The regulator’s shake-up of listings rules is likely to level the playing field between the UK and US markets, but it could also give rise to poor governance and more charlatan firms entering the market.
The Financial Conduct Authority (FCA) on Thursday announced changes to listing rules to boost growth and innovation on UK stock markets and increase the UK’s competitiveness on the global stage as a listing hub.
Historically tech companies have been turned off by the strict rules in the UK which do not allow dual class shares for premium listings. Dual class share structures have also been flagged for governance issues because they can give company founders enhanced voting power.
But the new rules, which apply from 3 December, include allowing founder-friendly dual-class share structures in premium listings and reducing free float requirement from 25% to 10%. Both moves give company founders more control over their businesses and the argument goes that could lead to companies listing sooner.
The FCA is also increasing the minimum market capitalisation (MMC) threshold for both the premium and standard listing segments for shares in ordinary commercial companies from £700,000 to £30m.
FCA director of market oversight Clare Cole says the regulator needed to act to meet the needs of an evolving marketplace.
“These changes ensure the UK’s markets maintain their reputation for dynamism, helping support the new types of companies seeking the investment that drives economic growth and by giving investors more choice with appropriate protection.
“Over the last few months, we have moved quickly to address areas where our rules could be improved to encourage innovation in primary markets. By taking this agile approach, we are pleased that new IPOs in 2022 will be able to benefit from the revised rules.”
Calls to reform UK listings
The changes follow a consultation launched in July on reforms to improve the effectiveness of UK primary markets following recommendations made in the UK Listing Review by Lord Hill, published by the Treasury alongside the budget in March, and the Kalifa Review, which covered UK Fintech.
Lord Hill’s review got backing from industry heavyweights including Schroders chief executive Peter Harrison who in April spoke of his fears that London’s stock exchanges had lost ground to their international competitors since 2007 which marked London’s most successful year for floats.
“I have become increasingly concerned that without reform, London faces slow decline at a time when Amsterdam and other markets are in the ascendancy,” he wrote in a letter published in the Times.
‘IPOs are the lifeblood of any stock market’
IFSL RC Brown Primary Opportunities fund portfolio manager Oliver Brown says he very much welcomes the changes as the dual class structure and 10% free float minimum aligns the UK market much more closely with the US, “a market that, frankly, the UK has been losing out to”.
Brown’s fund seeks to buy to buy into companies when there is a natural primary opportunity to do so, including at IPO stage.
“As a UK fund manager who I believe sees more IPOs than any other fund manager in the UK, I am very keen to see more companies list in London,” Brown says. “After all, IPOs are the lifeblood of any stock market. I certainly don’t view these changes as detrimental to the quality of companies that might be seeking to list.”
Could give rise to charlatans
But AJ Bell investment director Russ Mould says while the measures might tempt more entrepreneurs to London, it may also tempt “charlatans, and in the process raise the risk of poor governance”. He notes the regulators, auditors, bankers and analysts have already been embarrassed in the past couple of years by the collapses of NMC Health, Carillion, Conviviality and Patisserie Valerie.
Mould says a flow of new deals on the London market could help the economy to grow and raise standards of living for all, but there can be a downside to a flood of IPOs.
“As the new listings booms of 2005-07, 1998-2000 and the early 1970s will attest, a string of successful floats can tempt investors to let down their guard and permit lower-quality companies to come to market, as both buyers and sellers think there is a quick buck to be made.”
Wise, Deliveroo and THG share prices all down since dual class listing
Over the past year there have been a handful of firms that have undertaken high profile listings on the standard segment on the London Stock Exchange with dual class share structures, but their share price has fallen since listing.
Money transfer app Wise made history in July when it became the first company to directly list its existing shares on the LSE. It listed with a dual class share structure giving founders Kristo Käärmann and Taavet Hinrikus enhanced voting rights along with early institutional backers, including Baillie Gifford, Fidelity and Chrysalis Investments. However, since 7 July Wise’s share price is down 16.6%.
In April, Deliveroo’s IPO was considered a flop when its shares plummeted 22% in its first morning of trading with experts citing several reasons for the drop, among them its dual class share structure which Legal & General Investment Management, M&G, Aberdeen Standard Investments and Aviva Investors, all publicly criticised. Since its stock market debut, Deliveroo’s share price is down 8.7%.
The Hut Group’s (THG) IPO in September last year saw it raise £1.9bn, giving it a valuation of close to £5.4bn. It too has a dual class share structure and year to date, its share price is down 78%.
IA welcomes the move
But Investment Association chief executive Chris Cummings says asset managers have welcomed the move because the industry is keen to achieve the right listing environment which attracts high-quality and innovative companies to list and operate in the UK.
“We’ll be working closely with our members to see how the reforms work in practice and the outcomes they deliver,” he adds. “Success should be measured, not on the number of companies that list, but rather on the quality of those companies, and the long-term sustainable returns they deliver for shareholders.
“It is important now to focus on a broader set of reforms to the wider listing ecosystem, including promoting the UK as a listing venue and improving the advice and support that high growth companies receive through their listing journey.”
As part of its consultation, the FCA also asked for views on the overall structure of the UK listing regime and whether wider reforms could improve its longer-term effectiveness. It intends to provide feedback on these responses in the first half of 2022, including proposed next steps.
