FCA Listings Regime Overhaul: Why You Should Care

But should you care?

The changes confirmed by the FCA yesterday are the result of several years of wrangling over the UK's listing regime. Politically, this was a process initiated by the previous government, and in particular former chancellor Jeremy Hunt (though the regulator is of course, wink wink, independent of Whitehall influence).

UK Listings Overhaul: What Will Change?

The UK's listing regime is the set of rules that governs the steps companies have to take to "go public." It's the process by which shares in, say, Example Ltd become Example PLC, are listed on an exchange, included in indices, and traded by the public.

At the moment, the UK operates under a system that places restrictions on dual-class share schemes, giving company insiders a greater share of a company's voting power compared with other shareholders. Also in the mix are requirements to seek shareholder approval for certain significant corporate transactions, and transactions with related parties.

Both of these elements are now being rolled back in favour of a "streamlined" categorisation for companies seeking to publicly sell their shares in the UK. The UK will also move to a "disclosure-based" system, which the FCA hopes will "put sufficient information in the hands of investors, so they can influence company behaviour and decide how they want to invest."

UK Listings Overhaul: What Are The Risks?

But the operative word there is "hope." Because it's all a bit of a gamble.

So says Lindsey Stewart, director of investment stewardship research at Morningstar. An expert in corporate governance and boardroom decision making, Stewart is a former head of stakeholder engagement at the Financial Reporting Council, the UK body in charge of regulating auditors, actuaries, and accountants.

"The new listing rules represent a big gamble that cutting red tape for company founders and executives will unleash a wave of new and innovative businesses listing and raising capital in London. What's not to like?" he says.

"Well, the 'red tape' in question is a number of long-cherished shareholder protections that many claim are integral to the UK's capital market culture of strong corporate governance. In particular, a number of institutional investors claim the rollback of these protections is too high a price to pay, and would attract more companies with inadequate governance arrangements to the UK market."

That's a very important point. Because it shows that these changes are not one gamble, they are, in fact, two.

The first is that the disclosure regime will sufficiently inform investors to allow them to make good decisions when buying a company's shares. But the second is that investors themselves won't be duped by companies that, at the very best, overpromise and underdeliver, and, in the worst-case scenario, do so deliberately. Need it be said that equity investing is inherantly risky? Arguably it just got a little riskier, and particularly for retail – read: unadvised – investors.

Broadly speaking, we are not awash with data on the financial confidence of UK equity investors. However, what we do know is financial literacy in the UK is poor. In a friendly quiz, one company tested the financial knowledge of 2,000 UK consumers. Only 27% passed.

It's not too much of a leap to imagine that efforts to ignite exciting IPO activity in the UK's public equity markets might also encourage people to get involved in share sales they are not actually equipped to navigate.

Sounds righteous, huh? Well, that's an operative word too.

Step forward the Church of England, and the chief responsible investment officer on its pensions board, Adam Matthews. Matthews is a prominent sustainability and governance campaigner. He has this question: "in whose interest are the weakening of the UK listings rules announced this morning?"

Certainly, they could work in the interests of investors, who could stand to win financially from what's been termed by optimistic onlookers as "big bang 2.0," a reference to the original deregulatory changes made by prime minister Margaret Thatcher in the 1980s, which themselves heralded a boom in trading activity. But in the short-term, politicians are also trying to save face.

MUKnificent Seven: Will it Happen?

Ambitious companies are deserting London. That's the elephant in the room.

Betting company Flutter (FLUT), building materials firm CRH (CRH), and plumbing giant Ferguson (FERG) have all decided to leave London for the US. Britvic (BVIC), the drinks company, will also presumably de-list when it is eventually bought out by Carlsberg in Denmark. Travel company Tui (TUI) has also de-listed in favour of Frankfurt.

But the biggest kick in the teeth is Arm Holdings, the UK chipmaker whose decision to list on the US Nasdaq last year was a huge disappointment for senior British politicians keen to talk up London as a centre of progress, innovation and dealmaking.

And if they look at the US, where the so-called "magnificent seven" stocks have come to dominate not only the headlines but also the returns investors receive in their stock portfolios and funds, they can only add envy upon injury. And there is your answer. This isn't actually really about retail investors. It's about the UK economy, gross domestic product growth, and London's international reputation 16 years after the global financial crisis.

"Overall, if the new rules allow the UK to grow its own magnificent seven and a host of other fast-growing and innovative companies, then that certainly would be good news for the long-suffering British equity investor after years of lacklustre returns," Stewart says.

"But if not, then the rollback of important shareholder protections should give investors pause for thought. The checks and balances provided by 'one share one vote' and shareholder approval for key corporate transactions are ultimately there to protect those investors' capital."

In conclusion, then, yes, you should care. But more to the point, you now have cause to be should be careful. Great investing insight just got a bit more valuable.