements to provide management information on a quarterly basis, or of time limits for reporting other interim information, are unlikely to be in themselves sufficient motivation to influence a business’s decision on whether to list or not, although there may be other benefits.

Q3  What changes to the Transparency Directive will bring important reductions in costs for small listed companies?

If smaller issuers are exempted from the requirement to publish quarterly information then there will be a reduction in transparency. In principle, we believe that transparency should remain a core element of the information disclosure requirements of the capital markets, irrespective of the size of the individual issuer. Shareholders will have their own views on this matter. Those investors who place significant reliance on quarterly reports are likely to be those who monitor companies and markets closely on a regular basis; the majority of private investors are unlikely to place much reliance on quarterly information statements at all. However, to the extent that the aim of the directive is to protect investors, smaller issuers are as a rule likely to be more risky than larger issuers. They are therefore those which merit the highest level of scrutiny and regulatory control, so reducing the requirement to publish regular information would be unhelpful. 

However, revising the timing for publication of interim information could reduce the burden on smaller issuers and even have indirect benefits. Currently, the majority of listed companies across Europe have year-ends which coincide with either the calendar year or one of the quarters (March, June or September). As a result, quarterly information tends to be bunched in relatively tight windows, and for smaller issuers this acts as an indirect discrimination. Analysts and investors will tend to focus on larger issuers first, and the visibility of smaller less well-known issuers suffers. However, a four or eight week difference in the timetable for production of interim reports from smaller issuers would have the twin desirable effects of both reducing the burden on the issuers and also improving their visibility as the interim results of SMILEs would be published out of synch with the cycle of publication for larger issuers, thus increasing their visibility. 

Q6  What would be the optimal definition of a small listed company in the context of regular transparency requirements? 

The consultation document suggests two broad alternative bases for differentiation between listed companies, either on a pan-European basis or based upon local factors. In the short run, a 'local' test (the percentage of average capitalisation of a company listed in the particular market) has many attractions, as it will impact on a more similar range of companies in each stock market. However, if the aim of the Directive is harmonisation, it is difficult to justify this differential treatment, particularly where the aim is to promote a single market and improve flows of liquidity throughout the EU. Investors would see not simply two different types of issuer (SMILEs and 'large' issuers), but up to 54 different types, with the boundary between small and large set a t a different level for each of the 27 member states. In the context of investor requirements to notify issuers of significant interest, this level of complexity would be counterproductive, and form the perspective of investors from outside the European Union would actually increase the perception of a fragmented European investment market. 

Q7.2   Do you think that an extension of the deadline for the publication of financial reports would imply a reduction in legal, auditing or other type of costs? 

We do not consider that extending the deadline for the submission of financial reports would have the effect of reducing compliance costs, though we do think the idea has the potential to be beneficial to companies. 

Q7.3   Would you see the benefits from integrating in the Transparency Directive the disclosure obligations mentioned in question 8.3 which are currently in different directives? 

We see merit in integrating the specific disclosure obligations of the Transparency Directive with those imposed by other legislation. 

Information about holdings of voting rights – intentions with holdings or voting policies disclosure

The disclosure of investors’ voting intentions is a controversial area. Far from enhancing transparency and improving liquidity flows, requiring investors to crystallise and disclose their intentions would run the risk of increasing volatility in the markets, as the confirmation of a significant investor’s intention to sell their holding could prompt other smaller investors to modify their behaviour. 

Imposing this further requirement on investors, while superficially attractive from a transparency perspective, has a number of implications for the investor/issuer relationship, and is based on assumptions about the model of investment which may not be appropriate in all cases. The approach of different institutional investors (who will for the most part be those affected by the proposed requirements) varies, but it is key to remember that their primary duty lies not to the companies in which they invest, or even to the other stakeholders in those investments, but rather to the stakeholders in their own investment business. As such, the disclosure of their voting intentions in respect of all significant investments may well be an effective requirement to disclose their own commercially sensitive strategy. 

A further problem with disclosure of investors’ intentions is the timing of such disclosures. An annual disclosure is unlikely to be useful, but a requirement to notify a change in intentions as it occurs would be problematic in terms both of framing and policing the requirement. Moreover, the value of the disclosure is likely to be weakened where for example a fund manager votes different blocks of a significant shareholding in different ways in order to comply with the wishes of his clients.

Ineffective application of the Directive because of diverging national measures

While the term gold plating is often avoided because of its negative connotations when referring to more stringent national measures, it is nevertheless appropriate in this context, where the inconsistency of approach is directly opposed to the stated aims of the Directive (as opposed to say legislation with the aim of enhancing health and safety provision for visitors to public tourist attractions, where the cross border implications are minimal). If the Directive is to be considered a success then it must provide the benefits of enhanced transparency without imposing a distortionary cost burden upon the markets.

As ACCA has observed in the context of the abolition of audit and accounting requirements for small, medium and micro enterprises, the absence of any pan-European legislation does not necessarily lead to simplification or a reduction in local administrative burdens, and is likely to result in the creation of domestic regimes which are incompatible with each other, acting as a barrier to cross border transactions. However it is inconsistency, rather than the absence of guiding regulatory principles that causes the problems. The minimum harmonisation approach of the Transparency Directive has the same effect, as individual Member States can introduce (or retain) listing rules that are more onerous on issuers than required by the Directive. If investors are to have confidence to invest in businesses outside their home state then they must not only have confidence that the information on which they rely is accurate, but must also feel comfortable with the presentation and interpretation of that information. 

Other comments

There are many strands to the internationalisation of business. In addition to the transparency directive, there is the project for the interconnection of business registers, and the rise of Extensible Business Reporting Language (XBRL) which could potentially play an important, if not vital role in the harmonisation of information disclosure standards across the EU as is already the case with the COREP and FINREP projects. Any proposals for harmonisation of information provision should be framed in such a way as to take maximum advantage of the ability to rely on a standard platform for information exchange, as presentation of information in the language of a different Member State is precisely the sort of application for which XBRL is ideally suited.

Finally, we would make the point that the purpose of information disclosure is to provide information to the market which market participants will find useful for the purpose of making their investment decisions. Keeping regulatory burdens to a reasonable and proportionate level, bearing in mind the circumstances of the issuer concerned, is a worthwhile objective. But this aim must be secondary to the information needs of the capital markets. Thus the views of the investment community will be crucial in this exercise.