FCA consultation on effectiveness of the primary markets
The Financial Conduct Authority has published a consultation seeking views on potential reforms of the current listing segments function and on several specific changes to the Listing Rules to remove barriers to listing. This consultation is the latest in a series published in response to the recommendations of the Hill Review of the UK listing regime (see here) and the Kalifa Review of UK FinTech (see here), including the FCA’s earlier consultation on SPACs (see here) and HM Treasury’s Prospectus Regime Review (see here).
In a nutshell
The FCA’s consultation can be split into three parts. The first could be characterised as a call for evidence, seeking views from market participants on how the UK listing regime functions, which features they value most and where improvements might be made. These views will be used by the FCA to determine whether, and if so what, future reforms might be needed.
The second part of the consultation proposes changes to a number of Listing Rules to:
- allow dual class share structures within the premium listing segment;
- reduce the free float requirement from 25% to 10%; and
- increase the minimum market capitalisation threshold from £700,000 to £50m in both the standard and premium listing segments.
The aim of these changes is to remove barriers to listing and improve confidence in UK markets.
Thirdly, the FCA takes the opportunity to consult on a large number of minor technical changes to the Listing Rules, Disclosure Guidance and Transparency Rules and the Prospectus Regulation Rules which aim to modernise and simplify the rules.
Views on the UK listing regime
A model listing regime
The FCA prompts market participants to consider different aspects of the listing regime by providing four different models of how the system could be structured:
- model 1 - create a single segment for UK listed companies and set the minimum possible requirements for eligibility for listing;
- model 2 - create a single segment for UK listed companies and raise both eligibility and continuing obligations for all UK listed companies to that in the premium segment;
- model 3 - maintain two broad segments for UK listed companies (generally status quo); and
- model 4 - maintain two segments for UK listed companies but allow the market to set minimum standards for the “alternative” segment (this is based on the proposals in the Hill Review).
These are not options to choose from, but a way of assessing different features of the UK markets. The table on page 23 summarises the potential benefits and negatives of each model.
As part of the discussion section, the FCA also highlights that admission to listing runs as a parallel process with admission to the relevant trading venue, including on further issues of shares. Issuers must apply to the FCA for admission of securities to the Official List both when the class of securities is first admitted and for any further issues thereafter. At the same time, issuers must also apply to the trading venue for the admission of both the original and further securities. While the processes may be coordinated to happen simultaneously, the FCA cannot see a strong case for maintaining a duplicative process for further issues and proposes admitting a class of securities of the Official List, rather than individual securities, meaning that future applications to the FCA would not be needed for further issues.
Changes to the Listing Rules
Dual class share structures
The FCA proposes allowing some dual class share structures on the premium listing segment, subject to a number of conditions. The change would be structured as a exception to the rule that restricts votes, on matters relevant to premium listing, to holders of premium listed shares only (LR 9.2.21R).
The objective of this change is to attract more innovative growth companies to list in the UK. The current prohibition on such structures on the premium listing segment means that these, typically founder-led, companies can feel particularly vulnerable to a takeover or disruption aimed at removing directors before they are able to deliver their full business strategy.
However, the consultation emphasises that this desire to attract new global issuers has to be balanced against investor protection and the argument that these structures can undermine strong corporate governance. To achieve this balance the FCA proposes allowing “specified weighted voting rights shares” which comply with following conditions:
- a maximum weighted voting ratio of 20:1;
- the weighted voting shares may only be held by a director of the company at the time of the IPO or beneficiaries of a director’s estate following death;
- weighted voting rights are only available on:
- a vote on the removal of the holder as a director; and
- on any matter, following a change of control;
- the shares must convert to ordinary premium listed shares on transfer to anyone other than a beneficiary of the director’s estate; and
- the structure must include a mechanism for the weighted voting shares to convert to ordinary shares or expire no later than 5 years after listing.
The consultation proposes amending the relevant Listing Rules to lower the minimum proportion of shares required to be in public hands from 25% to 10%, both at the time of IPO and as a continuing obligation.
The FCA acknowledges that the current requirement appears burdensome on issuers compared with those of other jurisdictions and that a higher free float may create execution risks for issuers at IPO. In addition, the consultation also details how the free float mechanism is not a particularly effective way of ensuring liquidity due to the many different factors at play in public markets.
The FCA notes that investors see a connection between strong corporate governance and free float so the consultation seeks views on whether an annual (or more frequent) disclosure requirement of an issuer’s free float would be helpful.
Minimum market capitalisation
Minimum market capitalisation is the minimum level of the total market value of all securities that are to be listed. The current level is set out in Listing Rule 2.2.7R at £700,000, a level which has been in place since 1984.
The consultation proposes to increase this level to £50m both in order to update the requirement, given market value growth since 1984, and to give investors greater trust and clarity about the types of company with securities admitted to different markets. The FCA points out that there are viable, and often preferable, alternatives to listing available for companies with a smaller market capitalisation.
Track record requirements
Listing Rule 6.2 contains the current requirement for a 3 year financial track record covering at least 75% of the business for issues applying for admission to trading on the premium listing segment. The Hill Review raised concerns that this can be unduly burdensome and cause a barrier to listing.
The consultation considers these issues but the FCA is not proposing to make any changes at this stage (although it highlights its willingness to be flexible around the existing requirement). This is partly because the track record requirement also forms part of the prospectus regime (on which HM Treasury is currently consulting) but also because it considers that only relatively few issuers will find the requirement difficult, while changing it risks providing less information for investors.
Minor changes to other rules
Chapter 9 of the consultation sets out a large number of more minor changes to the Listing Rules, Disclosure Guidance and Transparency Rules and the Prospectus Regulation Rules. These changes are not intended to change market practice but to update the rulebook to remove conflicting requirements and outdated terms and practices, for example to remove gender-charged terminology and requirements for hard copies of documents.
The consultation will remain open for 10 weeks (until 14 September 2021) and the FCA will seek to make the relevant changes by late this year. In relation to the discussion subjects, the FCA will provide feedback and, if appropriate, consult on wider changes to the UK listing regime in due course.
Click here for Primary Markets Effectiveness Review (CP21/21)