City regulators are set to implement the most significant change in listing rules for three decades to attract and retain companies on London’s equity markets.
Financial Conduct Authority (FCA) said that loosening the rules governing the rights and information provided to shareholders when companies are listed on the stock exchange would align “the UK regime with international standards”.
The City blames UK listing regulations for driving companies overseas and discouraging them from floatation in the UK. Last year, the loss of Arm Holdings to Wall Street, a chip designer, was seen as an indication of London’s lack of appeal to high-growth technology businesses.
The authority stated that the changes would enable “a wider variety of companies to be listed on a UK Exchange”, and include a simplified listing regime. This includes removing “premium listings” in favor of a single category.
There will be more flexibility in the voting rights of founder entrepreneurs who often hold promising companies and can create disagreements between shareholders.
Companies with a poor financial history will also find it easier to flotter.
The regulator stated that its approach is to shift away from “before-the-event” controls, and to put the onus of due diligence on the investors before they back a company.
Following two FCA consultations in the last year, Thursday’s announcement was made with the approval of the new government.
Rachel Reeves said that the changes were “a significant step in reinvigorating capital market and bringing the UK into line with its international counterparts”. She also added that the changes would ensure we attracted the most innovative firms to list here.
The number of UK listed companies has dropped by around 40% since the peak of 2008. This was the conclusion of a review conducted by Lord Hill of Oareford, under the Boris Johnson government.
Nikhil Rathi and Sarah Pritchard from the regulator’s executive director for markets and international said that reform is needed to combat the risk that our regime will fall out of step with other jurisdictions and make it less likely that growing companies choose the UK to list their shares.
List rules determine what companies can list in London, and which shares are included in UK pension funds and tracker funds.
Some trade associations, pension schemes and asset managers have warned that the changes may damage the ability of investors to engage with boards and hold them accountable.
has raised the alarm in the case of Railpen, a pension fund that covers 350,000 railway employees, People’s Partnership which includes millions of pensioners who are auto-enrolled, and council pension funds.
The City regulator admitted that the new rules “involve greater risk”.
Rathi stated that the reforms may mean that investors “change how they engage with businesses, making greater use of shareholder rights under law and other mechanisms for scrutinising boards and business strategy”.
He acknowledged that the new regime could lead to more stock-market failures, but claimed that it would bring a wider range of companies to Britain.
The regulator stated that approval from shareholders would be needed for “key events” such as reverse takeovers or decisions to remove the company’s stock from an exchange.
Some have warned that weaker rules may further depress the already moribund UK values.
Tim Bush, PIRC’s head of governance, financial analysis and shareholder activism, stated: “This appears to open the doors for more value-destroying listing.” The lobbying here is based on assertions and mantras that are not supported by any evidence. Evidence shows that New York’s regulatory system is strict and has not attracted capital because of its laxer rules.
Chris Beckett of Quilter Cheviot’s equity research department, a wealth management firm, called the revamp “admirable”, but said: “Using listing rules to explain the London market struggles is a little bit of a false narrative.” The composition of the major indices is the primary reason for the dark clouds that have been looming over the City. London is home of large legacy industries, such as miners and oil and gas, and financials. These have fallen out of favor in the last decade.”
Since Arm Holdings (the UK-based chip designer king) chose New York instead of London to list last year, the clamour has been cacophonous for a revision of UK stock market regulations.
Institutional investors have become much more quiet, despite their concern that lowering standards of protection would not be the solution. Reformers won. The Financial Conduct Authority has pushed through rule changes which allow companies to ignore the principle “one share one vote” and force related-party transactions without approval.
It is hoped that the upside will be a influx of exciting growth companies in London. It could become a magnet for companies that are trying to take advantage of outside investors. Last time listing rules were loosened, London welcomed IPO failures such as Bumi and Essar.
The usual response is “Buyer Beware”. Investors should scrutinize their choices more and be less hostile towards entrepreneurs, who may have very valid reasons for wanting to maintain power in their fiefdoms.
This thinking has two major flaws. These companies will likely be added to indices such as the FTSE 100 or FTSE 250, and automatically included in tracker fund — used by investors that don’t like to bother with stock selection but want minimum standards for governance and disclosure.
A market that lowers the standards will end up damaging everyone. When there are no checks on a used car lot, everyone is assumed to be a cut-and shut job, including the good ones. Trust is lost. Prices fall.
Brokers, bankers and lawyers may be able to enjoy an influx of new clients for a time. Investors are not sophisticated: if there are too many IPOs that fail, they’ll give London a wider berth.
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