FSA to require one month's notice of capital issues

The FSA is proposing that insurers, banks and other authorised firms should tell it at least one month before issuing shares or any other capital instrument that will count as regulatory capital (see Quarterly Consultation Paper CP11/1). The requirement will in some circumstances extend to capital instruments issued by non-EEA members of the group.

In our view, the proposed changes are flawed because:

• they go far further than is necessary to meet the FSA's objectives;
• they don't take proper account of their impact on firms and groups; and
• they may put firms in breach of other legal or regulatory requirements.

A more measured approach would be for the FSA to revise current guidance on firms' general disclosure requirements to ensure that it receives all the information it requires on capital issues from all firms. At the very least, one month's prior notice should not be required for issues of:

• ordinary shares;
• other capital instruments of a type that have already been issued by the firm;
• capital instruments whose issue is subject to conflicting legal or regulatory constraints e.g., the contractual terms of a convertible may be inconsistent with a one month notice period; and
• capital instruments by another member of the firm's group.

Firms may wish to resist the FSA's proposals by the 6th March deadline for comments. Herbert Smith will be putting in a response that reflects concerns set out in the briefing attached here.