Speech by Clare Cole, Director of Market Oversight, FCA to City & Financial's 'The Modernisation of the Listing Regime' event.
Speaker: Clare Cole, Director of Market Oversight
Event: The Modernisation of the Listing Regime, City & Financial
Delivered: 17 September 2021
Note: this is the speech as drafted and may differ from the delivered version
- The UK Listing Review, chaired by Lord Hill achieved unprecedented support, across all parts of industry, for the need to reform of the listing regime. The FCA is committed to seizing this opportunity to make the listing regime more agile and more flexible.
- We want to ensure it’s suitable for the types of companies that are coming to market in today’s economy, so investors, be they institutional or retail, are able to share in the growth of these new and innovative companies.
- Our consultation on the Primary Markets Effectiveness Review covers some specific reforms to the regime that we would like to bring about quickly:
- a targeted approach to allowing dual class share structures in the premium segment
- a reduction in the level of free float to 10%
- measures to improve investor trust and confidence in the types of companies on different markets, by raising the minimum market capitalisation required for listing on the main market to £50 million
- This is only the beginning of the process of reform. We will be engaging with stakeholders across industry, so we can work together to redraw the picture of public markets in the UK, as efficiently and collaboratively as possible.
It is an exciting time for the listing regime and Primary Markets. Exciting is not a word you often hear around our regime, but we are faced with such a unique opportunity if feels only right to do so. Hopefully, over the next 10 minutes I will be able to sell the case for change and why we should all be describing this time as exciting.
I wanted to start by talking about 1984 – what springs to mind? Orwell's novel? The DC universes’ Wonderwoman 1984? But what actually happened 37 years ago:
The launch of the iconic Apple Mac and its famous Ridley Scott directed, and Orwellian themed advert, during the Superbowl. So the Apple Mac would have cost you $2,500 and was the first mass produced Apple computer.
Of course Apple, and home PCs, have come on a bit since then. And the evolution of the mass home technology market has been nothing short of revolutionary. We certainly wouldn’t have been able to work from home like we have over the last 18 months if we had been using one of these.
But, the listing regime is still stuck in 1984. Large aspects of our regime remain unchanged since then – at its core is a regime based on rules designed when we still stored data on a floppy disk.
But a lot has happened since then for Apple and a lot has happened in our markets. We have had the impact of 9/11, the financial crisis and bail outs, the impact of EU regulations, Brexit, and of course coronavirus (Covid-19), we have seen the rise and rise of fintech, crypto, changing awareness of the importance of environmental, social and governance (ESG), and you can go on.
Throughout all this, capital markets have remained critically important. Yet they have not adapted with the times. Of course, we have seen some changes, but they have been reactive, often slow and linked to European requirements. Some might argue we may have missed the boat in some cases.
So what do we have now – well its functioning, companies are going public, capital is being raised, but it’s disjointed, unclear to users and in some cases perhaps prohibiting high quality issuers listing here.
The pandemic really showed the value of being a public company. In the first half of 2020, £23.7 billion in new capital was raised on UK public markets. I'm really proud of how quickly both the market and the FCA reacted to address the challenges we faced in March 2020.
The speed with which we published policies aimed at mitigating the practical effects of Covid – allowing for delays in publishing financial accounts, a different approach to working capital statements, virtual general meetings – should all show our commitment to moving fast to ensure markets can function well for both companies and investors.
Now, we need to build on that agile, nimble approach and bring it into our normal policy making process.
This review has been described as a 'once in a lifetime opportunity' – I think that’s right and I certainly think this is exciting.
Over the last few months, we have reacted quickly to address immediate issues where our rules were hindering innovation in primary markets, like special purpose acquisition companies (SPACs); but importantly, we have also started the discussion on more fundamental changes to our market. We have challenged ourselves and the industry to think long term and strategically about what is best for the UK.
The Hill review really helped us start this journey, to quote from the report: 'Everyone agrees – investors, advisors, regulators, banks, companies – that there is a need for reform'.
And I couldn’t agree more with that statement, the FCA is fully committed to change – we have the support of HMT and everyone I speak to – advisors, lawyers, bankers, investors, issuers have the appetite to develop a more agile, flexible regime where we can move quickly. Of course, they don’t always agree on what needs changing, but they do want to see a new fit for purpose regime.
So I will start by just picking up on some of the simpler, consultation proposals we have issued this year.
Lord Hill’s Listing Review put a spotlight on aspects of our regime that are causing companies to think twice before pursuing a London listing. That spotlight, as well as the insights from the Kalifa Review of UK Fintech, gave us a head start in considering whether the Listing Rules are still suitable for the types of companies that are coming to market in today’s economy.
We want investors, be they institutional or retail, to be able to share in the growth of these new and innovative companies. More of them listing on public markets at an earlier stage in their development is the best way of doing that, in a transparent, and well-regulated space.
The proposals for a targeted form of dual class share structure in the premium segment, and lowering the minimum free float level, are firmly aimed at making a more welcoming environment for innovative companies so they will transition to public markets earlier.
But they are targeted. They aim to look at the specific concerns raised by companies seeking to list and balance them with the needs of investors. Each of the measures contains carefully constructed safeguards – like a 5-year sunset clause for the use of dual class share structures – where we have worked hard to ensure that the high standards of investor protection and corporate governance that we so value are still front and centre of our listing regime.
No one will be surprised that we have carefully considered other international approaches; and then designed a regime that we think will work well for UK capital markets.
