Political concerns continued to grow throughout 2023 about the weakness of UK growth. In financial markets, these concerns manifested around the declining attractiveness of the London Stock Exchange as a listing venue of choice for public companies. Worries have been exacerbated by a mix of firms choosing to sell to private equity, choosing to list in other countries due to perceived valuation and growth, or even to relocate their listing from London to other exchanges such as New York. The challenge is in how to solve it without diluting too heavily the governance standards that the UK has prided itself on.
A New Regulatory Regime
An open consultation from the FCA proposes a simplified listing regime with a single listing category aimed at helping boost UK growth and competitiveness, by making the London exchange more attractive to a wider range of companies. As with many other areas of regulation, transparency and disclosure are key tools to balance the risks of a new regime. These ensure people have enough information to make informed investment decisions and the ability to engage with and influence companies’ behaviour.
The UK Corporate Governance Code, or CGC, is a key part of UK listing rules and the Financial Reporting Council is expected to publish an updated version of the code imminently, following its own consultation last process last year. The FRC recently said it is keen to explore ways of ensuring reporting requirements and guidance are proportionate – a word used by the FCA in its recent review – and maintain effective corporate governance and stewardship to promote growth and competitiveness. Following its work on the UK CGC, the FRC intends to engage with stakeholders on a review of the UK Stewardship Code, as envisaged in the white paper ‘Restoring Trust in Audit and Corporate Governance’, including understanding how it works in practice and what changes may be required.
Corporate Governance is a (Consumer) Duty
Governance, and particularly product governance, is at the heart of the FCA’s 2023’s flagship piece of regulation, the Consumer Duty. To recap, the Duty, effective since July 31 2023, seeks to put good outcomes for consumers at the heart of financial service providers’ businesses. Specifically, four outcomes are sought: helpful and accessible customer support, timely and clear understandable information about the subset of a firms’ products and services that are designed for the target market, which should be offered at fair value.
The regulator wants the Duty to shift culture and behaviour within firms to consistently focus on customer outcomes. A board level ‘Consumer Duty Champion’ is meant to drive focus on embedding the principles throughout a firm. This can span everything from staff training through gathering the right data and setting key performance indicators. At least annually, a report of the firms’ compliance with the Duty must be reviewed and approved by the board. This is all in addition to longstanding fitness and propriety assessments that individuals must pass (and continue to meet the conditions) to hold senior-level roles in financial services firms.
Sustainable Investment Labels, Governance at the Core
A perennial focus of regulators over recent years is that of environmental, social and governance investment. The newest development in ESG will see new UK sustainability disclosures together with four new investment labels – Sustainability Impact, Sustainability Focus, Sustainability Improvers, and Sustainability Mixed Goals – available to products from the end of July.
Here, governance is a core requirement, underlying firms’ ambitions to elect a label for any of their products. They must ensure there are resources, governance and organisational arrangements in place to achieve the product’s sustainability objective; there is adequate knowledge and understanding of the assets; and there is a high standard of due diligence in the selection of any data or other information used to inform investment decisions. These criteria are on top of requirements to have sufficient knowledge, skills and experience, commit sufficient time and act with honesty, integrity and independence.
Andy Pettit is director of policy research (EMEA) at Morningstar
