FCA plans biggest shake-up of London stock market listings for 30 years

The City regulator is to go ahead with the biggest shake-up of listing rules in three decades in an attempt to help London equity markets attract and retain more companies.

The Financial Conduct Authority said loosening rules that govern the rights and information given to shareholders when companies float on the stock market would align “the UK’s regime with international market standards”.

The City has blamed UK listing rules for discouraging companies from floating here and driving businesses overseas; last year’s loss of Arm Holdings, the chip designer, to Wall Street was regarded as symptomatic of London’s weak appeal to technology and high-growth businesses.

The changes, which the authority said would allow “a wider range of companies to issue their shares on a UK exchange”, include a simplified listings regime, removing the “premium” and “standard” listing in favour of a single category.

The need for votes on significant or related-party transactions has been removed and there will be greater flexibility around enhanced voting rights, often held by founding entrepreneurs behind promising companies which can cause disagreements with shareholders.

It will also be easier for companies with little financial track record to float.

The regulator said its overall approach was to move away from “before the event” controls and towards putting the onus on investors to do their own due diligence before backing a company.

The reforms, which will apply from July 29, follow two FCA consultations last year and Thursday’s announcement came with the new government’s approval.

Rachel Reeves, the chancellor, said the changes “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”.

A review chaired by Lord Hill of Oareford under Boris Johnson’s government found that the number of listed companies in the UK has fallen by about 40 per cent from a recent peak in 2008.

Nikhil Rathi, chief executive of the regulator, and Sarah Pritchard, its executive director, markets and international, said that reform was needed to tackle the risk that “our regime falls increasingly out of step with those of other jurisdictions, making it less likely that companies eager to grow choose the UK as a place to list their shares”.

Listing rules ultimately determine which companies are allowed to list in London and what shares end up in the UK’s pension pots and tracker funds.

Pension schemes, asset managers and some trade associations have warned the authority that the changes could damage investors’ ability to engage and hold boards to account.

Railpen, the pension fund for 350,000 railway workers, the People’s Partnership, which has millions of auto-enrolled pension members, and council pension funds are among those that have sounded the alarm.

The City regulator acknowledged that the new rules “involve allowing greater risk”.

Rathi said the reforms “may mean investors change how they engage with companies, making more use of shareholder rights at law and other mechanisms to scrutinise boards and business strategies”.

He conceded that the new regime might lead to more stock market failures but argued that it would attract a more diverse range of companies to Britain.

The regulator noted that shareholder approval would still be required for “key events, like reverse takeovers and decisions to take the company’s shares off an exchange”.

There have been warnings in some quarters that the weaker rules could depress moribund UK valuations even further.

Tim Bush, head of governance and financial analysis, at PIRC, the shareholder activist group, said: “This seems to open the gates for more value-destroying listings. The lobbying that has gone on here has been based on mantras and assertions without any evidence. In fact, evidence points to the fact that New York hasn’t attracted capital by having lesser rules; it has a tough regulatory regime.”

Chris Beckett, head of equity research at Quilter Cheviot, a wealth manager, said the overhaul was “admirable” but added: “Using the listing rules as a reason for the London market’s struggles is a bit of a red herring. The main reason for the gloomy clouds over the City is the makeup of the main indices. London is home to large legacy-industry companies, such as miners, oil and gas and financials, which have been out of favour in the past decade.”

City makes a trade-off to attract listings

Ever since Arm Holdings, the UK-based chip design king, chose New York over London for its listing last year the clamour for a rethink of the UK’s stock market rules has become cacophonous (Patrick Hosking writes).

Much quieter have been the institutional investors who worry that watering down standards of protection is not the answer. The reformers have won, with the Financial Conduct Authority pushing ahead with rule changes that allow companies to flout the principle of “one share, one vote” and push through related-party deals without approval.

The upside, it is hoped, will be an influx of more exciting growth companies to London. The danger is it becomes a magnet for murky companies seeking to disadvantage outside investors. The last time the listing rules were watered down, London welcomed IPO disasters including Bumi, Essar and ENRC.

“Buyer beware” is the usual riposte. Investors need to subject their picks to more scrutiny and should be less hostile to entrepreneurs who sometimes for very good reasons want to preserve power in their fiefdoms.

But there are two problems with this thinking. First, these companies are likely to enter indices like the FTSE 100 and FTSE 250 and will automatically be included in tracker funds — used by investors who don’t want to be bothered with stock selection and like minimum standards of governance and disclosure.

Second, a market that lowers standards ends up tarnishing everyone in it. In a used-car lot with no checks, all are assumed to be cut-and-shut jobs, even the good ones. Trust sinks. Prices fall.

The brokers, bankers, lawyers and accountants may enjoy a flurry of new clients and fees for a while. But investors are simple souls: if they find too many IPO stinkers on their plates, they will give London an even wider berth and valuations will fall further.