FCA: single UK listing regime would remove complexity and boost competitiveness

The proposals, contained in a recent discussion paper, are designed to ensure that the UK regime remains competitive and continues to attract high growth and innovative businesses.

In the proposed new regime, companies seeking to list in the UK would be required to comply with a single set of minimum listing criteria and a single set of mandatory continuing obligations, and to appoint a sponsor when listing. It would then be open for listed companies to decide, in conjunction with their shareholders, whether to comply with an additional set of supplementary continuing obligations.

The discussion paper is just that: the proposals are likely to be refined in response to industry feedback, and any final rule changes will be subject to consultation. The paper is, however, useful in signalling the FCA’s direction of travel.

Why is the FCA considering these changes?

According to the FCA, market trends show a decline in companies coming to market over the last 20 years and, more worryingly for the UK, London’s share of global initial public offerings (IPOs) declining from 10% in 2006 to 5% in 2018. There is clearly a desire to ensure the UK remains competitive – something which can be seen in recent changes made to the listing rules to accommodate dual class share structures, special purpose acquisition vehicles and sovereign controlled companies.

Key to remaining competitive, in the eyes of the FCA, is “removing complexity that is not serving a genuine and defined purpose” and which may act as a deterrent to companies considering a listing.  The FCA notes that many of the listing requirements were designed a number of years ago and may not suit modern businesses, particularly those that are considered to be innovative or high growth.

Lord Hill also recommended a re-branding and re-marketing of the standard listing segment in his UK Listing Review.

What would the new single segment regime look like?

Central to the new single segment regime would be one set of eligibility criteria. This is designed to ensure that a ‘UK listing’, as it may become known delivers one level of “quality” of applicant. Requiring a sponsor to be part of every listing would also support this quality drive.

Certain requirements of the existing eligibility criteria (three year representative earning track record (LR.6.3), three years’ of audited financial information that represents at least 75% of the issuer’s business (LR 6.2) and a ‘clean’ or unqualified working capital statement (LR 6.7)) would move to the prospectus rules and be disclosure requirements rather than outright bars to eligibility.

Certain other requirements of the existing eligibility criteria (control of the business, carrying on an independent business, controlling shareholder and constitutional requirements related to the company’s share structure and associated rights) would become continuing obligations and be replaced by a single eligibility criterion requiring the issuer to confirm its ability to comply with the relevant continuing obligation regime it elects to follow at IPO.

The continuing obligations themselves would be split into two, with the mandatory continuing obligations applicable to all issuers with a ‘UK listing’. Issuers would be able to elect whether to comply with the supplementary obligations. It is unlikely to be possible to selectively comply with some of the supplementary obligations, the FCA seeming to prefer an all or nothing approach “to avoid complexity”.

Which continuing obligations would be mandatory and which supplementary?

The FCA’s proposal is that the differentiation between mandatory and supplementary continuing obligations would be narrower than the difference between the existing standard and premium listing segments. This is to avoid the same perceptions of lower quality as have been ascribed to companies listing in the standard segment being applied to those who don’t elect to comply with the supplementary regime.

Mandatory continuing obligations would be those that focus on either transparency; or protecting shareholders from circumstances where management or a significant shareholder may have differing interests to an ordinary shareholder. The mandatory regime would include, amongst others, the following requirements which have, to date, only applied to premium listing applications:

• control of business (LR 6.6)
• related party transaction regime (LR 11)
• constitutional arrangements and pre-emption rights (LR 6.9)
• requirement to obtain shareholder approval for cancellation of listing (LR 5.2.5)
• restrictions around rights issues and open offers, including as to maximum discount of 10% (LR 9.5)

The supplementary continuing obligations would focus on areas of the existing premium listing segment which have afforded shareholders a greater role in holding the company to account on an on-going basis, including:

• the controlling shareholder regime (LR 6.5)
• the requirement to demonstrate an independent business (LR 6.4)
• the significant transactions and reverse takeover regimes (LR 10 and LR 5.6)

The discussion paper does also include a debate around whether the existing 25% ‘Class 1’ threshold is appropriate, and whether moving to 33% would make the regime less likely to put listed companies at a disadvantage to private and/or overseas companies. For example, when competing in auctions, the time it takes to publish a circular and seek shareholder approval can count against a premium listed company.

Next steps and potential impact

The FCA is seeking responses to its proposals by 28 July 2022. There will likely be further iteration of the proposals in response to this feedback. The FCA will then decide whether further discussion is required or if it can move towards publishing a consultation paper. This process will take time, so any actual change is likely to be some way off.

However, one key factor in determining the success, or lack thereof, of the standard listing segment has been the index providers’ exclusion of standard listed companies from key indexes. This issue has often driven issuers to the premium segment, or perhaps away from listing in London altogether if unable to satisfy those requirements.

The FCA acknowledges that indexation is not something over which it has any control. However, the narrowing of the gap between mandatory and supplementary regimes does appear to be designed to bring the regimes closer together, presumably with the hope that those companies choosing to comply with ‘only’ the mandatory continuing obligations would not be excluded from indexation. If successful, this, alongside some of the proposed changes, could enable a wider range of IPO candidates to seek investment from a wider pool of potential investors - which has to be good for London’s capital markets, and the UK as whole.