The EU Prospectus Directive (PD) came in to force in the UK on 1 July 2005 setting out what the EU considered the necessary requirements to protect investors looking to buy shares in listed companies throughout the European Union.

But the PD has had more than its shares of unintended consequences. For shareholders in anything other than the very largest listed companies, rights issues and open offers have become a distant memory.

Indeed the PD itself has become the inspiration for a new breed of European stock exchange – the so called “exchange regulated markets”. While the phrase was coined by the London Stock Exchange to apply to AIM, its own Alternative Investment Market – the largest and most successful of these markets whose participants share a desire to avoid the worst of the regulatory burdens imposed by the PD – there are at least twelve such markets in Europe.

These markets are provided and run by market operators and clearly exist because there is a significant need for access to capital markets by companies who either cannot or will not comply with the full demands of the PD.

Yet mere PD compliance was not enough for the UK. For domestic companies or overseas issuers choosing the FSA as their European home state regulator, until now a listing on the Official List has required far more than the EU minimum requirements – demanding that issuers have a Sponsor, a three year track record, at least 25% of their shares in public hands, comply with the Combined Code on Governance and so on. When the FSA conducted its review of listing requirements much was made by the London Stock Exchange and others of the additional comfort investors derived from our peculiar brand of “gold plating”. Many claimed that the additional investor protection was a significant part of the secret of London’s success as a financial centre.

But the European rules are clear. Companies producing a prospectus complying with the basic PD requirements were entitled to a listing on the UK Official List by virtue of the passporting provisions. All that was needed was for them to lodge a copy of their document with the FSA and listing could not be denied. Issuers incorporated outside the EU could choose to prepare a prospectus in Belgium or Ireland, have it approved there and then demand admittance to the UK Official List without compliance with the additional requirements of the UK Listing Rules.

The FSA was worried that investors would be confused. How would those buying shares be able to distinguish between companies on the Official List who had gone the extra mile from those who had come in through the “back door”?

The FSA’s answer is to divide the Official List into two: those issuers who comply with EU minimum requirements, who will be given a “Standard Listing”, and those who embrace the full Listing Rules, who will be recognised as having a “Premium Listing”. After April 2010 all UK listed companies appearing on trading screens will have a symbol alongside their ticker indicating whether they are AIM, Standard or Premium listed.

It seems like an elegant solution and not much to make a fuss about. But the law of unintended consequences will apply.

A distinguishing feature of the UK Listing Rules is that companies seeking a listing must have a Sponsor – an independent financial institution prepared to lend its reputation to the issuer. The FSA can exert pressure on the market by bestowing and removing Sponsor status.

AIM’s distinctive system of Nominated Advisers takes this basic idea much further. Every company admitted to the market must have a Nomad with specific responsibility to ensure that issuers comply with the rules and are suitable for listing. Nomads must meet certain qualification requirements and the London Stock Exchange can appoint or remove Nomads from its list. It has been exercising its authority over the Nomad community in both informal and formal ways to try and keep standards up and unsuitable companies off the market.

This form of regulatory outsourcing has been emulated by other markets.

Yet these controls are alien to the Prospectus Directive. The European view is that disclosure is everything and the requirement for home state regulators to approve documents will ensure that a high level of disclosure will be adhered to. Otherwise it is for the market to decide on issues of suitability, liquidity and corporate governance.

That the FSA has now cleared the way for domestic UK issuers to achieve listing on a UK public market without the need for an authorised “minder” of any sort must present a significant business opportunity for those in the business of raising finance for companies who do not have Nomad or Sponsor status.

While it is arguable that the PD rules are tougher to comply with on IPO than the AIM requirements, in reality the main difference is the need to have a Prospectus signed off by the FSA. Some in the advisory community may see that as a small price to pay (especially as it is the issuer and not the adviser who is ultimately paying) to break free from the growing level of interference and control the FSA and LSE are exerting over Sponsors and Nomads. And those advisers can sell an Official Listing to putative issuers – conforming with the traditional view that such a listing is superior to an AIM listing.

The FSA has said it was not under pressure from the EU to introduce a Standard Listing regime in the UK. History will judge whether their doing so will significantly undermine attempts to improve the quality of issuers on UK markets.