Big shake-up of UK stock market rules not universally popular

The Financial Conduct Authority (FCA) has given the green light to the biggest shake-up of the rules it uses to govern Britain’s listed companies in three decades.

The leading financial regulator hopes that the reforms, due to come into effect on 29 July, will reverse the recent downturn in the UK stock market’s fortunes.

There has been a dearth of companies floating on the London Stock Exchange while, at the same time, a string of companies have moved their main stock market listing from the UK to the US.

The latest of these is Flutter Entertainment, the parent of Paddy Power, Betfair and Sky Betting & Gaming, but others to have decamped in recent years include Tarmac’s parent CRH, the building materials supplier Ferguson, the German tour operator TUI and the Irish paper and packaging giant Smurfit Kappa.

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London also missed out when the Cambridge-based chip designer Arm Holdings chose New York over London, where it had previously been listed, when it returned to the stock market last year.

There are a number of elements to the rule changes – part of a wider sweep of reforms introduced by the last Conservative government, including the so-called ‘Edinburgh Reforms‘, which the new Labour government has embraced.

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Chief among the changes is a removal of the need for shareholders to vote on significant transactions and so-called ‘related party transactions’ where a company enters an arrangement with another company with which it already has a business relationship. This change effectively hands more power to company boards and takes it away from investors.

The previous need for a vote on ‘related party’ transactions was thought to be a key reason why Arm Holdings decided against a London listing.

A second change is that founders or directors of a company can have ‘dual’ or enhanced voting rights for an unlimited period. This brings the UK more into line with the United States – where such arrangements are common.

The aim here is to attract more growth companies, particularly in the tech sector, where founders want to retain control after the business comes to market. Similarly, institutional investors who backed a company prior to its stock market flotation will be allowed to enjoy enhanced voting rights for up to 10 years.

A third change will sweep away so-called ‘premium’ and ‘standard’ listings and replace them with a single category for equities. The premium listing, which required companies to adhere to stricter rules and standards, was at the centre of a push seven years ago to attract Saudi Aramco, the world’s biggest oil producer, to list in London. A number of fund managers opposed the rules being bent to allow Aramco a premium listing which, had it listed in London, would have entitled it to FTSE 100 membership.

Confirming the rule changes, Sarah Pritchard, the FCA’s executive director for markets and international, admitted that the new rules would allow greater risk but insisted they would better reflect the risk appetite the UK economy needs to achieve growth.

She said the changes followed “extensive engagement across the market”.

Ms Pritchard added: “A thriving capital market is vital in delivering investment to growing companies plus returns and choice to investors. That’s why we are acting to make it more straightforward for those seeking to list in the UK, while retaining vital protections so investors can help steer the businesses they co-own.

“Regulation is only part of the answer in helping the UK achieve sustainable growth. Other factors also play a significant role in influencing where a company decides to list. We’re committed to continually working together with all those who have a part to play in supporting a thriving UK capital market and thank everyone who has contributed to this work so far.”

Among those welcoming the rule changes was Dame Julia Hoggett, chief executive of the London Stock Exchange, who has been at the heart of efforts to attract more companies to list in London and to make the City a more attractive place to do business.

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She said: “We congratulate the FCA on delivering the largest set of reforms to our listing rules in decades. It has been heartening to see how the entire ecosystem has come together to achieve this ambitious objective.

“It will ensure that companies listed in the UK can benefit from a listing regime that better supports their growth ambitions, increases investment opportunities for UK investors and supports the UK economy.”

And also giving the reforms her blessing was Rachel Reeves, the new chancellor, who said: “The financial services sector is central to the UK economy, and at the heart of this government’s growth mission.

“These new rules represent a significant first step towards reinvigorating our capital markets, bringing the UK in line with international counterparts and ensuring we attract the most innovative companies to list here.”

So the rule changes clearly have a lot of supporters in high places.

But be in no doubt – they are by no means universally popular in the Square Mile.

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Some investors fear they represent an unacceptable lowering of standards that could end up saddling savers – who invest in the stock market via their pensions, ISAs and life policies – with more clunkers in their portfolios.

A group of pension funds led by Railpen, which manages the retirement savings of 350,000 railway workers, wrote to the FCA last month urging a rethink. They pointed to rule changes made in 2006 with the aim of making the UK a more attractive listings destination for resources firms but which instead led to a string of investment disasters including Eurasian Natural Resources Corporation (ENRC), a Kazakhstan-based mining company that for a while was a member of the FTSE-100 and Bumi, an Indonesian-based coal miner.

Critics of the reforms – unfairly – also suspected a stitch-up because Nikhil Rathi, the chief executive of the FCA, was previously a senior executive at the London Stock Exchange.

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