Financial Services Authority – issue of shares to the public

Chapter 5

Financial Services Authority – issue of shares to the public

Chapter Contents

5.1      Background

5.2      Financial Services Authority

5.3      Functions of the Financial Services Authority

5.4      Statutory Objectives

5.5      Principles of Good Regulation

5.6      Who is regulated?

5.7      The single regulator

5.8      Market conduct

5.9      The London Stock Exchange

5.10    Regulation

5.11    Prospectuses

5.12    Content

5.13    Exemptions

5.14    Powers of the Financial Services Authority

5.15    Remedies for misleading prospectuses

5.16    Invitations to invest


Self-test questions

Further reading

5.1  Background

As has been noted in section 1.2.4, most companies are limited by shares. Public companies may issue shares to the public (section 1.2.5).

The Financial Services and Markets Act 2000 has replaced the Financial Services Act 1986 and related legislation in regulating the financial services industry. There is now a single regulator, the Financial Services Authority.

5.2  Financial Services Authority

The Financial Services Authority (FSA) is an independent non-governmental organisation (see It has statutory powers derived from the Financial Services and Markets Act 2000. It is a company limited by guarantee and is financed by the financial services industry. The Treasury appoints the board of the FSA, which comprises executive and non-executive members.

The board sets overall policy, although day-to-day decisions and management of the staff are the responsibility of the Executive Commitee.

One of the non-executive directors, the Deputy Governor (Financial Stability) of the Bank of England is an ex officio director. The non-executive directors are responsible for ensuring the economical and efficient running of the Financial Services Authority and overseeing the mechanisms of financial control. They also set the pay of the executive members of the board.

5.3  Functions of the Financial Services Authority

The Financial Services Authority regulates the financial services industry in the United Kingdom.

It has a wide range of rule-making, investigatory and enforcement powers in order to meet the four statutory objectives set for the FSA. In meeting these statutory objectives the FSA is also obliged to have regard to the Principles of Good Regulation.

The statutory objectives and principles of good regulation centre on three strategic aims:

(i) promoting efficient, orderly and fair markets;
(ii) helping retail consumers achieve a fair deal; and
(iii) improving the country’s business capability and effectiveness.

5.4  Statutory Objectives

The Financial Services and Markets Act sets four statutory objectives for the FSA. These are:

(i) market confidence: maintaining confidence in the financial system (s 3);
(ii) public awareness: promoting public understanding of the financial system (s 4);
(iii) consumer protection: securing the appropriate degree of protection for consumers (s 5); and
(iv) the reduction of financial crime: reducing the extent to which it is possible for a business to be used for a purpose connected with financial crime (s 6).

These statutory objectives are supported by a set of principles of good regulation. The objectives also provide political and public accountability; the annual report of the FSA contains an assessment of the extent to which it meets its objectives. There is also scrutiny of the FSA through Parliament which may focus on how the objectives are achieved.

In addition the objectives also govern the way that the FSA carries out its general functions such as rule-making and giving advice. Thus the FSA is under a duty to show how draft rules that it publishes relate to the statutory objectives.

The objectives also assist in providing for legal accountability. If the objectives are wrongly interpreted or if the FSA fails to consider them, then it can be challenged before the courts by way of judicial review.

5.5  Principles of Good Regulation

In pursuing its functions under the Financial Services and Markets Act, the FSA is required to have regard to additional matters – ‘Principles of Good Regulation’. These principles of good regulation are:

(i) Efficiency and economy – This refers to the need to use resources in the most efficient and economical way. The non-executive committee of the board of the FSA is required to oversee the allocation of resources and to report to the Treasury every year. The Treasury, in addition, is able to commission ‘value for money’ reviews of the FSA’s operations.
(ii) The role of management – This deals with the responsibilities of those who manage the affairs of authorised persons. A firm’s senior management is responsible for its activities and for ensuring that its business complies with regulatory requirements. This principle helps to secure an adequate but proportionate level of regulatory intervention by holding senior management responsible for risk management and controls within firms.
(iii) Proportionality – The restrictions imposed by the FSA on the industry must be proportionate to the benefits that are expected to flow from those restrictions. In relation to this proportionality the FSA takes into account the costs to businesses and consumers.
(iv) Innovation – This recognises the desirability of facilitating innovation in connection with regulated activities. This involves in appropriate cases not restricting market participants from launching new financial products and services.
(v) International character – The international character of financial services and markets, and the desirability of maintaining the competitive position of the United Kingdom, are an important aspect of the regulation of financial business. This involves co-operating with overseas regulators to agree international standards and to monitor global firms effectively.
(vi) Competition – The need to minimise the adverse effects on competition that may arise from the FSA’s activities and the desirability of facilitating competition between the firms that are regulated is recognised. The principle of encouraging competition involves the avoiding of unnecessary regulatory barriers for businesses.

