The FCA’s proposals aim to make the UK the preferred listing venue for the companies and economy of the future. Does the government’s desire for a Brexit dividend and its drive for global competitiveness require the “super-equivalent” nature of the UK listing regime to be a thing of the past?
London: The sick man of Europe
On 3 March 2021, Lord Hill delivered his report of the UK Listing Review to the then Chancellor of the Exchequer which emphasised the need for strong public markets in the UK. Historically, listing on the premium listing segment of the FCA’s Official List has been globally recognised as a mark of quality for companies. But the figures paint a different picture: between 2015 and 2020, London saw a decrease of 40% in the number of listed companies since the 2008 peak.
This is even starker when compared to the position before the FSA’s (the predecessor to the FCA) last review of the Structure of the Listing Regime in January 2008 where, in the years preceding, London had been the largest European market in terms of offering value and volume. One may argue that the reason for this decline is not the “super-equivalent” nature of the listing regime favoured by that review but a combination of the growth in private equity, the decline of valuation multiples for UK listed companies and the loss of a wider pool of capital created by Brexit. However, for London to survive as a thriving and world-leading hub for international companies to raise capital, the regulatory system should remain attractive and competitive. To quote Kevin Costner in Field of Dreams: “If you build it, they will come”.
The Single Segment
One of the key recommendations of Lord Hill’s Review was “Improving the environment for companies to go public in London” and, as a result, the FCA released a second discussion paper, in May 2022, exploring a listing regime based on a single segment.
The FCA’s recommendations propose a single segment with continuing obligations for listed companies split into mandatory and supplementary obligations: a two-tier market in all but name bearing all the hallmarks of the current listing regime. This would have the same pitfalls as the current market segments and the attractiveness of either segment will ultimately be dependent on the stance adopted by FTSE Russell on index inclusion. If they determine that to be eligible for index inclusion a company will only need to meet the mandatory requirements, it begs the question why an issuer would choose to meet the supplementary requirements. Similarly, if an issuer would need to satisfy the mandatory and supplementary requirements to be eligible for index inclusion, the position would be the same as it is today.
These proposals also increase the regulation of standard listed companies. Examples of this include:
- The Premium Listing Principles and the new Listing Rules on dual class share structures will apply to all listed companies in a single segment regime. Currently they only apply to premium listed companies;
- Expanding the role of the Sponsor to all issuers of equity shares in commercial companies in the single segment; and
- The requirement for FCA approved circulars and shareholder approval of related party transactions, something that isn’t currently required on the standard listing segment.
So, what is the alternative?
Another option would be a single, unified segment implemented based on the current requirements of the standard listing segment but with a disclosure-based approach. This would allow investors to make their own decisions about what they require from a governance and continuing obligations perspective. For example, there could be additional flexibility given on the choice of corporate governance codes, with some issuers deciding to comply or explain against the UK Corporate Governance Code, whilst others may decide to choose a different governance code if this is preferred by its investors or if the company thinks such governance code is more aligned with its objectives. In recent years, a number of issuers have delisted stating that the public markets do not provide an appropriate framework for them to implement their growth or turnaround strategies. This is not good for issuers or investors and where possible, the regulation should aim to ensure that the public markets continue to work for the companies and the investors who rely on them.
The post Brexit dividend sought by the UK’s Conservative government is based on the breaking of the chains of regulation and the ability for investors to be empowered to make their own investment decisions. The FCA and HM Treasury appear to be aligned with this desire for greater competition and it is likely that greater flexibility is coming. The question remains how far this will go.