Speech by Clare Cole, Director of Market Oversight, at the Westminster Business Forum.
Clare Cole
Speaker: Clare Cole, Director of Market Oversight
Event: Westminster Business Forum
Delivered: 6 February 2024
Note: this is the speech as drafted and may differ from the delivered version
Highlights
- Thriving capital markets are the cornerstone of a strong economy and can power sustainable growth. Many factors contribute to a company’s decision to list and an investor’s decision to invest.
- Our listing rules are only one part of the picture but we are doing our bit. We’ve set out our detailed proposals for reforms to the UK listing regime to encourage a more diverse range of companies to list and grow.
- In parallel we’re working on proposed revisions to the UK’s prospectus and public offering infrastructure to make it easier to raise capital.
- We are also refreshing the National Storage Mechanism, the FCA’s online archive of 3.9 million items of regulatory information, to make it more user friendly and help investors make informed decisions.
- Our proposals are the most wide-ranging reforms to the UK’s capital markets in over three decades, driving forward changes to attract the brightest and best companies and ensure investors have the information they need.
Introduction
The purring of powerful engines revving up to deliver speed and precision. The smell of the rubber hitting the road.
The adrenaline-soaked anticipation of success. The zooming of wheels spinning in unison to deliver a synchronised performance.
Critical decisions that can have far-reaching consequences.
Data and statistics being relayed and analysed in real-time on screens across the world.
Innovation and teamwork at play to deliver high-octane results against a backdrop of accepted rules and regulations designed to govern the game.
You would be forgiven for thinking I am describing a Formula One Grand Prix, but I had something far more exciting in mind – the UK’s capital markets ecosystem.
Much like in Formula One, the role of a governing body is to set regulations designed to reduce the risk of serious harm, whilst at the same time facilitating competitive and exciting races.
Thriving capital markets are the cornerstone of a strong economy and drive the sustainable growth that powers our economic ecosystem.
It is not just about the individual competitor but also the sport; not just about the racetrack, but the entire stadium and the city that looks towards it.
The FCA’S proposals for the new UK Listing Regime
At the FCA, we are committed to strengthening the UK’s position as a global leader in innovation and investment.
This is why, shortly before Christmas, we set out our detailed proposals for reforms to the UK listing regime[1].
These reforms are aimed at encouraging a more diverse range of companies to list and grow on UK markets, while promoting more investment opportunities for investors.
These are the most wide-ranging and consequential reforms to the UK’s capital markets in over three decades.
Notwithstanding the scope and complexity of these reforms, and not unlike the crew at a pit-stop, we have acted at pace, with agility and ambition.
Following a consultation[2] in May 2023, in which we set out a range of potential measures for discussion, we conducted extensive engagement and acted swiftly on the feedback received.
Our detailed proposals were set out in our consultation paper published in December. Given the nature of the reforms, we are also publishing a restructured, streamlined and more user-friendly UK Listing Rules sourcebook.
To expedite the rule-making process, and provide greater clarity to the market earlier on, the new rulebook is being published in two tranches. The first tranche containing the main rules accompanied our December consultation paper[3]. The second will follow later in this quarter.
The consultation[1] will close on 22 March. Subject to feedback and approval, we aim to publish final rules this summer. Implementation will follow shortly after publication.
During our extensive engagement, we heard from participants from across the market ecosystem.
These include current and prospective issuers, investors, asset managers and owners, pension schemes, advisors, trade bodies, and stakeholder representatives.
We received feedback in a variety of settings. Whether in the form of formal submissions, one-on-one meetings, round tables with trade and industry bodies, as well as C-suite representatives.
One overarching message emerged: that of a need for a reset of the UK’s listing regime.
Encouraging innovation and bolstering competitiveness
Our races need to evolve in order to keep attracting teams and spectators. An empty racetrack serves no-one.
The disadvantage faced by UK-listed companies when competing on the global M&A stage is very real. It manifests itself in the form of processes that increase issuer and shareholder costs, and also deal contingency that means UK issuers may pay a premium or lose out on opportunities to their non-UK peers.
This represents an opportunity cost for UK issuers and their investors, who lose out on potentially value-generative transactions. Small and mid-cap companies that grow through innovation and transactions are worst affected.
This stifling of innovation is a further cost, not just to the capital markets, but to our entire economic ecosystem as a whole.
At the same time, there is no clear evidence of a valuation premium for UK listed companies due to our additional standards.
In fact, UK investors invest across global markets and are increasingly exercising their investment choice in other markets where certain elements of our regime are not imposed by regulation.
The latest ONS data shows that only 4% of UK quoted issuers are held by UK pension schemes and insurers.
Our proposals have been aimed at addressing the sources of friction and inefficiency in our listing rules.
