The Financial Conduct Authority’s (FCA) unveiling of its long-awaited listing reform has been heralded as a major step in plans to reposition the London Stock Exchange (LSE). The next step is implement the plan, which is designed to attract capital to UK-listed stocks.

The sweeping reforms represent a monumental shift for the UK listing regime, which could revitalise the UK capital market’s appeal on the global stage, according to Michael Jacobs, a corporate partner at Herbert Smith Freehills.

“The FCA are to be commended for this re-set of the listing regime, which puts to bed any suggestion that the UK regime is more complex or restrictive than other markets,” Jacobs said. The reforms are “already making a tangible difference to the live transactions we are working on for existing listed companies and IPO candidates,” he added.

The pipeline of IPOs in the UK includes 95 candidates. One of the latest entries to the pipeline is the European telco arm of CK Hutchison [HKG:0001], which could be listed or sold.

The work of the FCA and the UK’s new Labour government to revive the UK equity market in general and IPOs in particular is far from complete.

While the listing rules make it easier for companies to list by removing any regulatory impediment to listing in London, it does not fix the issue of falling demand for UK stocks, said an equity banker.

“By the end of May, we’d had 36 months consecutive months of outflows out of the UK. We need to bring back liquidity,” the banker said. “There is plenty of money going into global equity, but not the UK. We’d like to see more done in terms of bringing liquidity back.”

The issue of encouraging capital to invest in UK stocks, and IPOs, is firmly a government problem; and Labour, led by new Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves, are keen to move fast.

On Wednesday, Labour unveiled a new National Wealth Fund (NWF) aligning the UK Infrastructure Bank and the British Business Bank to “invest in new industries of the future.” The NWF will be a combination of private and public investment.

There has also been talk of trying to encourage UK pension funds to invest more in equity and perhaps IPOs, which market participants hope would, alongside more flexible listing rules, encourage companies both domestic and non-domestic to conduct IPOs in London.

Disclosure and flexibility 

The UK regulator introduced a host of regulatory changes to “better aligns the UK’s regime with international market standards.” The rules for the new listing regime confirm a shift by the FCA to a more disclosure-based approach, as opposed to a rules-based one, the regulator said, adding that the regime puts information in the hands of investors so they can make informed decisions but also removes remove barriers for listed companies.

New rules mean the FCA will no longer impose shareholder votes on significant and related party transactions. Changes also provides more flexibility on enhanced voting structures and dual-class share structures and creates a single, simpler equity listing category for commercial companies.

“This is the culmination of four years of work in terms of the reform of the listing regime. It takes the UK back to being a disclosure-based listing regime and it is exactly the approach that investors say they want to see,” said Mark Austin, a partner at Latham & Watkins and one of the most stalwart advocates of UK stock market reform. Austin was the chair of the UK’s Secondary Capital Raising review and an adviser on Lord Jonathan Hill’s UK listing review.

Austin said that the listing regime’s changes are “not about deregulation” but about creating a level playing field with other major listing venues.

One of the pieces that has proven most contentious on the lead-up to the FCA publishing its reforms has been the introduction of dual-class share structures, which critics say diminishes the principle of one share / one vote. But in reality, it simply brings the UK into-line with other global exchange geographies where global investors are also happy to invest.

“The dual-class structure provisions and the single segment are significant,” Austin said. “They mean that founders and also institutional pre-IPO owners can now list their companies without having to have a secondary listing and get FTSE index inclusion for their companies.”

The rule changes place London in a stronger position now compared to other exchanges that have had less regulatory constraints, including the US which is the biggest competitive market, according to James Roe, a partner at A&O Shearman. 

The FCA said that the new listing rules represent a transition away from the old way of doing business. Focusing on disclosure means that investors will be able to take their own decisions.

M&A in focus

One significant change involves removing the requirement for shareholders to vote on significant transactions. This should make M&A deal-making easier for listed companies.

“The intention behind this was partly to put London-listed companies on an even playing field with non-listed companies competing to buy other companies,” noted Danny Tricot, partner and head of the European capital markets practice at Skadden.

“Under the new Listing Rules as originally proposed, when announcing a significant transaction, companies would have been required to include extensive financial disclosure in their initial announcement,” Tricot said.

“However, imposing such difficult disclosure requirements at the point of signing a deal meant that the process would have remained relatively cumbersome for listed companies. The most recent change proposed by the FCA stipulates that companies are only required to disclose this information at or as soon as possible after signing.”

Meanwhile, Austin said that the new rules produce a “simplified, flexible and pragmatic regime” based on disclosure, rather than “frictional and unduly burdensome regulations and rules.”

“We know global investors are happy with that, they can do their own work and they tell us that they don’t need the FCA looking over their shoulder to seek to protect them – what they do need is full disclosure and then they can make their own fully informed investment decisions,” Austin said.

The first step

“More work is needed on increasing equity demand for UK stocks, and big institutions should be encouraged,” said Clive Hopewell, head of the International Capital Markets practice at Bird & Bird.

“Accounting rules have been tightened since the [Robert] Maxwell [pensions fund] scandal, leading to pensions not investing in smaller firms,” Hopewell said. Changes to prospectus rules could help, he added.

“Currently, if you go over an issued share cap of 20% in a rolling 12-month period, you have to produce a prospectus. Increasing this to, say, 50%-70% will be a game changer for London and an increase is expected to come into effect at the beginning of next year,” Hopewell said.

The ball is now firmly in the government’s court, but Labour’s speed in signing off the FCA reforms and in introducing their own growth schemes like the NWF has given some licence for hope.

“The work continues but this is a very significant part in that journey and is a really important point in improving our equity markets and making them match fit again,” Austin said. “We still have more to do on capital flows and increasing investment in the UK, we all know that, but this shows that the FCA and this government, like the last administration, is very committed to that.”