So expanding on governance – I might just quickly touch on the other 2 consultations we put out this summer for you to review from your holidays. Yes, apologies, we do appreciate that a summer consultation brings its own challenges.
We see no contradiction between wanting to ensure our listing regime is fit for purpose in 2021 and beyond and high standards of corporate governance. Both the climate related disclosure requirements (TCFD) and those that call for more disclosure of diversity on company boards are designed to improve standards – but they are based on disclosure. They are outcomes focused. And we hope they put the investor in charge.
Fundamentally, our listing regime needs to be leading the way on giving information and data to investors so they can use that information to understand, and challenge, the quality of the governance in those companies they want to invest in.
Dynamic, innovative, well run public companies are key to investment returns for the next generation of UK retirees.
However, it is important that these companies are able to meet the requirements of the markets they are listed on and meet the expectations of the investors who are active on them.
Our proposal to raise the minimum market cap necessary for companies to list on the main market aims to recognise that. The UK is fortunate to have multiple markets that function well and provide a forum for both liquidity and transparency suitable for smaller companies. We are committed to ensuring that quality issuers still have suitable routes to accessing public capital markets, where investors are fully aware of the risks they are taking.
So, what about the other areas of the regime; those that weren’t picked up by Lord Hill’s spotlight? What about those that need a full wide beam to find the inefficiencies that have crept in over the past few decades?
In the first 6 months of this year companies have raised £9.8 billion in IPO capital, the highest in any first-half since 2014.
All of that capital-raising brings with it a wealth of experience of what works in our regime – and what doesn’t. What strange archaic rules did companies have to spend a week arguing with lawyers about? What tipped the balance for a company to go public rather than stay private? What was it about the UK listing regime that meant a company chose to go elsewhere rather than opt for the prestige of a premium listing?
We currently have an opportunity to use that recently gained knowledge. And combine it with the wealth of experience across UK industry, to go back to the drawing board.
We can ask that really important question: What purpose does listing in the UK serve? Then go back to first principles to design a regime that delivers that purpose efficiently and effectively.
We have put forward 4 extreme models of what listing in the UK could look like – not as options or preferences – but examples, to illustrate what could be and ask the question – what does the market really value?
What is valuable about a standard listing? Can the market articulate what they want it to be for, positively – rather than in terms of what it is not. It is not a premium listing, it is not a junior market listing. It clearly serves a purpose for instruments like preference shares and debt instruments or certificates – but does it serve one for equity shares in commercial companies?
I’d say, answers on a postcard – but that may have been more suited to 1984 – so what I will say is, I hope that you replied to the FCA’s consultation this week, but also that you continue to engage with us in all forums possible as we embark upon our journey of reform.
Beyond the important debate about the division between standard and premium, the 4 models we put forwards aim to draw out the specific features of what we have today, to see what different participants really value -and what could perhaps be achieved by different means.
Features that have long been part of the London listing landscape, need to be examined, considered, and optimised.
The sponsor regime is a key feature of the premium listing segment rules, unlisted public markets like the Alternative Investment Market (AIM) and Aquis have similar concepts with nomads and corporate reporting officers – but what is it about having a sponsor that markets value?
Is it just having someone to engage with the FCA? Someone who is experienced in our regime and perhaps it helps to have someone who speaks our language.
Or, is there value to the additional due diligence and kicking the tyres that a sponsor does on a company coming to market? Does that improve confidence for investors or is it really about the reassurances the FCA receives? Does it give comfort these companies really are ready for the public to invest in?
We also want to examine the ongoing obligations our listing regime places on companies. The significant transactions regime, the related party transactions rules, the controlling shareholder regime – these are all features that could be removed or enhanced.
Now is the time to say what is valuable to you and why.
Most of the changes I have spoken about today, stem from the long and illustrious history of the UK listing regime, long predating both our membership and our exit of the EU. However, Lord Hill’s Review also made a key recommendation on an aspect of the primary markets regime that has fundamentally influenced how public markets in the UK are structured – the prospectus regime.
When and whether a prospectus is required under EU law, and now the UK Prospectus Regulation, has influenced decisions on when and how companies go public in the UK – and dictated choices for companies who wish to raise further capital once listed.
It is no accident that HM Treasury (HMT) has taken forward the recommendation to review the prospectus regime from the ground up at the same time as the FCA is starting a discussion on the listing regime. The 2 go together and we are keenly supporting each other in the work ahead.
A modern listing regime needs a modern prospectus regime that is fit for purpose for the UK economy. The FCA intends to be at the forefront of developing a new regime that works for both issuers and investors, where the documentation required is suited to the transaction.
In the immediate term, as we embark on this exciting journey of reform, a few landmark dates for you: The FCA consultation paper on the Primary Markets Effectiveness Review closed on 14 September; HMT’s consultation on the Prospectus Regime Review closes on 24 September.
Following that, and subject to consultation responses, and the decision of our Board, the FCA will be aiming to move swiftly to make final rules before the end of the year, on those areas we consulted on specifically – ie dual class share structures, free float, minimum market capitalisation – so next year's IPOs can already benefit from the initial round of changes.
However, the bigger picture will take longer to develop, and this discussion is very much the beginning of our engagement. There will be plenty of opportunities to get involved. Today’s agenda addresses many of these important and thorny topics so we will be listening carefully to your views and ideas. We will be following up with stakeholders across industry, so we can work together to redraw the picture of public markets in the UK, as efficiently and collaboratively as possible.