UK listing rules: watering down investor safeguards won’t turn London’s tide

London looks increasingly desperate to stop the diminution of its capital market. The latest to join the collective hand-wringing is the Financial Conduct Authority.

It proposes amending listing rules to make London a more attractive destination for new companies. Some proposals go too far in eroding investor safeguards. Moreover, while removing accumulated grit is a laudable ambition, fiddling with the rules is not the answer to the City’s malaise.

It is not difficult to see why the FCA has decided to take a hard look at its rule book. The number of companies listed in London continues to decline. The UK stock exchange now accounts for 3.1 per cent of the market capitalisation of global listed equities, down from 5.8 per cent a decade ago, according to the regulator’s own analysis. The loss of high-profile IPO candidates, such as UK-based Arm, further sharpens anxieties.

In this situation, sitting on its hands is not an option for the FCA. But doing too much can also be counterproductive — and some of what the regulator has proposed is concerning. In particular, a proposal to remove a mandatory shareholder vote on larger related-party transactions looks more trouble than it is worth.

This is not some bit of archaic bureaucracy. The rule exists to prevent controlling shareholders from pushing through deals at the expense of minorities.

True, not that many companies currently seek a shareholder vote on RPTs: there have been 19 in the past five years. But the very existence of the requirement may be enough to dissuade controlling shareholders from pursuing whackier plans.

Meanwhile, the argument that other stock markets — particularly in the US — do not force companies to put such transactions to a vote also holds limited water. Giving investors the chance to opine on such sensitive deals at general meetings is surely more efficient than having them seek redress through the courts. 

More broadly, investors might be willing to countenance some erosion to their safeguards if they thought it would turn the tide for the London market. But the focus on London’s listing rules — admittedly more stringent than those in the US and some European exchanges — looks a red herring. The US benefits from a huge tech ecosystem that generates IPO candidates, and a more liquid equity market. Such advantages are not easily overcome by fiddling with the listing rules.

What do Lex readers think about the FCA’s proposals? Please tell us what you think in the comments section below