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The Prospectus Directive Chosen Aspects of theImpact 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 .......................................7The 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 ...................................................... 20Transparency 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

Directives 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

essays second part is devoted to analysing the factors that can shape a companys

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 LSEs 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-68C2-42D8-9903-

FB2C4B1BDF59/0/MainMarketStatistics0812.pdf2 Derived from World Federation of Exchanges Statistical data, available at: http://www.world-

exchanges.org/statistics/ytd-monthly3

For statistical information until 2003, see J. Socha, Chairman of the Polish Securities and ExchangeCommission (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 LSEs number of

listed companies during this same period fell by 6%. Effectively Warsaws 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. Whats 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 Exchanges 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.org5 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 theWarsaw Stock Exchange. Whenever hereunder the abbreviation is used it is to be read as meaning the

Warsaw Stock Exchange.

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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

Warsaws 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

worlds major exchanges have lost a portion of their capitalisation. In this negative

environment, there is a multiplication factor added to the significance of a companys

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

worlds 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.

6 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 companys 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 directors approach to carrying risks, the companys 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 Borlands 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 companys shares by an investor

becomes automatically the companys property. No direct property rights to the

invested capital remain with the investor, creating the right to the dividend instead.

7 [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, includingthe 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 capital8.

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.

8 (1899) 14 App Cas 525, HL, p. 5439 G. Fuller, The Law and Practice of International Capital Markets, 2007, p. 8 - 1310 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 ofpreferential 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

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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 stagnation12. 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 companys economic environment a companys 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 1990s 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 counsels 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.19.12 See, A. Sherman et alia, Raising Capital, Business Source Premiere, EBSCO Publishing 2003,

p.184 -18613

A. Sherman et alia, Raising, p. 18514 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

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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 market

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. 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 companys 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 thosefor 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;17 Committee on Capital Markets Regulation, Interim Report 2006, available at:

http://www.capmktsreg.org/pdfs/11.30Committee_Interim_ReportREV2.pdf

18 This is in a period between Januray and December 2008. Data retrieved from: http://www.world-

exchanges.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 jurisdictions

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 companies19. 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.185720 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

Boards 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, 1998a22 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=42808623 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 FSAs 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 Polands 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/DTR25Financial 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 Polishlegal 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 PFSAs organization, legal

rights and duties, the status of its officials is regulated by Polish administrative law.

The Authoritys funding is provided, not unlike the FSAs, 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

27 Journal of Law 2005, nr. 183, pos. 1537; English translation available here:

http://www.kpwig.gov.pl/en/Images/nadzorze_03_03_tcm21-4129.pdf28 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, Rzd tnie budet Nadzoru Finansowego, 26 February 2009, available at:

http://biznes.interia.pl/raport/kryzys_w_usa/news/rzad-tnie-budzet-nadzoru-finansowego,125544831

H. Kochalska, Rzd Tnie Budet 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 followed32.

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. IOSCOs 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

32 Article 4 of the Financial Supervision Act 2006.33

IOSCO, Objectives and Principles of Securities Regulation, May 2003,Available at:http://www.iosco.org/library/pubdocs/pdf/IOSCOPD154.pdf34 IOSCO, Objectives, p. 10

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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 Committees statement inure its own

officials as to how they are to understand a certain piece of legislation36. 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 200637 This is due to the Polish Constitutional order. The Polish Constitution strictly enumerates the states

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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http://www.gu.com.pl/index.php?option=com_content&task=view&id=22579&Itemid=307http://www.gu.com.pl/index.php?option=com_content&task=view&id=22579&Itemid=307http://www.gu.com.pl/index.php?option=com_content&task=view&id=22579&Itemid=307http://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 goals38.

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 FSAs open policy towards discharging its functions and goals see: The FinancialServices 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 FSAs 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 topromote 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 FSAs 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 Authoritys income41. The FSAs

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 PFSAs wholly centrally budgeted funding structure doesnt leave any

40

Article 25.1 of the Statute of the European System of Central Banks, Official Journal of the EuropeanCommunities No C 191/68, available at: http://www.ecb.int/ecb/legal/pdf/en_protocol_18.pdf41 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 FSAs 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 doesnt have a clear influence over its final shape. However,

according to the Financial Supervision Act 2006 the organs 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 Auhtoritys 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 zaspaa 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

Authoritys 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 systems44. In the UKs 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 UKs 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 UKs 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 Commissions 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 Action46.

