So the City watchdog wants to relax the listings rules I see, what gives?
The Financial Conduct Authority prefers the word “improve”, but yes it looks likely it will change the rules so that firms only have to make 10% of their shares available before they float, down from 25% presently.
It will also be more relaxed about “dual share” classes, which would allow entrepreneurs to sell stock but retain a high level of voting rights so they don’t lose control of their company.
This is about luring tech firms?
Yes. There’s a feeling, not least from the tech sector but also within government, that London is fuddy-duddy on this issue, and that’s why it loses tech floats to New York in particular.
Is the City supportive of this move?
Far from all of it is. Traditional fund managers point out that the rules were there to protect investors and that one of the reasons London has thrived over decades is because it has a reputation for having a strong legal and regulatory framework. Such reputations are hard won and easily lost.
In any case, London still won’t be the most lax listing regime, even if it wanted to be. When did a race to the bottom become a good thing?
Charles Howarth, a corporate partner with law firm CMS, says: “The change to allow companies with dual share classes in the Premium segment is welcome, but there must be a risk that the proposed restrictions around the use of dual share classes will mean that the regime is still not competitive with the US markets.”
He adds: “The proposed change to the free float requirement is welcome. But as Lord Hill noted, this change may fail to have any impact unless FTSE Russell changes its own rules to allow companies with a free float under 25% to be included in the FTSE UK indices.”
Isn’t the main point of all this to make more money for bankers?
I am shocked, just shocked, that you could think such a thing.
Russ Mould at AJ Bell says: “On the face of it, moves to boost the City as it fights for market share with Amsterdam, Paris, Frankfurt and other venues in a post-Brexit world seem sensible, as do attempts to allow up-and-coming firms to raise the money they need, as it will give them chance to invest, flourish and reinvigorate the British economy.
“But casual observers who do not work in the financial markets could be forgiven that this is simply another attempt to loosen well-established rules so that the City and its eco-system of bankers, lawyers, advisers and fund managers do not miss out on the juicy fees which are currently flowing toward New York.”
Rules are good, then?
They used to be. Some note that the Financial Conduct Authority set a pretty depressing precedent when it changed its rules in an (ultimately futile) attempt to get Saudi Arabia’s Aramco to offer a secondary listing in London when it floated on the Riyadh exchange in December 2019.
Private investors might enjoy taking part in the float of wizzy tech apps that they personally find appealing. But hot tech floats are risky, as naïve investors that the FCA is supposed to protect might one day find out.
Mould adds: “It is to be hoped that the FCA maintains its critical faculties. Fear of missing out (FOMO) is just about the worst possible reason for making any investment decision, as the regulator’s own work on behavioural finance suggests. To let this emotion drive a change in the rules with regards to new tech listings in particular could potentially expose investors to greater danger and the risk of portfolio losses.”
So, what is good for the seller might not be good for the buyer?
You’ve got it. The new rules may make it easier for the entrepreneur to raise capital, invest and create jobs. Which is good. What happens after that?
Mould again: “The FCA’s job is to ensure that quality control remains paramount as it looks to balance the understandable desire to foster the next generation of corporate winners with the need to protect investors, and do so at a time when some corners of the market are looking frothy.”
Are any experienced market players in favour of the FCA plan?
Definitely, lots. David Buik at Aquis Exchange is barely younger than God, he says: “In comparison to the US and China, the UK, in terms of mega tech companies, is behind the curve. So we must attract tech IPOS and fund raising activity in an aggressive manner. With the Macron charm offensive, UK financial services must fight back and get on the front foot. What was the point of leaving the EU if we don’t provide measurable advantages? These deals still have to be regulated very strongly. For once, UK fintech business development is in the vanguard; let us not surrender the initiative to any other European financial centre.”
How behind are we?
Figures from the FCA show the size of the problem the watchdog wants to address. Between 2015 and 2020 the UK accounted for only 5% of IPOs globally, a poor return for the second largest financial centre after New York.
What does the FCA say?
Clare Cole, director of market oversight at the FCA, said:
“Effective public markets are critical in enabling companies to finance their businesses, which in turn creates growth and jobs for the UK economy. These proposals are essential if we intend for the UK to continue to be a modern and dynamic market. Today, we are acting assertively to meet the needs of an evolving marketplace.”
Cole added: “They are intended to encourage high quality companies to list earlier, and so increase the possibility of a wider investor base being able to access growth in these companies.”