A powerful group of UK pension schemes has argued that plans to relax the UK’s company listings rules to attract more IPOs to the London Stock Exchange would roll back fundamental investor protections and weaken institutional shareholders’ ability to challenge company boards.
The pension schemes involved steward around £300 billion on behalf of 22 million members.
The schemes are: Railpen, Brightwell, Brunel Pensions Partnership, The Church of England Pensions Board, HSBC Bank (UK) Pension Scheme, Merseyside Pension Fund, NEST, People’s Partnership, TPT Retirement Solutions, Universities Superannuation Scheme (USS).
In May, the UK’s Financial Conduct Authority (FCA) said it is proposing to “reform and streamline” UK stock market listing rules as it ramps up efforts to lure more company listings to the London Stock Exchange.
The FCA said the listing regime in the UK has been seen by some issuers and advisers as too complicated and onerous.
Company stock market listings in the UK have fallen 40% since 2008, according to The UK Listing Review.
The pension schemes published a letter to the FCA calling for a “broad and evidence-based policy discussion following the FCA’s consultation on listing reforms.”
The group said it wants to “ensure that the UK’s historically high corporate governance standards and robust investors’ protections are maintained to support healthy capital markets in the future.”
In the letter, the schemes argue that the FCA’s proposals would:
- Roll back fundamental investor protections, such as the right to a shareholder vote on both significant and related party transactions, as well as the equal voting rights “that serve as the foundation of a fair and democratic capitalist system.”
- Dilute investors’ ability to act as robust stewards of members’ assets.
- Diminish the UK’s reputation as the world’s leading “quality” market and its role as a beacon for high corporate governance standards.
The group said it has highlighted individual schemes’ discussions with companies, IPO advisers, and investment managers, “which found that innovative companies are primarily looking for fair valuations, a stable policy, economic and political environment, and a deep, liquid pool of thoughtful and long-term domestic and international capital.”
The group said it concluded that policymakers “should pause their current proposals and seek to implement other, evidence-led measures to address these fundamental issues.”
Michael Marshall, head of investment risk and sustainable ownership at Railpen, said: “We’re supportive of a public debate on the UK capital markets and are keen to ensure our market thrives whilst maintaining the robust quality the UK is known for.
“The FCA’s current proposals risk watering down that quality and reducing the pool of institutional and retail investors willing to invest in UK-listed companies.
“We welcome the opportunity to share ideas and discuss evidence-based approaches which could boost the UK’s appeal without diluting investor protections.”
Railpen senior investment manager Caroline Escott said: “As UK pension schemes, we naturally want to see the UK continue to thrive as a global financial centre.
“Well run, high performing pre-IPO companies and advisers, as well as available academic evidence, tell us fair valuation issues are a key challenge.
“Such valuations are driven by a large volume of liquid, high quality institutional and retail investor capital – volumes which come in turn from investor confidence in the protections they are given as well as policy, political and economic stability.
“Proponents of a more relaxed UK approach to shareholder rights underestimate the extent to which investor-friendly corporate governance standards have shaped the UK’s attractiveness on the world stage. We look forward to a broad discussion which considers voices from across the entire capital markets ecosystem.”
The pension schemes’ letter read in full: “We do not think the FCA’s proposed reforms to the UK listings regime will lead to the healthy capital markets we all want.
“We believe that they would in fact exacerbate the current issues by making UK-listed companies less attractive to the kinds of well-informed, long-term investors that our portfolio companies – including several that are looking to list in the next few years – tell us and our managers they are looking for.
“The current proposals would roll back fundamental investor protections, such as the right to a shareholder vote on both significant and related party transactions, as well as the equal voting rights that serve as the foundation of a fair and democratic capitalist system.
“Diluting these important shareholder rights mean that investors would find it more challenging to act as effective stewards of their assets. It would also diminish the UK’s reputation and attractiveness as the world’s ‘quality’ market, and its role as a beacon for high corporate governance standards and robust investor protections.
“Many of us have previously welcomed FCA and other UK policy efforts to support investors in undertaking robust stewardship in members’ best interests. We agreed with policymakers that thoughtful stewardship on material factors is a fundamental ingredient in supporting companies that are well-placed to perform over the long term.
“Yet these latest policy discussions risk undoing much of the progress achieved, fundamentally reducing shareholder protections in a way that would ultimately leave scheme members exposed to more significant risks and higher costs.
