FCA Paves Way for Largest Overhaul of London Stock Market Listings in Three Decades

The Financial Conduct Authority (FCA) is set to implement the most extensive overhaul of London stock market listing rules in 30 years, a strategic move intended to make the UK a more attractive hub for companies to list and remain.

By easing regulations around shareholder rights and company transparency when firms publicly list their shares, the FCA aims to harmonize the UK’s listing framework with global market expectations.

Burdensome UK listing requirements have been criticized for pushing companies to list abroad, exemplified by Arm Holdings’ switch to Wall Street last year—a strong indication of London’s waning allure for tech and high-growth firms.

The forthcoming rules, designed to accommodate a broader spectrum of companies, propose a streamlined listing regime. The traditional “premium” and “standard” categories will be replaced with a unified listing class.

The necessity for shareholder votes on significant transactions or dealings with related parties will be abolished, alongside more flexibility for enhanced voting rights favored by founders of high-potential companies, which can often spark disputes with stakeholders.

This revision will also facilitate listings for companies with limited financial track records.

The regulatory shift toward relying on investors’ due diligence marks a departure from stringent pre-listing controls.

The changes, effective from July 29, come after two FCA consultations last year and have garnered endorsement from the new government.

Chancellor Rachel Reeves hailed the reforms as a pivotal step toward revitalizing the UK’s capital markets, aligning them with international peers, and attracting innovative enterprises.

A review led by Lord Hill of Oareford discovered that the roster of listed UK companies has shrunk by approximately 40% since 2008.

Nikhil Rathi, the FCA’s CEO, and Sarah Pritchard, Executive Director of Markets and International, emphasized the urgency of reform to ensure the UK’s listing practices remain competitive, cautioning against potential obsolescence.

Listing regulations dictate eligible companies for London listings and influence the composition of shares within UK pension funds and tracker assets.

However, pension funds, asset managers, and trade bodies have voiced concerns that these changes might hinder investor engagement and accountability over corporate boards.

Pension schemes like Railpen and The People’s Partnership, alongside council pension funds, have raised alarms regarding the increased risks.

Despite acknowledging the heightened risk with the relaxed rules, Rathi insisted that the new regime might necessitate investors to be more proactive in utilizing their legal rights and alternative mechanisms to scrutinize corporate governance and strategy.

Rathi also admitted the possibility of an uptick in stock market failures but argued that it would attract a more diverse array of companies to the UK.

The FCA affirmed that shareholder consent would still be mandated for critical decisions like reverse takeovers and delistings.

Critics caution that the more lenient rules might further depress already sluggish UK valuations.

Tim Bush, Head of Governance and Financial Analysis at PIRC, criticized the changes, suggesting they might lead to value-destructive listings without empirical support, contrasting them with New York’s robust regulatory environment.

Chris Beckett, Head of Equity Research at Quilter Cheviot, considered the overhaul commendable but noted that blaming listing rules alone for London’s market woes overlooks deeper issues, such as the city’s reliance on outdated industry giants like mining, oil, gas, and finance sectors.

City Trades Standards for Listing Growth

Arm Holdings’ decision to list in New York rather than London has amplified calls for revamping the UK’s stock market regulations (Patrick Hosking writes).

Institutional investors have been relatively quieter with their concerns about reducing investor protections. However, reform advocates have prevailed, enabling the FCA to advance with changes that will permit deviations from the “one share, one vote” principle and allow related-party transactions without requiring approvals.

The expected benefit is an influx of dynamic growth companies to London. However, there’s a risk that this could attract less scrupulous firms aiming to exploit looser regulations to disadvantage minority investors. Historically, looser listing rules led to IPO disasters like Bumi, Essar, and ENRC.

The “buyer beware” approach urges investors to conduct thorough due diligence and accept founders’ attempts to retain control for practical reasons.

Yet, two issues arise: such companies will likely join indices like the FTSE 100 and FTSE 250, making them automatic choices for tracker funds favored by investors who prefer minimal governance and transparency standards.

Moreover, a market seen as lowering standards risks reputational damage. In an unchecked market, all participants might be viewed suspiciously, diminishing trust and value.

Though brokers, bankers, lawyers, and accountants might initially benefit from a surge in clientele and fees, repeated IPO failures could deter investors from London, exacerbating the city’s valuation challenges.