FCA's proposed London listing shake up might cause more market woes, PLSA

In its response to the FCA's paper primary markets effectiveness the Pensions and Lifetime Savings Association said more work was needed to find out why there had been a decline in the number of companies listing in the UK.

Concerns in the drop, a fall of around 40 per cent since 2008, prompted the FCA to launch a consultation proposing to replace standard and premium listing share categories with a single listing category for commercial company issuers of equity shares. 

The consultation period ended this week and in its response the PLSA said its members believed the proposed changes would "weaken shareholder rights by removing some important checks and balances, in particular for asset owners and retail investors, leading to a lack of diverse input and challenge from asset managers to companies." 

The PLSA argued that it had not been proven "that governance standards and investor protections required by a premium listing are, specifically, the root cause of the decline in IPOs across both the main market and the Alternative Investment Market (AIM)". 

London listing and UK markets

It also argued that the complexity of capital markets required an "evidence-based, cross-governmental investigation into the root causes of this decline, which could then provide the appropriate basis for solutions which genuinely make a difference and continue to require shareholder approval in circumstances which warrant this".

It added: "International investors have told our members the UK market is considered attractive and is able to hold its own against other financial markets due to high corporate governance standards and robust investor protections.  

As they are set, the current proposals may not result in more companies listing, but will reduce the standards expected of existing companies (diluting quality universally). The new rules run the risk of having a contrary effect to what is hoped for, by potentially reducing the pool of institutional and retail investors willing to invest in UK-listed companies.  Joe Dabrowski, deputy director of Policy, PLSA, said: “The UK is an attractive market for international investors precisely because our governance standards are high. Companies achieving a UK listing is a powerful signal that a company is well-run and well-placed to thrive now and over the long term. 

“As they are set, the current proposals may not result in more companies listing, but will reduce the standards expected of existing companies (diluting quality universally). The new rules run the risk of having a contrary effect to what is hoped for, by potentially reducing the pool of institutional and retail investors willing to invest in UK-listed companies.  

“This is because rolling back these fundamental investor protections means that asset owners would find it more challenging to act as effective stewards of their assets, which in turn would make them less certain that investing in a UK-listed company could lead to the sustainable financial returns scheme members and other savers need.” 

The PLSA's response to the FCA consultation:

FCA: Do you agree with our proposed approach to dual class share structures for the single ESCC category and the proposed parameters? If you disagree, please explain why and provide any alternative proposals.

PLSA: The majority of our members are cautious on the proposed approach to dual class share structures. These allow the directors of the company to have unequal voting rights to the amount of equity they hold in the company, limiting the rights of minority shareholders and making it difficult to hold management accountable on important issues. The proposed change looks like a step in the wrong direction in regard to maintaining strong standards of corporate governance and encourage less responsible companies to list in the UK market with fewer checks and balances. Many of our members believe that the proposals are unnecessary, replacing rules only introduced in December 2021, and will make it harder for scheme and their agents to act as effective stewards of their assets, ultimately having a detrimental impact on the long-term returns needed to achieve good outcomes for scheme members. Our members favour maintaining the current the sunset clause (five years) and maintain the 20:1 maximum voting ratio.

FCA: Do you agree with the proposed approach to significant transactions for a single ESCC category? If not, please explain why and any alternative proposals.

PLSA: Our members believe the vote on significant party transactions is an important investor protection. Simply requiring disclosures, without any accompanying mechanisms for investors to act pre- emptively on a transaction they are unhappy with, fails to provide an appropriate level of protection.

FCA: Do you agree with the proposed approach to RPTs for a single ESCC category, which is based on a mandatory announcement at and above the 5% threshold, supported by the ‘fair and reasonable’ assurance model which includes the sponsor’s confirmation as described above? If not, please explain why and any alternative proposals in the context of a single ESCC category.

PLSA: The requirement for a compulsory shareholder vote on related party transactions is considered a vital protection for investors, allowing them the opportunity to make their views known and felt on important and relevant transactions. It is also worth noting that the additional due diligence required if these proposals are introduced will impose greater costs on pension funds and other investors, since asset managers will have to do more due diligence on behalf of asset owners, increasing costs and reducing net returns. At the end of the chain, these increased costs could negatively impact the net returns achieved by scheme members, and possible counter current Value for Money initiatives. Also, if litigation becomes a route for redress, it adds significant bureaucracy and cost. Due to this, the cost benefit analysis announced in the consultation and due by Autumn 2023 will be an important clarification that the introduction of the new rules is justified.

In conclusion, our members are concerned regarding the proposals on new dual class share structures, the removal of shareholder approval for significant transactions and related party transactions. The proposed changes, as currently drafted, would weaken shareholder rights by removing some important checks and balances, in particular for asset owners and retail investors leading to a lack of diverse input and challenge from asset managers to companies.