Experts Call for Further Reforms as FCA Revamps London Stock Exchange Rules

The U.K. Financial Conduct Authority (FCA) is overhauling the rules of the London Stock Exchange (LSE), but experts believe additional changes are necessary to foster growth and attract initial public offerings (IPOs).

The LSE is set to implement the most significant rule changes in three decades. The FCA has introduced a simplified listings regime that will replace the existing premium and standard categories with a single category, effective July 29.

In a press release issued Thursday, the FCA stated that the new regime "ensures investors will have the information they need to make decisions about their money, while maintaining appropriate investor protections." However, the U.K. financial regulator acknowledged that eliminating the requirement for shareholder votes on “significant or related party transactions” and introducing more “flexibility around enhanced voting rights” could increase risks.

Compliance managers should be aware that, despite the regime's simplicity and uniform treatment for listed entities, it also reduces transparency and weakens shareholder rights.

Sarah Pritchard, FCA executive director, markets and international, emphasized that the goal is to stimulate growth. “That’s why we are acting to make it more straightforward for those seeking to list in the U.K. while retaining vital protections,” she said in the release.

Jason Fletcher, former chief investment officer of the London Collective Investment Vehicle, which pools investments for 32 London Local Government Pension Schemes, noted that institutional investors favor growth but also demand transparency and equality with other investors. The new rules will shift the balance of power towards founders and seed investors with “super voting rights.”

“Most investors want more transparency and this goes the other way,” Fletcher stated. “There will be less need for those with super voting rights to tell other investors what they are doing, even if they don’t own a majority of shares. This could affect investors who, for example, want to improve a business’s environmental credentials.”

Fletcher also expressed skepticism that the new listing rules would significantly influence organizations' decisions on where to list. He argued that cost and potential capital raised are more critical factors. “If you really want to encourage more organizations to list, make it free,” he added.

In a blog post, Inigo Esteve and Jonathan Parry, partners at law firm White & Case, argued that changes to U.K. accounting standards might have contributed more to the decline in London IPOs than higher returns elsewhere. Since 2000, “companies have been required to calculate the surplus or deficit of their defined benefit pension schemes annually and to disclose deficits as a financial liability in their accounts. This may have prompted companies to shift pension funds away from U.K. shares to lower-risk assets such as corporate and government bonds,” the post explained.

Listing rules are only part of the issue. “The need for premium listed companies to obtain shareholder approval for significant transactions and related party transactions and the prohibition on dual class share structures have been highlighted as examples of areas in which London’s rules are more onerous than competing exchanges,” the post added.

Esteve and Parry argued that while simplifying listing rules could make London IPOs more competitive, further measures are necessary. They suggested that “the U.K.’s pension system and its executive compensation and approach to taxation are some of the other potential areas for reform” and that “consolidating the U.K.’s fragmented pension market is another lever.” They see listings reform as an opportunity to address these more complex issues.

Fletcher concurred, noting that the current listing and pension fund rules exceed 400 pages and that simplification would be beneficial.

By fLEXI tEAM