FCA loosens rules to boost London stock listings

The UK Financial Conduct Authority (FCA) said it has overhauled listing rules for company shares in London to reduce red tape in an effort to “boost growth and innovation on UK stock markets.”

The new rules will give company founders more power over decision-making and disclosures to investors — and remove a requirement for companies to seek a shareholder vote on significant and related party transactions, with the exception of reverse takeovers and a listing cancellation.

The FCA said the new rules are the biggest changes to the London listing regime in over three decades.

Some investors immediately expressed concerns that the plan under the new rules to remove shareholder votes on significant and related party transactions would dilute investors’ rights.

The $77 trillion International Corporate Governance Network (ICGN) said it was deeply concerned by the loss of shareholder votes on significant and related party transactions, and by the introduction of a two-tier system for share ownership in the listing rules reforms.

Lindsey Stewart, director of stewardship research and policy at Morningstar Sustainalytics, said the new rules “represent a gamble over whether the UK can build more attractive markets by introducing features that many of the largest investors are opposed to.”

Under the new rules the FCA said it has set out a “simplified listings regime with a single category and streamlined eligibility” for those companies seeking to list their shares in the UK.

Pension scheme Railpen said it was “deeply disappointed with the “lost opportunity” to make UK capital markets an environment where all parties have a voice.

The rules merge the current two-tier standard and onerous premium listing segments.

Company founders and directors can now have dual or enhanced voting rights for an unlimited period — a move that aims to attract more growth companies whose founders want to retain control after a listing.

The FCA has also decided to allow pre-IPO institutional investors such as private equity to have enhanced voting rights for up to 10 years.

“The overhaul of listing rules better aligns the UK’s regime with international market standards,” said the FCA.

“It also ensures investors will have the information they need to make decisions about their money, while maintaining appropriate investor protections to hold the management of the companies they co-own to account.

“The new rules remove the need for votes on significant or related party transactions and offer flexibility around enhanced voting rights.

“Shareholder approval for key events, like reverse takeovers and decisions to take the company’s shares off an exchange, is still required.

“The changes to listing rules follow extensive engagement across the market. The FCA has been clear that the new rules involve allowing greater risk, but believes the changes set out will better reflect the risk appetite the economy needs to achieve growth.”

The new rules will apply from July 29, 2024.

Sarah Pritchard, Executive Director, Markets and International, at the FCA, said: “A thriving capital market is vital in delivering investment to growing companies plus returns and choice to investors.

“That’s why we are acting to make it more straightforward for those seeking to list in the UK, while retaining vital protections so investors can help steer the businesses they co-own.

‘Regulation is only part of the answer in helping the UK achieve sustainable growth. Other factors also play a significant role in influencing where a company decides to list.

“We’re committed to continually working together with all those who have a part to play in supporting a thriving UK capital market and thank everyone who has contributed to this work so far.”

Chancellor of the Exchequer Rachel Reeves said: “The financial services sector is central to the UK economy, and at the heart of this government’s growth mission.

“These new rules represent a significant first step towards reinvigorating our capital markets, bringing the UK in line with international counterparts and ensuring we attract the most innovative companies to list here.”

REACTION:

Tom Lee, head of trading proposition, Hargreaves Lansdown: “A successful listings regime which supports our home market is essential.

“However, making the UK an attractive place to list has to be balanced with rights for shareholders and ensuring that the quality of the market is not diluted.

“We will watch closely as these new rules embed, we have been concerned that the plan to remove shareholder votes on significant and related party transactions would dilute investors’ rights.

“As we look forward to further regulatory change planned, we are keen that retail access to IPOs and secondary capital raising rounds are at the heart of changes.

“The current regime is a barrier to retail investment. At the recent Raspberry Pi IPO we were significantly over subscribed.

“The demand from retail investors to buy into the equities market is there, and regulatory change should support this demand.

“Boosting retail investment on the stock exchange will have wider market benefits providing depth and liquidity, as well as boosting interest in investment with the wider public, unlocking further capital for UK-listed companies.

“Building an understanding of how investment plays a part in long-term financial resilience is essential.”

International Corporate Governance Network CEO Jen Sisson: “Investors have repeatedly expressed their concerns over the listing rules reform, and have not been heard.

“It is disappointing to see what feels like a polarising approach, pitting management and their advisors against the company’s owners – the shareholders. The interests of shareholders and management should be aligned in creating long-term value. The risks to shareholders are clear, the benefits of these reforms are not.

“Today’s changes mean that shareholders, the owners of the company, will no longer have a right to vote on significant and related party transactions. Those votes are an important protection for minority investors, ensuring that large shareholders and company directors do not unfairly benefit from their position.

“We are concerned by the introduction of dual class share structures, which create entrenched power in the hands of a small number of investors, disproportionate to their ownership stake. It disadvantages ordinary investors, taking away accountability mechanisms and making it hard for their voice to be heard.

“The FCA’s changes create a system which makes the usual dual class share issue even more complicated.  Institutional investors may only hold dual class shares for a ten-year period, but there is no limit on how long other holders – such as founders or other insiders – may hold this type of shares.

“This is neither simplified nor streamlined, and fails to protect minority shareholders. All dual class shares should have sunset clauses. One share should equal one vote.

“ICGN members are investing hard working people’s savings and pensions. The UK governance system of accountability to shareholders exists for a reason, to protect end investors, and today’s decision may have unintended consequences for these people.

“Strong shareholder rights and protections are crucial. We agree with the goal of a well-functioning and competitive UK market, but are deeply concerned that these changes do not strike the right balance between competitiveness and quality.”