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FCA’s Listing Rule Overhaul: Our Expert Weighs in on the Double-Edged Sword for Retail Investors

By Sarah Penney, Millennial Money Writer 

Last week, the Financial Conduct Authority (FCA) announced an overhaul of the process for companies wanting to list on the London Stock Exchange, calling them “the biggest changes to the regime in over three decades”. Listing rules will change from 29 July 2024, aiming to attract more companies amid declining IPOs. Key changes include: 

• Simplified listing process 
• Single ‘commercial’ category replacing ‘premium’ and ‘standard’ listings 
• Reduced shareholder voting requirements 

These reforms align the UK market more closely with our European and US counterparts, aiming to address the 40% decline in UK-listed companies since 2008. 

I sat down with our investor relations expert, Morten Singleton, to find out more about these reforms and what they might mean for retail investors. 

Millennial Money: What’s your initial take on the reforms to UK listing rules? 

Morten Singleton: A change was necessary, but we’re not convinced this was the right change to be made. While the UK has been losing out to markets like the US for some time, the reforms announced last week only address one side of the market. 

The changes to listing rules are very much aimed at satisfying companies, rather than shareholders. While the FCA claims shareholders were consulted, the reality is that listing will become easier for companies, with shareholder rights diminished. 

Shareholder votes no longer being required for significant company transactions is a concern for TEA. The Companies Act 2006 requires directors to act in the best interests of all members of the business and the voting rights afforded to members of a PLC provide a critical means of achieving this objective. Directors cannot understand what is in the best interests of all members, if they do not allow investors to have their say on matters. Investors, through their voting rights, police the actions of management and hold them accountable; if the powers of management go unchecked, this increases the risks of corporate scandals.   

MM: What was the FCA’s intention in introducing these reforms? 

MS: To put the UK on a more equal footing with international markets.  

Companies have been delisting from the London Stock Exchange (to list elsewhere, or due to acquisition etc.), and they have not been replaced by new Initial Public Offerings (IPOs). Companies claim this is because UK listing rules are overly complex and restrictive – the new rules streamline the IPO process with one standardised listing regime. 

MM: Do you think the changes will achieve their aim of reinvigorating the UK market? 

MS: There’s a consensus that these rules were necessary to bring the UK to parity, and to that end, it’s anticipated that they will do their job in terms of encouraging more companies to list in the UK.  

The concern is that by focusing too heavily on making life easier and the UK more attractive to companies, there will be unintended consequences which may well see the UK become less attractive to investors. 

MM: What kind of companies is the FCA trying to attract with these changes? 

MS: The FCA’s keen to attract any company with a high growth strategy.  

Companies have argued that the old listing rules stifled growth, with them having to go to shareholders for approval on every transaction that would allow them to expand. These changes are aimed at making growth easier in the UK. 

MM: The FCA themselves said these reforms will introduce more risk for investors. Is this a cause for concern for retail investors? 

MS: The new rules take away some shareholder powers, particularly the ability for investors to double-check what companies are doing regarding transactions. There is therefore a greater degree of risk in terms of having to trust companies to work in the interests of shareholders and do what they tell markets they’re going to do. This poses an inherent risk that unruly companies end up harming investor trust and confidence in the UK public markets. This could lead to increased market volatility. 

On the other hand, there is an argument that because there isn’t enough risk in the UK, the market has suffered a lack of investment in recent years. For investors looking for growth, other markets have been more attractive – with greater risk comes greater reward.  

However, there is a happy medium to be had. We don’t believe the significant erosion of shareholder rights and the ability for investors to keep companies in check is necessary to encourage growth in the market.  

MM: With these reforms meaning companies must seek fewer approvals from investors, will they discourage engagement with retail investors? 

MS: Yes, we’re concerned these listing reforms will reduce the desire for companies to actively engage with investors (particularly retail) and disenfranchise investors as compared to the previous listing regime, rather than empower them.  

There’s been an acknowledgement that engagement with UK companies is a problem and is impacting investment in the market, Reversing pension fund divestment is often cited as the key to turning around and invigorating the UK market, however we would argue that a focus on engaging retail investors is critical, unleashing a whole new pool of largely untapped capital.  

There are competitive advantages to be gained by facilitating closer relationships between corporates and all of their shareholders (retail and institutional) and the UK has an opportunity to set an example that companies and markets worldwide will look to emulate. 

MM: There have been calls for these reforms to be the start of the change, not the end. What would TEA, as advocates for retail shareholders, like to see as the next step in the revolution of the UK market? 

MS: As I’ve mentioned, we’re concerned about the disenfranchisement of retail investors caused by the FCA’s reforms. The changes announced last week are about attracting companies to the UK, not shareholders, and this is a problem for the market as a whole.  