“The discussions many of us have had with portfolio companies, IPO advisers and our managers indicate that innovative companies are primarily looking for fair valuations, a stable policy, economic and political environment, and a deep, liquid pool of thoughtful and long-term domestic and international capital.
“We believe that policymakers should instead seek to implement measures in these fundamental areas that will attract both the companies and the investors that are important for healthy capital markets.
“We are responsible for the retirement outcomes of millions of British citizens who work and live in the UK. We naturally want to see the UK continue to thrive as a global financial centre.
“However, we do not think that the changes proposed will solve the fundamental issues affecting our equity markets.
“Rather, we think that they will amplify the current challenges as well as leading to worse outcomes for our members.
“We also do not believe that policymakers have provided the necessary evidence to support yet further changes to the UK listings regime (taking place only 18 months after the previous changes were implemented).
“We look forward to a broad and evidence-based policy discussion that includes, and listens to, voices from across the entire capital markets ecosystem.
“This discussion should include serious consideration of the asset owner perspective, given our role at the top of the investment chain and close alignment of interests with those of our members.”
The UK’s Investment Association (IA), the trade body for UK investment managers that manage £10 trillion of assets, said it welcomes the FCA’s new blueprint for “significant reform and changes to the current listing rules to bolster UK competitiveness, while maintaining high standards of disclosure and transparency.”
The IA said it is concerned about the decline in new firms choosing to list in London and said “overly restrictive listing requirements have acted as one of several reasons why some companies have listed elsewhere.”
The IA said it supports many of the clear proposals put forward within the consultation, including the proposal to replace standard and premium listing share categories with a single segment for commercial company issuers of equity shares.
“We hope that this simplification will lower potential costs and complexities for issuers and encourage high-quality companies to list and operate in the UK,” said the IA.
“The IA is committed to working with the Government and regulator to find new ways to guarantee shareholder protections, which ensure companies can still be held accountable for their actions.
“As currently drafted, the proposals place greater stewardship responsibilities on some investment managers but offer a diminished ability to implement them.
“This includes: the removal of a shareholder vote for significant transactions, the removal of a shareholder vote for Related Party Transactions, and the watering down of Dual Class Share Structure restrictions.
“While the listings rules play a role in determining where companies choose to list, wider structural factors play a greater role.
“This includes: lower valuations, concerns regarding a lack of long-term political stability and competitive regulatory environment and eco-system, and a regulatory and commercial environment in the UK that disincentivises UK pension funds and retail investors from investing in the UK equities market.”
Investment Association CEO Chris Cummings said: “We want the UK to be the most globally attractive place for companies to list, invest and do business.
“To remain internationally competitive, innovation is key, and we welcome the FCA’s new blueprint for significant reform and changes to the current listing rules to bolster UK competitiveness, while maintaining high standards of disclosure and transparency.
“The UK has long been respected as the world leader for stewardship and corporate governance, and it is important that as we work together to attract and retain innovative companies, we ensure that investors have a reasonable level of protection.
“In this way, we can continue to deliver long term returns for our clients.”
The Principles for Responsible Investment (PRI) Governance Manager Betina Vaz Boni said: “The PRI strongly opposes the FCA’s proposal to allow enhanced voting rights to be exercised on all matters without exception.
“Such a change could weaken existing corporate governance standards, expose institutional investors to undue risk and undermine the effectiveness of their stewardship activities.
“Our recommendations in light of this is to include maintaining the sunset period for DCSS at five years, without extending it to 10 years.
“Furthermore, in the interest of transparency, it is crucial to maintain the listing eligibility requirement for companies to have three years of audited historical financial information, representing at least 75% of their business.
“Mandatory independent shareholder approval of Related Party Transactions (RPTs) at or above the 5% threshold; mandatory independent shareholder approval of significant transactions at or above the 25% threshold and related requirements for shareholder circulars, should also be maintained.
“Engagement and voting empower shareholders to improve returns, bolster governance, ensure accountability, address systemic risks, and achieve sustainability goals.
“The proposed changes by the FCA could curtail escalation opportunities and undermine the impact of stewardship efforts.
“They also contradict the FCA’s efforts to enhance investor stewardship and align companies’ governance, incentives, and competencies with sustainability considerations.
“The UK serves as a global reference on corporate governance, and relaxation of existing standards can have a ripple effect on corporate governance practices globally.
“In light of this, maintaining strong governance practices and preserving investor trust should be the priority, we urge the FCA to reconsider reforms that could undermine investor confidence in the UK market.”