On 3 May 2023, the FCA published its proposals for the most significant reforms of its listing rules in 30 years.

The regulator has been forced to address fears over the attractiveness of the UK’s stock markets. The City of London has obtained just 10 new listings so far in 2023, while by comparison the US stock markets have secured 68 new listings. An analysis by the Financial Times found London to be the European stock exchange most at risk of suffering significant departures to the US.

The FCA said it aimed to make the listing rules “more effective, easier to understand and more competitive”.
 
New rules

The FCA’s key proposals include:

a)     merging the current premium and standard listing share categories into one single category;

b)    removing the requirements of a three-year track record of financial and revenue generation and a ‘clear’ or unqualified working capital statement as conditions for listing;

c)     adopting a more flexible approach to dual share class structures;

d)    removing the requirement for compulsory shareholder votes and circulars for (i) significant transactions and (ii) related party transactions, including those where a controlling shareholder is involved and a controlling shareholder agreement is not in place;

e)     amending the rules requiring a listed company to have independent business and operational control over its main activities to create a more permissive approach that accommodates a wider range of business models; and

f)     replacing the requirement for a relationship agreement between a listed company and the controlling shareholder with a more flexible ‘comply or explain’ disclosure model.
 
Background to changes

By proposing to scrap the ‘standard’ and ‘premium’ listing categories, the FCA hopes to simplify the current regime by merging the two into one category with a single set of requirements. While the ‘premium’ category was previously considered by investors as the top grade for governance, disclosure and transparency, having both ‘premium’ and ‘standard’ listing categories has proved confusing. For instance, AIM – traditionally seen as the junior stock exchange in the UK – has arguably higher governance standards than the Official List due to, among other things, the requirement to have a nominated adviser at all times.

At present, companies wanting to list shares on any of the FTSE indices require a premium listing. This requirement to comply with the UK’s highest regulatory standards and to pay significant costs in maintaining the listing has been considered a deterrent to start-ups and early-stage companies.

To persuade more innovative, tech-orientated businesses to list in London, the FCA has proposed removing the requirement for companies to provide a three-year financial record before floating. This has been considered a deterrent to young start-ups from being able to list.

The FCA has also proposed to permit the issuance of different share classes with different voting arrangements, more specifically permitting shares with weighted voting rights to be held only by directors, allowing the retention of greater control by management over the development of a newly listed company.

The removal of the requirement to put related-party transactions to shareholder vote has been frequently cited by companies contemplating new listings as an overly burdensome barrier to floating. Such provisions may have been significant in influencing SoftBank’s decision to list Arm Holdings in New York rather than London.

Similarly, the FCA proposes to discard the requirement for listed companies making acquisitions larger than 25% of their own value to put the deal to a mandatory shareholder vote. This would facilitate director-led business growth which may be against the wishes of more conservative shareholders, bringing UK regulation in this area in line with the US.

The bigger picture

A company’s decision to list is based on more factors than regulation alone. Taxation, the availability of capital and the wider ecosystem of UK capital markets must also be considered. While the proposed reforms, if implemented, should help to galvanise the market, its revitalisation likely needs more than just a revamp of the rule book.

Cultural issues around executive pay hamper the UK’s ability to compete for talent on a global basis. Julia Hoggett, head of the London Stock Exchange, has called for “constructive discussion” on this topic as part of broader endeavours to boost the City’s appeal. On average, an S&P 500 head was paid $18.3m in 2021, almost four times more than that of a FTSE 100 chief executive at £4.26m (about $5.3m).

In the UK, attracting talent has been impeded by some asset managers voting against executive pay policies, despite executive pay levels sitting significantly below the global benchmark. Unilever’s remuneration report was rejected by nearly 60% of shareholders last month over concerns of the chief executive’s pay. Pearson also saw similar protests following a recommendation to increase bonus levels. The sizeable remuneration gap between executives in the UK and US is another factor that some credit for supporting the surge in companies choosing to list in New York over London in recent months.

There needs to be greater encouragement of UK pension funds to invest in UK listed equities. UK stocks make up less than 5% of UK pension fund portfolios today compared to around 50% two decades ago, demonstrating that even UK investors see better opportunities abroad or in fixed income assets.

It has been suggested that one vehicle to address the lack of pension fund participation in the UK equity market is the creation of ‘superfunds’. By pooling existing schemes together to create one large scheme, the superfund would be able to widen its investment scope and assign a portion of its investment to higher risk categories. Tax changes could also incentivise greater investment in UK listed equities.

A step in the right direction?

The reforms proposed by the FCA have never been more important and are necessary to bring the competitiveness of the UK market in line with other international stock markets.

However, it is unclear whether the reforms, if implemented, are sufficient to encourage more companies to list in the UK versus other highly competitive international markets. It may be a case of too little, too late. Other markets have been operating under less stringent rules for years, providing a regulatory advantage that attracts companies looking to list. Fast-growing tech and other new companies may continue to be drawn to the US, where they can obtain higher valuations. Most companies list with the principal goal of achieving the highest price, rewarding investors and allowing for future growth.

The FCA’s overhaul of regulation is important, but it must be considered in the context of the much wider ecosystem. As Nikhil Rathi, chief executive of the FCA, acknowledged: “While regulation plays an important part, a company’s decision on whether, and where to list, is influenced by many factors so substantive change will require a concerted effort from government and industry as well.” 

William Charnley and Marcus Young are partners in King & Spalding’s corporate, finance and investments practice in London. Catherine Munro is a trainee solicitor, also based in the firm’s London office.