The Financial Conduct Authority (FCA) has given the green light to the biggest change to the rules it uses to govern British listed companies in three decades.
The main financial regulator hopes the reforms, which are due to come into force on July 29, will reverse the recent downturn in the fortunes of the UK stock market.
There has been a dearth of companies floating on the London Stock Exchange, while at the same time a number of companies have transferred their main listing on the UK stock exchange to the US.
The most recent of these is Flutter Entertainment, parent company of Paddy Power, Betfair and Sky Betting & Gaming, but others that have changed in recent years include CRH, Tarmac’s controllerbuilding materials supplier Ferguson, German tour operator TUI and Irish paper and packaging giant Smurfit Kappa.
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London was also left out when Cambridge-based chip designer Arm Holdings chose New York over Londonwhere it was already listed when it returned to the stock market last year.
There are a number of elements to the rules changes – part of a wider range of reforms introduced by the last Conservative government, including the so-called ‘Edinburgh Reforms‘, which the new Labor government embraced.
The main change is the elimination of the need for shareholders to vote on significant transactions and so-called “related party transactions”, where a company enters into an agreement with another company with which it already has a commercial relationship. This change effectively gives more power to company boards and takes it away from investors.
The previous need for a vote on “related party” transactions was said to be one of the main reasons why Arm Holdings decided against a London listing.
A second change is that the founders or directors of a company can have “dual” or increased voting rights for an unlimited period. This puts the UK more in line with the US – where such arrangements are common.
The goal here is to attract more growing companies, especially in the technology sector, where founders want to maintain control after the business hits the market. Likewise, institutional investors who supported a company before its entry into the stock market will be able to enjoy enhanced voting rights for a maximum period of 10 years.
A third change will eliminate so-called “premium” and “standard” listings and replace them with a single category of shares. Premium listing, which required companies to adhere to stricter rules and standards, was at the center of an effort seven years ago to attract Saudi Arabia, the largest oil producer in the world, will be listed in London. Several fund managers opposed changing the rules to allow Aramco a premium listing which, if listed in London, would entitle it to membership in the FTSE 100.
Confirming the rule changes, Sarah Pritchard, executive director of markets and international at the FCA, admitted the new rules would allow for greater risk-taking, but insisted they would better reflect the risk appetite the UK economy needs to achieve growth.
She said the changes followed “broad engagement across the market”.
Pritchard added: “A thriving capital market is vital to providing investment for growing businesses, as well as returns and choice for investors. That’s why we’re acting to make it simpler for those wanting to list in the UK , while maintaining vital protections so that investors can help drive the businesses they co-own.
“Regulation is just part of the answer to helping the UK achieve sustainable growth. Other factors also play a significant role in influencing where a company decides to list. We are committed to continually working together with all those who have a role to play in supporting a thriving capital market in the UK and we are grateful to everyone who has contributed to this work so far.”
Among those to welcome the rule changes was Dame Julia Hoggett, chief executive of the London Stock Exchange, who has been at the center of efforts to attract more companies to list in London and to make the city a more attractive place to do business. .
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She said: “We congratulate the FCA on carrying out the biggest set of reforms to our listing rules in decades. It was encouraging to see how the entire ecosystem came together to achieve this ambitious goal.
“This will ensure that UK listed companies can benefit from a listing regime that best supports their growth ambitions, increases investment opportunities for UK investors and supports the UK economy.”
Also giving her blessing to the reforms was Rachel Reeves, the new chancellor, who said: “The financial services sector is fundamental to the UK economy and is 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 into line with its international counterparts and ensuring we attract the most innovative companies to list here.”
So the rule changes clearly have many supporters in high places.
But make no mistake: they are by no means universally popular on the Square Mile.
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Some investors fear they represent an unacceptable lowering of standards that could end up saddling savers – who invest in the stock market through their pensions, ISAs and life policies – with more junk in their portfolios.
A group of pension funds led by Railpen, which manages retirement savings for 350,000 rail workers, wrote to the FCA last month calling for a reconsideration. They pointed to rule changes made in 2006 that were intended to make the UK a more attractive listing destination for resources companies, but which instead led to a series of investment disasters, including the Eurasian Natural Resources Corporation (ENRC), a Kazakhstan-based mining company that for a time was a member of the FTSE-100 and Bumi, an Indonesia-based coal mining company.
Critics of the reforms – unfairly – also suspected a set-up because Nikhil Rathi, the FCA’s chief executive, was previously a senior executive at the London Stock Exchange.
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