We encourage the FCA to continue to look at how we can raise interest in the UK market from both companies and investors, and to consider how to ensure shareholders are not exposed to unnecessary risk.  

Having said this, the transformation needed to make UK markets great goes beyond the reaches of regulation. We need to make retail investing sexier in general. In countries like the US, stocks and shares are a common topic of conversation amongst friends; here it’s not.  

There needs to be a cultural shift and we look to the younger generations, who are already making strides, to drive this. We need to focus on better financial education, having better conversations about money, and encourage better investor engagement to see a real shift across the market.  

Final thoughts 

The FCA’s reforms to UK listing rules present a double-edged sword for retail shareholders. While the changes aim to attract more companies and potentially create new investment opportunities, they come at the significant cost of reduced shareholder rights and increased risk. Retail investors may find themselves in a more dynamic market with a broader range of companies to invest in, but they will have less say in significant company decisions and potentially less engagement from companies.  

This shift emphasises the need for retail shareholders to stay informed, adapt their investment strategies, and find new ways to make their voices heard in corporate governance. As the UK market evolves, the balance between market growth and investor protection will remain a critical issue for retail shareholders, and organisations like TEA, to navigate. 

The Engagement Appeal responded to the FCA consultation on 23 June 2023: Primary Markets Effectiveness Review: Feedback to DP22/2 and proposed equity listing rule reforms. You can read the response below.  

By way of introduction, The Engagement Appeal (TEA) is an organisation set up to promote inclusive investor relations. Retail investors in the UK have been growing significantly with the rapid uptake of online investment platforms, however, this has not resulted in improved engagement between PLCs and them. Companies still tend to prioritise their institutional investors.  Our goal is to get companies to give the retail investors an equal billing when it comes to addressing their concerns as well as promoting the company’s investment proposition.  

Our submission is in relation to the Financial Conduct Authority’s request for comments on Consultation Paper (CP) 23/10: Primary Markets Effectiveness Review (Feedback to DP22/2 and proposed equity listing rule reforms). 

We note that the Consultation Paper proposes the following changes, amongst others (the “Proposed Changes“): 

A more permissive approach to dual class share structures (DCSS).  

The removal of compulsory shareholder votes and shareholder circulars for significant transactions.  

The removal of compulsory shareholder votes and shareholder circulars for related party transactions (RPT), including where a controlling shareholder is involved and a controlling shareholder agreement is not in place. 

We understand the need for the UK Listing Regime to be more accessible, easier to understand and competitive, as well as the need for the UK public markets to remain an attractive and trusted place to list companies.  

It is our view that the existing regulations relating to DCSS go far enough in terms of achieving the aforementioned objectives. However, if the current restrictions around DCSS were to be relaxed further (and matters that shareholders must approve reduced) as proposed in the Consultation Paper, we believe that this could end up harming investor trust/confidence in the UK public markets. An unintended consequence could be increased market volatility. 

We set out in our White Paper: “The Path to Inclusive Investor Engagement” the reasons why it is critical for PLCs to not just engage with its largest members but to engage with as broad and diverse a range of investors as possible.  As a starting point, the Companies Act 2006 requires directors to act in the best interests of all members of the business. The voting rights afforded to members of a PLC provide a critical means of achieving this objective – directors cannot understand what is in the best interests of all members, if they do not allow investors to have their “say” on matters.  Indeed, investors – through their voting rights –”police” the actions of management and hold them accountable; if the powers of management go unchecked, this increases the risks of corporate scandals.   

TEA believes that a richer exchange of views with shareholders who offer different perspectives (as opposed to engagement with the largest institutional shareholders which inevitably generates a narrow set of views all expressed through a similar lens) reaps huge rewards for companies. For example, this can be seen in countries such as Australia, where market structures have made it easier to hear the voice of the retail investor. Turnout at company meetings and votes is higher, share register volatility is reduced – and very often, valuations are higher. Also, the eminent economist, Professor Oliver Hart’s theory that “shareholders don’t always want to maximise shareholder value”, points to the fact that by engaging and better understanding what all stakeholders need and want, a company can use this crucial source of intelligence and insight to better set its agenda around non-financial goals (and ESG issues) and hence implement long-term sustainable improvements.  

In our view, the Proposed Changes will disenfranchise investors as compared to the existing Listing Regime rather than empower them. In short, the Proposed Changes represent a step in the wrong direction in terms of promoting more inclusive engagement (and all the benefits set out above that ensue from it).  We understand the need for the UK public markets to remain competitive; however, we believe there are competitive advantages to also be gained by facilitating a closer and stronger relationship between corporates and all of their shareholders and the UK setting an example that companies and markets worldwide will look to emulate. 

We remain available to discuss our views further. 

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