The UK’s corporate governance landscape continues to evolve, with two important new consultations being announced in May 2023.
The Financial Reporting Council has launched a public consultation proposing the first revisions to the UK Corporate Governance Code in five years. The proposals are designed to enhance the code’s effectiveness; AB will be reviewing them in coming weeks.
Meanwhile, the Financial Conduct Authority (FCA) is consulting on its Primary Markets Effectiveness Review and is proposing a major overhaul of the equity listing rules for companies listing on the London Stock Exchange (LSE).
The new consultation sets out an ambitious blueprint for change
Listing regime change
The FCA wants to make the UK’s listing regime – the rules companies must follow to be allowed to list their shares on the LSE – ‘more effective, easier to understand and more competitive’. It has already amended the regime post-Brexit, acting on recommendations from Lord Hill’s UK Listing Review and the Kalifa Review of UK FinTech to boost growth and competitiveness.
In 2021 the FCA made targeted changes to the rules, including lowering free-float levels to 10%; allowing certain forms of dual-class share structures for premium listings; and introducing digital financial reporting. It is now building on these changes.
The May consultation sets out an ambitious blueprint for change – reforms designed both to attract a more diverse range of applicants and bolster UK competitiveness while maintaining high standards of disclosure and transparency.
‘We want to encourage more companies to list and grow in the UK, versus other highly competitive international markets,’ says FCA CEO Nikhil Rathi.
The consultation lasts eight weeks. The FCA aims to complete a second, detailed consultation by the end of the year, meaning the new rules could be in place by early 2024.
Need to revitalise
This rapid timetable reflects growing concerns around the position of London as a leading global financial centre. While it has been Europe’s biggest financial hub for many years, listings in the UK have reduced by 40% since 2008, according to the UK Listing Review. Between 2015 and 2020 the UK accounted for only 5% of initial public offerings (IPOs) globally.
The LSE’s lacklustre performance is continuing. The FT reported that it has secured only six new listings so far in 2023, compared with 56 in the US and 34 on European stock exchanges.
The standards are regarded as overly burdensome and deterring some companies from listing in the UK
FCA consultation
The consultation includes the following key proposals:
- Replace London’s existing standard and premium markets with a combined single listing category for company shares, providing a simpler, flexible framework to appeal to a more diverse range of companies. Investors will continue to receive key information for decision-making, including annual reporting against the code, which will be mandatory for all listed companies.
- The sponsor regime is retained with modifications. While a sponsor declaration will still be required for an IPO, their role will be greatly reduced once the IPO is completed.
- A more flexible approach is proposed for the exercise of enhanced voting rights, together with an extension of the sunset period before the rights lapse, from five to 10 years. It is hoped these moves will be attractive to company founders looking to list by enabling them to retain more power and for longer.
- Eligibility rules requiring a three-year financial and revenue earning track record together with a clean working capital statement as a condition for listing will be removed. This will make it easier to join the market, enabling more young companies and/or technology companies to list on the LSE.
- The proposals include the removal of compulsory shareholder votes and circulars for significant transactions and for related-party transactions. The current requirement can be seen as an unnecessary hurdle – for example, Arm would have needed a shareholder vote on related party transactions with companies owned by its parent, SoftBank, to list in London.
One particular concern is that high-profile technology companies are increasingly opting to pursue a US listing rather than one in London. Arm, the Cambridge-based microchip designer, chose to list on the Nasdaq exchange rather than the LSE earlier this year, despite persistent lobbying from the UK government.
stock valuations, the availability of capital and taxation. Nevertheless, the FCA has received feedback from a range of market participants that the listing standards are regarded as overly burdensome and are deterring some companies from listing in the UK. Hence the decision to initiate a deeper overhaul of the regime by simplifying the rules.
Opportunity and risk
The FCA believes that its proposed rule changes (see panel) will help to keep London competitive. It also acknowledges that simplifying the UK’s listing regime will make investing in London riskier. Care is needed – increased risk may deter investors who view an LSE listing as reassuring evidence that minimum standards of governance and due diligence have been met.
Rathi is aware of the importance of risk culture: ‘Our proposed reforms would significantly rebalance the burden of regulation to the benefit of listed companies and investors who are willing to set their own risk appetite and terms of engagement.’
The FCA wants an open discussion about the change to risk appetite that a listing regime based on disclosure and engagement rather than regulatory rules would require. However, changing the rules is much easier than changing the culture. The FCA has more work to do.
More information
See AB‘s series of videos giving investor insights into stock markets, including ‘What are exchange-traded funds?’