5.6  Who is regulated?

The Financial Services Authority, whose aim is to promote efficient, orderly and fair financial markets and help retail financial service consumers get a fair deal, regulates financial services markets, exchanges and firms. It sets the standards that these organisations must meet, and may take appropriate action against firms if they fail to meet the required standards.

5.7  The single regulator

The FSA has been the single regulator for financial services since December 2001 on the coming into effect of statutory powers under the Financial Services and Markets Act 2000. The Act provides a wide range of rule-making, investigatory and enforcement powers which are bestowed on the FSA.

The FSA regulates over 29,000 firms of differing sizes and engaged in various activities. The FSA publishes a single Handbook of rules and guidance for all authorised firms carrying out business in the UK.

The regulatory approach is commonly known as ARROW. This stands for the Advanced, Risk-Responsive Operating FrameWork. The approach recognises the responsibilities of consumers as well as of firms’ own management, and the impossibility and undesirability of removing all risk and failure from the financial system.

Handbook Online presents the regulations and guidance of the Financial Services Authority. These may be found at

The FSA makes it clear that the approach to regulation and enforcement involves a combination of high-level principles, detailed rules and supporting material, with an increasing emphasis on the FSA’s Principles for Businesses. The FSA issues guidance and supporting material, and will not take action against a person for behaviour that it considers to be in line with the FSA guidance and supporting material. While the guidance is not binding on those to whom the FSA’s rules apply, they are intended to demonstrate ways in which a person can comply with the relevant rules.

5.8  Market conduct

The FSA Handbook includes several requirements about standards of market conduct which users of the UK markets are obliged to follow.

These standards include the ‘Code of Market Conduct’ and the ‘Price Stabilising Rules’. The Handbook also refers to the responsibilities of users in relation to the City Code on Takeovers and Mergers. The responsibility for takeovers and mergers rests with the Takeover Panel, but the FSA works closely with the panel to maintain appropriate standards.

The Financial Services and Markets Act 2000 gives new powers and responsibilities to the FSA to protect the integrity of the UK’s financial markets by tackling market abuse. The regime complements existing laws on insider dealing (see Chapter 14).

Contact details

The Financial Services Authority

25 The North Colonnade

Canary Wharf

London E14 5HS

(Company No: 01920623)

Tel: 020 7066 1000 (from overseas +44 20 7066 1000)

Consumer Helpline – 0845 606 1234 (from overseas +44 20 7066 1000)

Complaints against the FSA – 020 7066 9870 (from overseas +44 20 7066 9870)

5.9  The London Stock Exchange

The Financial Services Authority, as the United Kingdom Listing Authority, is responsible for maintaining an official list of securities which are admitted to trading on at least one recognised investment exchange.

It is the authority responsible under the Act for regulation. It is a company limited by guarantee. It is financed by fees received from those subject to its regulation. An investment exchange becomes a recognised investment exchange by obtaining a recognition order from the Financial Services Authority under s 290 of the Act. The London Stock Exchange is the principal recognised investment exchange in the United Kingdom. It admits listed company securities to trading on its listed market. It also operates the Alternative Investment Market, providing a market place for shares of medium-sized and less mature companies. Its website address is There are other UK-based recognised investment exchanges, such as the London Metal Exchange, as well as recognised overseas exchanges.

The London Stock Exchange (LSE) is a recognised investment exchange. It deals with the buying and selling of government stocks and the securities of British and foreign companies, among other things. It introduced fully automated trading in 1997.

The London Stock Exchange operates three important markets. These are the Main Market, the Alternative Investment Market for less mature stock, and the Professional Securities Market, which is a market for professional traders dealing in debt securities.

5.10  Regulation

There are various aspects relating to the public offer of shares which are regulated. These are the recognised investment exchanges themselves, the market for the sale and purchase of shares and the issue of securities, as well as the involvement of those buying and selling securities.

5.11  Prospectuses