Scrutinising the UK’s new ‘match fit’ listing rule book

For some reason, the Financial Conduct Authority unveiled its proposed new UK listing rules on the 20th December, long after most market players and pundits had decamped to warmer climes for a digital detox (I, for one, missed the memo).

The timing was strange because the draft rules — initially floated in a consultation last May — are a milestone in London’s fightback to reclaim its status as a premier venue for equity listing and fundraising. It’s a substantial document aimed at making the UK listing regime “match fit,” according to the law firm Latham & Watkins.

The proposals come on top of reams of reports, reviews and comptes rendus recently published by City luminaries. The alarm is palpable. London has lost high-profile listings to the NYSE and Nasdaq, and the hoped-for riverflow of IPOs has turned into a brackish billabong, with a meagre $1bn raised in 2023 and the largest flotation plummeting by over 75 per cent. The UK, currently the 18th-biggest IPO market, risks relegation to the junior varsity squad.

The FCA’s consultation paper encapsulates a “disclosure-based” regime, putting the onus on investors to form a judgment based on a company’s disclosures. If implemented, the reforms would:

• Combine the premium and standard listing segments into a single category; 

• Eliminate the three-year track record requirement for an IPO;

• Facilitate the adoption of dual classes of shares; and 

• Dispense with the need for a shareholder vote or circular for significant or related-party transactions. 

The proposed rules would significantly relax investor protections, a fact the FCA acknowledges and some investor groups lament. As the watchdog puts it:

We recognise these proposals would result in a rebalancing of risk. We have to recognise that this may mean more failures as part of ensuring the market overall supports the risk appetite the economy needs.

In other words, you can’t make a market omelette without breaking a few nest eggs.

London isn’t alone in trying to resuscitate its equity capital markets. Everybody’s doing it! The day preceding the FCA’s announcement, the Chair of the European Securities and Markets Authority (ESMA) expressed on Bloomberg TV a desire to “boost” European IPO markets. Meanwhile, Hong Kong has just formed a task force to attract listings from the Middle East and south-east Asia, and Italy has streamlined its rules to encourage new flotations.

The competition for listings has evolved into a matter of national pride and industrial policy. Policymakers have been spurred to action by the sight of commercial crown jewels — such as British chips designer Arm, German sandal maker Birkenstock, and Italian luxury company Ermenegildo Zegna — choosing to list in the US. It smacks of national humiliation, a public vote of no confidence more mortifying than any parliamentary manoeuvre.

For the UK, the narrative cuts deeper and goes something like this: When Britain was an EU Member State, it was “the default place for Western capital.” However, policymakers took London for granted and complacency set in. Regulators piled on requirements and red tape. The FCA’s “onerous” rules were, for example, blamed for Softbank’s decision to list Arm in the US. Moreover, an overly prescriptive corporate governance code has stymied company flexibility. 

Meanwhile, internal stewardship teams at UK asset managers have assumed greater power, using shareholder votes to advance ancillary agendas, objecting to management pay packages, and forcing boards into wasting time to justify decisions well within their normal purview.

And the UK media has exacerbated the pain and strain of a public listing by being — as the FCA’s director of market oversight said — “very negative about our entrepreneurs and listed issuers.” Little by little, the story goes, the laurel of listing on the London Stock Exchange has turned into a grind and a chore. 

And whatever the effects and defects of Brexit, it has at least forced a reckoning, exposing the competitive disadvantages that were previously obscured. The UK government now has the freedom to act on its own to MALGA (Make London Great Again), including streamlining listing requirements, implementing the Edinburgh Reforms, junking the EU banker bonus caps, badgering the Financial Reporting Council into scrapping new boardroom rules, and making it harder for investors and “loathed” proxy advisers to register dissent over board decisions on matters such as C-suite compensation.

The deregulatory thrust of this narrative has strong merits, but it’s also partial, in both senses of the word.

It is true that bureaucratic barnacles have latched on to the UK listing regime mothership, and many (but not all) of the reforms mark a significant improvement. (FWIW, the proposal to remove the vote on related-party transactions should be reconsidered, notwithstanding Softbank’s objections. After-the-fact disclosure provides scant protection for shareholders.)

Unfortunately, the current rule framework isn’t near the top of the list for why London listings have withered. As the FCA admitted in its own review:

Inevitably, the listing regime is not the only element, and perhaps not the primary one, in decisions made about when and where to take companies public. Influencing other factors that drive those choices — including the macroeconomic environment, taxation, depth of capital markets, valuations, research coverage, indexation, and many other aspects besides — will require others to also act where they have the levers to do so.

The reasons for London’s challenges as a capital market have been scoped, scrutinised and studied. For one thing, the UK suffers from anaemic growth, laggard productivity, high taxes, sclerotic planning, stifling public sector inefficiencies, deteriorating infrastructure and increasing trade barriers. These factors not only block the emergence of new companies of sufficient size and appeal to be quoted, but also weaken the investment case for buying shares in UK-based companies.

For another, a long litany of pension, insurance and tax policies have discouraged equity ownership, diverting capital to other asset classes such as fixed income and property.

Finally (and this is often overlooked in all these save-the-City initiatives), investors are wary of London IPOs because the after-market performance has been shocking for a long period of time.

The more recent vintages have left a yucky taste in investors’ mouths, but the not-so-noble rot started much earlier. IPO participants are often incentivised to take the money and run; investors sense the skewed motivations and asymmetry in information access and demand a valuation discount. Companies then become reluctant to list in the UK.

It’s surprising that none of the various reforms addresses this longstanding market failure, especially since investors raise this issue in virtually every conversation about London IPOs.

The CAB Payments IPO debacle — which follows other recent flotation fiascos — should prompt some reflection on the responsibilities and accountability of the various parties involved. Instead, they are featured and feted in LSE-sponsored events.

The harsh reality is that even the most accommodating financial regulator can neither create better companies nor make the funding environment for early-stage life sciences and tech companies conducive to their staying in the UK. If US money backs pre-IPO funding rounds, those investors will push companies to list in the US.

In short, the FCA’s proposed reforms turn the listing regime from flabby to “match fit,” but London will need a lot more vigorous treatment before it can be considered fully rehabilitated.