FCA Listing Rules Risk Scaling Back Investor Protections

The regulator’s proposals aim to attract high-growth companies to list in the UK, but may curtail shareholder rights and roll back corporate governance safeguards.

The Financial Conduct Authority (FCA) has proposed simplifying the UK’s listing rules, but asset owners are concerned that the regulator’s “permissive approach” to dual class share structures (DCSS) will limit investors’ influence on investee companies.  

“Asset owners and managers have a number of weapons in our arsenal, with the ability to vote being an important one because it serves as a public display of our support for, or the sanctioning of, a company based on its corporate behaviour,” said Caroline Escott, Senior Investment Manager – Active Ownership at UK-based pension fund Railpen.  

Escott said that investors need full and equal voting rights to exercise influence on investee companies, noting that the FCA’s proposed listing rule reforms risk limiting shareholder rights, potentially leading to investors withdrawing from the UK market.  

“Historically, one of the key components that has made the UK market an attractive place for global investors is the strong protections afforded to them and high corporate governance standards,” Escott told ESG Investor. 

“However, we have concerns that some of the proposals may make the UK a less attractive place to invest, which goes against what the FCA and the government are trying to achieve.”  

The FCA’s proposed reforms involve replacing the existing ‘standard and ‘premium’ listing segments with a single category for equity shares in commercial companies. The FCA’s Primary Markets Effectiveness Review outlined that a single listing category would remove eligibility rules requiring a three-year earnings track record, which often deter early-stage companies from going public.  

It would also be “more permissive” on DCSS and remove mandatory shareholder votes on transactions, such as mergers and acquisitions (M&A). 

Escott expressed concern over the proposals, noting that M&A decisions “strike at the heart” of a company’s future business model and operating procedures and, therefore, shareholders’ voices must be heard on such matters.  

“A major incentive for boards to engage with their investors is knowing they might be voted against if investors are unhappy with their actions,” she said. “If you dilute our ability to express our unhappiness through DCSSs, that then acts as a disincentive for boards to speak to their investors.” 

Railpen and the Council of Institutional Investors (CII) are co-founders of the Investor Coalition for Equal Votes (ICEV), which was launched in June to campaign against the use of DCSS. 

Striking a balance 

The rationale for the proposals, according to the FCA, is to create a simpler and more accessible UK listing regime for companies, improve the attractiveness of the initial public offering (IPO) market, and provide more investment opportunities for investors.  

Escott, however, felt that the regulator’s previous proposals outlined in May last year were more “sensible”, making note of improvements around safeguards on the use of unequal voting rights, and a proposed? limitation of a five-year sunset clause on the weighted voting cap. 

“I am keen to see investor protections remain at the level that they had been placed previously,” she said. “As it stands, we have concerns about the current proposals and what they mean for investor protections and for asset owners’ and asset managers’ abilities to be effective stewards of their assets.” 

Escott urged the asset owners to “stand up” for investor protections and safeguard corporate governance standards by exercising their “privileged role at the top of the investment value chain”. 

“It’s important that the voice of the responsible, long-term investor community is heard on these issues at this time,” she added.  

The FCA’s consultation on its prosed listing rule reforms closes on 28 June. The regulator proposes to issue a further consultation in autumn 2023, setting out wider proposed changes to the Listings Regime and draft rules. The FCA plans to make “substantial progress” by the end of 2023 in taking forward the proposals. 

Railpen plans to provide feedback to the FCA’s consultation in an effort to support investors in continuing efforts to be “effective stewards of their assets”, whilst also ensuring that the UK remains an attractive place for high growth companies, Escott added.  

“If our goal is to foster deeper and higher-quality capital markets, we should avoid diminishing the appeal of the UK as an investment proposition by scaling back corporate governance safeguards.” 

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