The FCA has shown it is serious about improving London's listing regime
Fears that London's stockmarket is in decline have been taken into account by the regulator
The UK needs to think big when reforming its increasingly anaemic stockmarket, but it must be careful not to let progress come at the expense of corporate governance standards.
Last week, the UK’s Financial Conduct Authority launched its latest consultation intended to overhaul the listing rules of the London Stock Exchange.
The new proposals go much further than many in equity capital markets expected. Proposals include abolishing the premium and standard listing segments and replacing them with a single improved listing category for companies. The FCA is also examining whether it should have an even more tolerate policy towards dual class shareholder structures than it introduced in a previous review, which give company founders outsized voting rights, as well as permitting companies to push through M&A deals and other related party transactions without the strict need for shareholder approval.
There is a widespread consensus within equity capital markets that the UK government and regulators need to do something to arrest London’s perceived decline versus other major financial centres such as New York, or rival European bourses such as Amsterdam and Frankfurt.
Much like the UK itself, the London Stock Exchange has struggled to carve out a role for itself post-Brexit. Many of the international listings from the Middle East and Russia that once provided a steady source of business in years gone by have dried up, and the domestic UK equity IPO market has ground to a halt since 2021.
Existing UK stocks are faring little better, most having traded at a discount to their international peers since 2016 and underperforming. As of Tuesday afternoon, the FTSE 100 has returned just 0.5% over the past five years, excluding dividends, compared to a 21.1% rise in the Euro Stoxx 50 across the same period.
The valuation gap has led to a growing number of delistings because of private equity takeovers of London-listed companies. Dozens of UK corporates are reported to be considering a move to a foreign exchange.
Last year, to make matters worse, Paris overtook London as the biggest UK stockmarket by market capitalisation, thanks partly to LVMH’s stunning run to become the most valuable European company.
In recent months, the performance of the London Stock Exchange and this lack of activity has led to a torrent of bad headlines and negativity. But some of the fears about London’s decline are overblown. There may have not been many IPOs in the UK capital, but since the start of 2022, there have not been many IPOs anywhere in the world. The obvious exception is the Middle East, a region that is has long been a major beneficiary from high oil prices.
But notably in 2021, a banner year for IPOs globally, London was the top exchange in Europe.
Overblown or not, very few will reject the chance to improve London as a listing destination and this latest review should be welcomed.
While the new rules may address some of the concerns about London’s competitiveness, the FCA needs to make sure that any enhancements do not come at the expensive of corporate governance standards, which have long been a major strength for London.
Historically, a premium listing was seen as the gold standard for corporate governance. During its consultation, given that it intends to do away with these, the FCA needs to listen carefully to the market to ensure not to lose this status as it seeks to shake London’s stockmarket from its post-Brexit malaise. Removing one of the few existing draws of the LSE would be a very unfortunate side affect of changes to the listing regime.
Indeed investors should always be given a say over major transformational decisions in the life of a company, even if they cede day to day control to a company's board or founders. Disclosure requirements should also remain strict, as investors can always vote with their feet if they disagree with decisions.
A nimbler and more liquid UK stockmarket would also be a major boost for the country’s flailing economy. The reforms to the listing rules, alongside the forms to the rules governing capital raising, will make it easier for UK companies to access capital and fund ambitious growth plans.
If passed in their current guise, the new rules would also align London closer to New York and Hong Kong, the world’s premier equity capital markets. The FCA should not be shy in its implementation, but if the proposals are anything to go by, this is not the regulator's intention.