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

44See, 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 andCrises in European, Atlantic and Commonwealth relations, p.46 (The 1998 Communication), COM(1998)625

26
http://www.rhs.ac.uk/bibl/wwwopac.exe?DATABASE=dcatalo&LANGUAGE=0&OPAC_URL=&SUCCESS=true&RESOLVER=http%3A%2F%2F193.63.81.241:4550%2Fresserv&BUTTON=http%3A%2F%2Fopenurl.ac.uk%2Fbutton&ALT=locate+via+University+of+London+Research+Library+Services&rf=000019976http://www.rhs.ac.uk/bibl/wwwopac.exe?DATABASE=dcatalo&LANGUAGE=0&OPAC_URL=&SUCCESS=true&RESOLVER=http%3A%2F%2F193.63.81.241:4550%2Fresserv&BUTTON=http%3A%2F%2Fopenurl.ac.uk%2Fbutton&ALT=locate+via+University+of+London+Research+Library+Services&rf=000019976http://www.rhs.ac.uk/bibl/wwwopac.exe?DATABASE=dcatalo&LANGUAGE=0&OPAC_URL=&SUCCESS=true&RESOLVER=http%3A%2F%2F193.63.81.241:4550%2Fresserv&BUTTON=http%3A%2F%2Fopenurl.ac.uk%2Fbutton&ALT=locate+via+University+of+London+Research+Library+Services&rf=000019976http://www.rhs.ac.uk/bibl/wwwopac.exe?DATABASE=dcatalo&LANGUAGE=0&OPAC_URL=&SUCCESS=true&RESOLVER=http%3A%2F%2F193.63.81.241:4550%2Fresserv&BUTTON=http%3A%2F%2Fopenurl.ac.uk%2Fbutton&ALT=locate+via+University+of+London+Research+Library+Services&rf=000019976


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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

whole48. 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. 21-2248 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.pdf49 European Commission, Financial Services, Turning the Corner. Preparing the challenge of the next

phase of European capital market integration

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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. 451

See, HM Treasury, the FSA and Bank of England The EU Financial, p. 652 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

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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 securities53. 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/EC54

Art. 1(1) Directive 2003/71/EC55 Article 3 and 4 Directive 2003/71/EC56 Art.5 and 9 Directive 2003/71/EC

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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. 858

P. Boury, R. Panasar The Prospectus Directive Creating a single European passport, GlobalCounsel Paper Series, 2004, available at: www.practicallaw.com/A4070059 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/EC61G. Ferrarini, Capital Markets in the Age of the Euro: Cross - border Transactions, Listed Companies

and Regulation, 2002, p. 249

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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 issuers decision to enter the regulated equity

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markets, the cost that compliance costs of regulation can play a vital role on the

companys effective decision62.

The impact with which varying costs that regulatory compliance costs may influence

a companys 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

62 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 - 32163 Centros Ltd v Erhvervs- og Selskabsstyrelsen (C-212/97), ECJ, 9th March 1999, [2000] Ch. 44664

For a more detailed consideration of the case see: E. Wyymersch Centros: A Landmark Decision inEuropean 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 - 29367 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=102870169

Art. 11 of Directive 2003/71/EC70 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 12 th 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/EC74 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-2004-809/reg-2004-809_en.pdf75 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 Europe 78. 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] L337/1777 Commission Regulation (EC) No 211/2007 European Union Official Journal [2007] L61/2478 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-A6E5-

71EC95A7317E/0/0108PDatt.doc

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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.

Directives 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 regimes flaws

was its lack of strength in implementing unilateral regulation among Member States. The ICMA calls

for further strengthening of the Prospectus Directives regime and implementing more specific rulesinto 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 Directives regulation, amendments made to the

FSAs 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 Parliament 83. 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.pdf83 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 statutes85. 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. SABENA87the 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

84KPWiG, Zarys publicznego oferowania papierw 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.pdf85 Article 91(2) of the Constitution of Poland, available at:

http://www.sejm.gov.pl/prawo/konst/angielski/kon1.htm86 ECJ 05.02.1963 C-26/62, [1970] C.M.L.R. 187 [1976] ECR 455 C 43/75, see S. Weatherill, Cases and Materials on EU Law, 8 th 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,M188 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 p

dissertation full draft4

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