FCA’s plan to ease listing rules is gormless
Investors want to toughen corporate governance, not weaken it
The UK’s Financial Conduct Authority is consulting equity market stakeholders on whether to scrap the distinction between the London Stock Exchange’s premium and standard segments. The market should reply with a loud ‘No’.
The regulator’s motivation is that some fast-growing tech companies are believed to have shied away from listing in London, partly because they did not want to comply with, or could not manage, the stricter requirements for a premium listing.
The standard listing was open to them, but they disliked what they saw as the poor image of a second tier listing and went elsewhere.
Now, as the latest step in a series of measures to overhaul and refresh UK capital markets regulation, partly inspired by Brexit, the FCA has proposed reforming the system, so that there is just one mandatory set of listing requirements.
These would be like the standard rules today, but with some elements drawn from the premium rulebook, such as having a sponsor, as a leading equity capital markets lawyer explained in an interview with GlobalCapital yesterday.
Then, companies that wanted to could “opt up” for the more stringent requirements carried by the present premium listing. These include trifling matters such as requiring shareholder votes on major M&A deals.
ECM bankers have so far shown little interest in the proposals, to judge by GlobalCapital’s conversations with them. They are more worried about whether they are going to be able to do any deals in June — let alone hopes of IPOs, which have now largely fallen by the wayside until September.
But some of the more technically minded in the market, such as lawyers, have given the plans a cautious welcome.
Clearly, listing rules are only one decision factor for thrusting digital or biotech companies wondering where to float — and probably quite far down the list. The dominant issue is usually where they they think they will get most attention from investors that really understand their sector.
But, some in the City believe, if the plans improve the branding of London’s market and remove one deterrent, they could at the margin help London grow a thriving stockmarket of growth companies.
It does need refreshing — many believe the London Stock Exchange is overly weighted to old economy stocks such as oil and gas.
But market participants should ask themselves who would really benefit from the changes?
Hardly investors. The drive to improve corporate governance is the oldest and least controversial of the three pillars of ESG, and an area where the UK has been an acknowledged leader.
The FCA’s changes are explicitly designed to make it easier — or less awkward — for companies to list that have lower standards of governance, transparency or accounting robustness.
If companies go abroad to list, does that wrest them away from UK investors? No. Nearly all savings are routed through large institutions and professional asset managers, which can invest in any major developed market, as well as many emerging ones.
Perhaps it could distance the emigrant companies from self-directed UK retail investors — but they are the ones most in need of protecting from firms with poor governance.
Would it help companies? Not much. Supporters of the reforms openly say their concern is companies turning to overseas markets, not failing to list at all.
Those for whom the listing location matters most, in fact, are the London Stock Exchange itself and local market intermediaries. However, even UK-based law firms and larger banks would probably still get business from outbound IPOs. Just the Stock Exchange, then.
Perhaps this rather brusque dismissal of the possible winners is overdone. Taking the proposals at face value, do they make sense?
The FCA is not questioning the value or importance of certain facets of corporate governance and accounting. It is simply proposing to make the distinctions less visible.
If companies can still “opt up” to high standards of corporate governance — as presumably nearly all that currently observe these standards will want to continue to do — all the FCA is proposing is to remove the clear branding from companies that follow these high standards.
Why? To make some of those on the lower rung feel less embarrassed. Actually no, not even them — they are already contentedly listed on the standard segment. It is to attract a few unlisted companies that may or may not be swayed towards London by having to comply with fewer irksome rules.
This is like a food regulator trying to expand demand for chocolate by printing the ingredient lists on the packets in smaller text, so consumers wondering whether to buy chocolate find it harder to tell good quality from bad.
As the LSE itself highlights on its website: “Premium Listed companies comply with the UK’s highest standards of regulation and corporate governance, as a consequence they may enjoy a lower cost of capital through greater transparency and through building investor confidence.”
Last year, the FCA trumpets in its consultation announcement, 126 companies listed in London, raising £16.9bn. How much does it believe that sum could have been increased with easier listing rules? Let’s take a wild guess and say 25% — or £4bn-odd.
The FTSE All-Share Index, which requires a premium listing for inclusion, contains 98%-99% of the total market capitalisation of UK stocks. So what is at stake in weakening or removing the Premium label to gain perhaps £4bn of extra listings is possibly the cost of capital of 1,300 companies worth £2.4tr.
The FCA’s proposal is plainly absurd and runs counter to the whole thrust of modern financial market policy and investor effort — to improve governance and make it simpler and easier to grasp.
One final point. Last year, the UK’s equity capital market may, as the FCA boasts, have had its busiest year since 2007. This year has been a wash-out.
Why is that? Not because companies are put off by onerous listing rules. The IPO market is dead because investors, in a weak market, have no inclination to take risk on new, unfamiliar companies.
This crucial capital market has completely ground to a halt because of the war in Ukraine and fears of inflation and interest rates rising. It raises questions about the thinness and fragility of the investor base for IPOs in the UK, as elsewhere in Europe.
If the FCA wants to improve the UK’s listing market, it should think of ways to strengthen investor confidence, not muddy the waters for institutions trying to pick companies they are willing to trust.