These have included propositions to:
- replace the 'Premium' and 'Standard' listing segments into a new, consolidated, single category for commercial companies
- reshape the significant transactions regime to no longer require burdensome FCA-approved circulars and prior shareholder approval of transactions below reverse takeover levels, while focusing on timely and effective disclosure by issuers to promote engagement
- rationalise the related party transaction regime similarly to remove prescribed shareholder votes, while retaining independent checks and balances such as the 'Fair & Reasonable' opinion from sponsors and the role of independent directors
- alleviating sunset clauses on dual class shares structures, and enabling a wider range of pre-IPO participants to hold such shares in issuers post-IPO and thus remain part of the issuer’s exciting growth story
Such structures may encourage companies at the cutting edge of innovation to remain in the UK.
After all, in choosing to move from Mercedes to Ferrari, Lewis Hamilton will no doubt have considered many factors – Ferrari’s history, the team, the Italian weather and food!
Engagement and market integrity supported by a disclosure-based philosophy
With this increased choice and agility comes greater responsibility, and potentially more risk. Investors must be prepared to exercise the powers at their disposal to hold the companies they own to account.
Stewardship is more than just shareholder votes mandated by regulation. Continued active engagement on the part of investors based on ongoing disclosure will be required. Whilst certain votes as requirements set by UK Listing Rules may be removed, investors will continue to be able to engage with companies and use other shareholder rights or mechanisms to scrutinise boards and business strategies, such as via AGMs and voting on the appointment of directors, and through the wider governance framework. We will continue to work with other regulators and the wider market on these frameworks.
To which end, the listing rules disclosures will continue to be complemented by existing aspects of wider UK regulation such as the robust and well-tested disclosure and transparency, market abuse, and prospectus regulations.
All of these, taken together, continue to support market integrity. They intend to ensure that investors receive full and accurate information and can make their investment decisions appropriately.
We want UK listed markets to work as effectively as possible for both issuers seeking capital, and those allocating it on behalf of investors, to promote growth and sustainable returns for all.
Where companies choose to list elsewhere, the UK economy loses out on the consequent scale-up effect – from the focus of the company’s management, its future growth and operations, further innovation, and increase in value for investors. As well as missing out on the development of a community of similar peer companies. When the UK’s capital markets lose out, the UK as a whole loses out.
Fostering a thriving and competitive capital markets ecosystem
Our proposals are focussed on putting the choice back to issuers, investors, and markets, rather than the regulator.
As we have stated, and as is widely acknowledged, our listing rules are only one aspect of the changes required to reinvigorate the UK’s public markets.
In addition to cost and complexity, multiple factors are cited as contributing to a company’s decision whether and where to list its securities, and an investor’s decision to invest – including macroeconomic environment, taxation, depth of capital, comparable peers, valuation and research expertise, investor and stakeholder base, remuneration, indexation, location of operation, and profile and media coverage. As we have stated throughout this process, others within the ecosystem must pull the levers they hold too. We are committed to doing our part.
But, we are particularly interested in whether we have got the balance right. We look forward to continuing our engagement and receiving evidence on which we can base our final decisions.
The consultation period for proposals regarding sponsor competence closes on 16 February 2024, and the consultation period for the remainder of our proposed reforms closes on 22 March 2024.
We look forward to receiving your feedback so we can take it on board as we finalise our proposals.
The evolving regulatory landscape
And the reform of our listing rules is by no means the only item on our agenda. In parallel with the listing regime reform, we have been working on proposed revisions to the UK’s prospectus and public offer infrastructure.
This follows the UK Secondary Capital Raising Review[4] and is in preparation for the implementation of new legislation for the Public Offers and Admissions to Trading Regime (POATR)[5].
On this, we published a series of six Engagement Papers[6] last spring and summer covering:
- whether or how to set prospectus requirements;
- the inclusion of forward-looking information in prospectuses;
- rules for junior markets;
- for public offer platforms allowing companies to raise capital without admission to a public market.
We continue to gather feedback and expect to consult on rules across these areas this summer.
We will also be investing in FCA systems to ensure all that information remains available, free of charge, for the record, to the investing public, and is easily accessible.
I’m talking here about the National Storage Mechanism[7], the FCA’s online archive of 3.9 million items of regulatory information.
In due course, we hope to re-brand the facility, and re-launch it. We think this investment could significantly improve the user experience, making it miles more user friendly and useful than now.
As F1 development relies on the wealth of data accessible to the team, transparency is the life blood of markets.
Conclusion
With our focus on fostering innovation and growth, we want to make sure the racetrack is ready, the spectators empowered, the teams primed for their best performance.
The cars are lining up on the grid. The lights are ready. So, in the words of Murray Walker: go, go, go!