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FCA consults on plans for reform of the UK listing regime

  • United Kingdom
  • Capital market law
  • Corporate

31-05-2022

The Financial Conduct Authority (FCA) has published a Discussion Paper (DP22/2) in which it seeks views on the future of the UK listing regime.

Background

The Discussion Paper follows the outcome of the Review of the UK Listing Regime undertaken by Lord Hill (Review) which was published in March 2021 (see our briefing here for details). The FCA has already taken forward a number of the proposals set out in the Review (see for example our briefing here on changes made to the UK listing regime in December 2021 regarding dual class share structures and free float), and HM Treasury is taking forward a review of the UK prospectus regime.

In July 2021, the FCA sought views (in CP21/21) on four possible models for the UK listing regime going forwards, including merging or re-branding the premium and standard segments and making amendments to the eligibility criteria and continuing obligations. The proposals were considered in our briefing here. The FCA has considered the responses provided to CP21/21 and has now set out a more detailed consultation on its plans.

The objectives include removing the current complexities of the listing regime, promoting broad access for a wider range of companies, empowering investors to make their own decisions based on clear and high-quality disclosures, and allowing issuers and investors flexibility to determine where additional shareholder engagement, overseen by the FCA, is appropriate.

Reform of listing regime structure

The FCA’s core proposal is that the above objectives could be achieved by having a single segment for listing equity shares in commercial companies (referred to as a “UK Listing”), which would have one set of eligibility criteria, and would sit alongside junior markets, such as AIM and the Aquis Stock Exchange. The new regime would feature a single set of eligibility criteria, with a minimum set of mandatory continuing obligations and issuers having a choice whether to adopt further additional obligations (labelled “supplementary”), commented on further below. The FCA intends that all listed companies in the new segment would require a sponsor in the same way as for the current premium listing regime.

Eligibility criteria

In summary, the FCA proposes that the current admission requirements in relation to revenue track record, historical financial information and the requirement for a clean working capital statement be replaced by disclosure in prospectuses or other listing documents. This is intended to allow investors to consider the characteristics of each issuer on an individual basis and to open up the market to technology and bioscience companies who may not meet the current requirements.

To address duplication, the FCA is considering removing as eligibility requirements admission criteria which are also continuing obligations (such as controlling shareholder requirements and the requirement to carry out an independent business). These would instead be incorporated into the two sets of continuing obligations discussed below, alongside an explicit eligibility requirement for a company to confirm its ability to comply with the applicable continuing obligations.

Continuing obligations

The mandatory obligations would consist of requirements that focus on transparency and protecting shareholders where the interests of management, or a significant shareholder, may be different to that of ordinary shareholders. The mandatory obligations would include compliance with:

  • the Premium Listing Principles – the FCA proposes that the Premium Listing Principles should be extended to all issuers under the new proposed single segment regime;
  • the sponsor regime;
  • the Listing Rule 11 regime on related party transactions; and
  • reporting against the UK Corporate Governance Code (on a comply or explain basis), as well as diversity and inclusion and climate change reporting (which already apply to standard listed commercial companies).

The supplementary continuing obligations would be those premium listing requirements that provide for shareholders to have a greater role in holding the company to account on an on-going basis, such as the significant transactions regime in Listing Rule 10. These are areas where potential shareholders are able to decide when they invest whether they are willing to accept a lower level of shareholder involvement, and also those where the issuer can explain why they are choosing not to apply the additional supplementary requirements in the context of their overall business strategy.

During the IPO process, an issuer would decide whether to opt into the supplementary continuing obligations. This decision would be based on the specific characteristics of a company’s business and the needs of shareholders. Issuers would not be able to opt into individual parts of the supplementary continuing obligations -  they would need to adopt all or none. Once listed, moving in and out of the supplementary regime would be analogous to moving listing segments currently and would require shareholder approval, where appropriate. Issuers will have to disclose in their annual report whether or not they comply with the supplemental obligations. The FCA is seeking views on the division between the two proposed sets of ongoing obligations.

Other proposed changes

Other changes under consideration and matters on which the FCA seeks views include the following:

Class 1 transactions: The FCA is considering increasing the level of the threshold for Class 1 transactions within the significant transactions regime from the current level of 25%.

Transition to a single segment regime: It is likely that the FCA will make transitional provisions to allow existing standard listed companies to maintain their listing in the standard listing segment. Alternatively, existing standard listed companies could undergo an eligibility assessment with the FCA and move to the new segment, if appropriate. Equally, the FCA notes that moving all existing premium listed companies to either the mandatory or mandatory and supplementary continuing obligations regimes within the new segment is unlikely to be appropriate. The FCA may therefore require a shareholder vote of each existing premium listed company to determine whether compliance with the supplementary continuing obligations is appropriate for the company.

Dual class share structures (DCSS): Whether DCSS companies introduced in the form set out in PS 21/22 (commented on in our briefing here) should be permitted in the single segment.

Sponsor regime: Chapter 4 of the Discussion Paper examines the role and purpose of the sponsor regime, and considers how this might apply in the new single segment regime. All companies with a UK listing would be subject to the sponsor regime (not just those opting into the supplementary continuing obligations). The FCA is seeking views on whether the sponsor regime should generally remain in its current form and asks a number of questions around sponsor record keeping requirements and whether these could be simplified.

Next steps

The discussion period closes on 28 July 2022. The FCA will provide feedback in due course and either issue a further discussion paper or bring forward specific proposals for consultation.

Comment

In a post-Brexit UK marketplace focused on digitalisation, technology and sustainability, the proposals are seeking to move away from the current, rigid two listing segment system to a simpler, more flexible and permissive single segment structure that should carry more appeal to companies operating in high growth sectors and industries who may not easily meet certain existing eligibility criteria, for example, those relating to historical financial information and track record, or whose businesses or strategies are such that they may not want/be able to comply with certain existing continuing obligations, for example, the rules relating to having to obtain shareholder approval for certain significant transactions.

The aim of the new regime is to encourage more companies, from a wider range of sectors and industries, to seek a UK listing by removing certain of these barriers to entry whilst at the same time using clear, high quality prospectus disclosure to arm investors with the information they need to reach informed investment decisions.

In seeking to arrest the City’s decline as a pre-eminent destination for high quality, international companies to come to market, the FCA is trying to strike an appropriate balance between attracting the best companies to London whilst at the same time ensuring that investors are adequately protected.

The package of proposals that the FCA is putting forward is a sensible one to invite further discussion on what the UK’s post-Brexit listing regime should look like. Removing certain eligibility requirements, allowing companies to ‘opt in’ to certain supplementary obligations over and above a mandatory baseline package that all companies must comply with depending on their particular circumstances and emphasising clear, high quality issuer disclosure as a means of arming investors with the information they need to reach informed investment decisions is likely to make early interactions with institutional investors during the IPO process (via ‘early look’ presentations and the like) to ensure that they are comfortable with the approach being taken by the issuer even more critical to an IPO’s success.

In addition, it will be interesting to see whether junior markets, such as AIM and Aquis, see any need to review their own eligibility requirements and rulebooks in the context of the FCA’s proposals.

For more information or guidance on the proposed changes, please contact your usual Eversheds Sutherland contact or get in touch with the below: