Investment News: FCA Hopes to Boost London as New York Wins Battle for Business

Taken from an article published in Forbes Advisor on 3 May 2023, here: Investment News: FCA Hopes To Boost London As New York Wins Battle For Business – Forbes Advisor UK

The UK’s financial regulator, the Financial Conduct Authority (FCA), has called for an overhaul of UK stock market share listing rules after several high-profile companies shunned the City of London in favour of Wall Street flotations, Andrew Michael writes.

In recent months, London’s appeal as a location for companies looking to float their shares has come into question after several firms, including the chip designer ARM Holdings, favoured New York over a domestic listing.

Data from the UK Listing Review shows that the number of UK listings has fallen by 40% since 2008. In recent years, continental European exchanges have also attracted increased attention from companies looking to float.

In a consultation document, the FCA says it wants to reform and streamline the rules to “help attract a wider range of companies, encourage competition and improve choice for investors”.

In practice, this would mean bringing the current rulebook more into line with that of the US, while removing a series of investor protections – a decision which, if implemented, has been described as concerning by commentators.

The regulator has proposed replacing London’s current ‘premium’ and ‘standard’ listings framework with a single system that contains less onerous rules.

Premium listing imposes higher compliance and disclosure requirements than the EU minimum requirement for a standard listed company.

As things stand, only those companies with a premium listing are eligible for inclusion in FTSE indices, the market barometers that are tracked by so-called ‘passive’ investments such as index trackers and exchange-traded funds.

According to the FCA, a single equity category would “remove eligibility requirements that can deter early-stage companies, be more permissive on dual class share structures, and remove mandatory shareholder votes on transactions such as acquisitions to reduce frictions to companies pursuing their business strategies”.

The proposals also include concessions to allow founders of newly floated companies to retain more power by allowing different share classes with differing voting arrangements.

There would also be a removal of the rules that require so-called ‘related party transactions’ to be put to the vote of all shareholders – a restriction thought to have prompted Arm’s owner, SoftBank, to choose a New York listing.

There would also be the scrapping of the need for companies to demonstrate a three-year track record before listing, and the requirement for listed companies making acquisitions larger than 25% of their own market value to put the deal to a shareholder vote would also be removed.

Scrapping the present listing regime would represent one of the largest overhauls of UK stock market rules since the so-called Big Bang in the 1980s, which revolutionised the way London operated and cemented its position as a leading global hub in areas such as investment management.

Although broadly in favour of the need for change, commentators raised concerns that the proposals, if implemented, could harm investor protection.

Richard Wilson, head of investing platform interactive investor, said: “We strongly support the principles behind listing rule reform to make the UK more competitive, but eroding shareholder rights risks undermining market standards, and this is not the right answer.

“Dual-class structures, which come with differential voting rights, erode shareholder rights. Distorted rights distort governance and accountability. One share, one vote is a bedrock of shareholder democracy and we are concerned to see that the spectre of dual share classes, which we have actively lobbied against, still looms large.

“Reference to removing mandatory shareholder votes on transactions such as acquisitions is another major red flag.”

Kevin Doran, managing director at investing platform AJ Bell, said: “The loss of ARM Holdings to the US market has clearly stung the government and FCA hard.

“As the crown jewel of the domestic tech sector, the fact that the company chose the US as its new home when returning to public markets is a sign of how far the UK has fallen since the company de-listed in 2016.”

The FCA consultation closes on 28 June 2023.

Talking Point – Does London Need To Get ‘Scrappy & Hungry’?

Despite understandable concerns, especially around investor protection, the FCA’s proposals aimed at preventing a stream of corporate exits from the London market from turning into a flood have, broadly speaking, been welcomed by the City of London and beyond, writes Andrew Michael.

The FCA’s intention is sound: to make the UK in general, and London in particular, a more attractive and competitive environment where publicly quoted companies are able to flourish. For that it is to be applauded.

But whether the changes ultimately achieve their desired effect and reinvigorate the domestic market probably requires more than a shift in the UK’s listing rulebook, despite its widely regarded status as the gold-plated blueprint for corporate behaviour.

The proposed reforms come in the wake of a turbulent period for the City amid suggestions that it has lost its appeal, with the US gaining the upper hand, especially with regard to companies planning a flotation.

As Julia Hoggett, chief executive of the London Stock Exchange, has suggested, London arguably became complacent about its role as Europe’s dominant financial centre and now needs to become “scrappy and hungry” to compete.

Roger Clarke, head of IPSX, the real estate stock exchange, says: “The FCA is beginning to recognise that a culture that seeks to eliminate risk completely will succeed in eliminating returns completely, hampering UK investment appetite. That is in nobody’s interests and will lead to a disastrous future for pensioners and savers.

“An unintended consequence of years of creeping regulation to remove risk for investors has been the removal of entrepreneurial and innovative spirits in the financial markets that established London’s global dominant position.

“Investors can and should be trusted to take responsibility for their investment decisions. Regulated markets are essential, risk-free markets are an illusion.”