New listing rules came into force in the UK in July – the most significant change to the regime in over 30 years. The UK’s Financial Conduct Authority (FCA) says the new rules aim to boost growth and innovation in the country’s stock markets by introducing ‘a new simplified regime that maintains high standards that compare well internationally’. 

The number of listed companies in the UK has fallen by about 40 per cent since 2008. Between 2015 and 2020, the UK accounted for only five per cent of initial public offerings (IPOs) globally. This fall in listings has compounded a broader sentiment that London is increasingly losing out to other markets, such as the US and continental Europe. ‘The UK is dropping out of the shortlist for people who are not connected to the UK’, says Jan Willem Hoevers, Co-Chair of the IBA Securities Law Committee and a partner at De Brauw Blackstone Westbroek in Amsterdam. 

Under the new rules, the previous ‘premium’ and ‘standard’ listing segments have been removed and replaced with a new ‘commercial companies’ category for equity share listings. For companies in this new category, shareholder votes won’t be required on significant and related party transactions but will still be needed on reverse takeover transactions and cancellations of listing. By keeping shareholder votes on some transactions, the FCA aims to balance moving to a disclosure-based philosophy with ensuring that investor protections remain in key areas. The UK Corporate Governance Code will apply to companies in the new category. 

The FCA tells Global Insight that ‘the [previous] regulatory regime was deemed complex and quite hard to understand’. It says the premium and standard segments were making it difficult to compare the UK regime with other markets and the need for shareholder votes on certain transactions had become a barrier to issuers considering a London listing.

Under the new regime, the FCA will be more permissive towards companies listing with dual class share structures or weighted voting rights. The regulator says the previous approach to dual class shares was unattractive to founder-led companies in particular, because the founder may want to keep a controlling hand on the strategy of the company. The track record requirement for eligibility has also been removed. This change aims to enable early-stage start-up companies to come to the market without an extensive track record. 

The new listing segment will maintain the sponsor regime that was part of the old rules. The FCA says this is a critical check on companies to ensure they’re meeting its high standards. It also believes the regime enables skilled advisers to offer good advice to new issuers coming to market. In response to concerns that the regime was too onerous, the FCA has provided additional guidance to sponsors covering how it expects them to meet their obligations. 

The regulator acknowledges the changes create more risk for investors but believes it has balanced this against the need for greater growth. It argues that moving to a more disclosure-based regime will empower shareholders to make informed decisions about where to invest and the associated risks. Mark Chalmers, counsel at Davis Polk in London, says that ‘the pendulum has swung away from placing more obligations on issuers […] and it’s placing more of an onus on shareholders themselves to do their own diligence’. 

While the FCA says its rule changes aim to align the UK regime more closely with international market standards, it isn’t trying to replicate another market. Rather, it’s trying to create a level playing field by removing unnecessary hurdles for UK issuers. The shareholder approvals that have been dropped, for example, were criticised for failing to offer an advantage to UK-listed companies, instead representing an extra process burden that could put them at a disadvantage in a competitive auction process. 

There are other factors beyond the listing rules that make different markets attractive to new issuers. For example, the US markets are perceived to have more liquidity than that of the UK and this sentiment is powerful when it comes to deciding where to list. Higher rates of executive pay in the US can also motivate companies to list there. Issuers will also consider the extent to which the business will be understood and therefore accurately valued by research analysts in a particular market. Finally, Brexit has affected the way the UK market is viewed and therefore its ability to compete internationally. 

Changing the listing rules is one aspect of a broader programme of work the FCA is undertaking with the aim of ‘strengthening the UK’s position in the global wholesale markets’. The regulator is currently consulting on proposed rules to establish a new public offers and admissions to trading regime, which will replace the existing UK Prospectus Regulation. Under the proposals, a prospectus wouldn’t be required when a company raises further capital after admitting securities to public markets, except in limited circumstances.
 
In July, the regulator also confirmed new rules that provide asset managers with greater freedom in how they pay for investment research, by allowing the ‘bundling’ of payments for research and trade execution. This new payment option is compatible with rules in other jurisdictions, making it easier for asset managers to buy research across borders. 
 

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