FCA regulatory proposals: Enhancing UK primary markets

  • The paper focuses on six areas, which include:re-thinking the current split between standard and premium listings to increase the appeal of the standard segment;
  • introducing a new international segment for overseas companies;
  • revisiting the possible participation of Exchange Traded Funds (ETFs) on the standard listing; and
  • attracting early-stage science and technology companies looking to raise longer-term investment capital.

In addition to this paper, the FCA has published a consultation paper which sets out more developed proposals to enhance certain aspects of the Listing Rules. Both papers include proposals to meet the demands of domestic and international issuers and investors to improve the overall effectiveness and competitiveness of UK financial markets.

The Discussion is to re-evaluate London’s pre-dominance as a go-to listing venue for IPOs and offers ways to address some of the weaknesses with the current listing regime, to help the UK retain its competitiveness outside of the European Union (EU). In considering the policy aims, the FCA has contemplated streamlining current market structures in favour of markets that can adequately serve both issuers and investors. The FCA is keen to explore whether changes to the UK primary markets can address a shortage of growth capital particularly for companies in technology and science sectors.

Standard Listing

Stakeholder feedback indicated issues with the Standard Listing regime. In particular, the FCA noted that some stakeholders found a Standard Listing unattractive due to:

(a)        a lack of clarity regarding its purpose and the extent of issuers’ obligations; and

(b)        a title which implies it is a “second best” option.

This perception was compounded by the fact the Standard Listing segment was based on minimum EU standards. Many international issuers decide to list in London to raise their profile and it is those issuers the standard segment seeks to attract. However, those same issuers could list on other European markets which have adopted the minimum EU standards (or very similar standards) without suffering the pre-conception of being a “second best” option. It's perhaps no surprise that the standard segment has not been as successful as initially hoped.

The standard segment has, however, successfully attracted companies which don't meet the demanding admission criteria of the premium segment, but want to use a listing on the standard segment as a stepping stone to a premium listing. A standard listing can also play a role as a temporary “step down” from a premium listing, As a venue for companies that wish to maintain voting structure that are incompatible with premium listing, And as a useful option for overseas issuers wishing to establish a dual listing.

The FCA sought views on how to enhance the attractiveness of the standard segment, including changing its name, but there is no suggestion of abolishing it or radically changing the admission criteria.

An international segment

The FCA is considering introducing a new international segment to create a credible listing alternative for larger overseas companies. Currently, overseas companies seeking to list in the UK can do so through a premium listing, a standard listing or a global depository receipt (GDR). The FCA identified a GDR listing as the preferred option for overseas companies, as a premium listing usually requires companies to ensure their corporate governance arrangements meet UK requirements. However, a GDR listing of equity shares is not accessible to retail investors who may be looking to invest in established and successful companies based overseas.

In creating a new international segment, the FCA has considered several possible features discussed with stakeholders, including:

  1. a requirement to appoint a sponsor when listing, to support appropriate standards of due diligence;
  2. substantive eligibility criteria, including an unqualified working capital statement, minimum market capitalisation and audited financial information supporting a three-year revenue earning track record; and
  3. application of the related party rules, with other features of the premium listing regime applying on a comply or explain basis.

The FCA's proposals for a new international segment align with the London Stock Exchange’s (LSE’s) renewed focus on international companies; in May it was rumoured the LSE had been courting Coal India, the world’s largest coal mining company valued at $27 billion, about a potential listing in London. The LSE had also signed a Memorandum of Understanding with the Kenyan Ministry of Energy and Petroleum in respect of dual listing of Companies in Nairobi and London and recently released a report titled “Companies to Inspire Africa” which aims to introduce London investors to African companies. Now the FCA is consulting on proposal to create a new premium listing category for sovereign controlled companies, which is widely seen as potentially facilitating the list of Saudi Aramco in London, and may choose to advance other specific policy proposals as a result of the DP17/2 later in the year

Exchange Traded Funds (ETFs)

The FCA considered stakeholder feedback on the status of the listing regime in regards to open-ended and closed-ended investment funds. Under the current regime, open-ended investment companies, ETF’s, can only trade through a premium listing and cannot apply for a standard listing. Stakeholders identified that the premium listing regime added an additional layer of regulation to ETFs, which are already subject to regulation outside the Listing Rules, including the UCITS framework and COLL (a specialist sourcebook for collective investment).

Stakeholders felt these regulations provided adequate investor protections, and the additional hurdles imposed by a premium listing, such as the requirement to appoint to appoint a sponsor, added little value. In addition, many of the continuing obligations on premium listed companies did not generally apply to open-ended investment funds.

Scale-up capital and growth science and technology companies

The Discussion also considered the importance of making a premium listing more attractive to science and technology companies. The FCA noted that, currently, the UK listing regime doesn’t do enough to support access to scale-up and patient capital, which are a crucial source of funding for early-stage companies.

The FCA found that, increasingly, the central purpose of many science and technology companies’ IPOs is to provide a means for existing shareholder to exit their investments – not to raise funds for further growth and success. This is often the case with private equity – backed business, which comprises a significant source of IPOs. The Discussion also identified an interesting trend amongst life-science companies: previously, these, companies would have accessed primary capital markets as a means of early-stage fundraising, but now they’re remaining private for longer, due to the lengthened period between start-up and end-product.

The feedback received from stakeholders showed that although the UK was recognised as a supportive environment for companies in the early start-up stage, achieving longer-term capital for the scale-up phase was not as effective. In addressing some of the issues raised in the Discussion, the FCA posed a number of questions that form part of its on-going review into scale-up capital requirements of early-stage companies. These are:

  1. what are the factors that adversely impact the effectiveness of the UK’s public equity markets in providing scale-up capital?
  2. what potential enhancements to the primary market regulatory framework could improve the provision of scale-up capital?
  3. should science and technology companies have reached a certain stage of business maturity before accessing public equity markets? What should define this stage of maturity?

Patient capital and exploring alternative market structures

Another topic explored in the paper is the stakeholders’ view that the UK may not be effective in providing patient capital or investments based on longer-term investment plans. The findings expressed within the Discussion suggest that patient capital appears to be being phased out by the current trading environment: The use of algorithmic and high-intensity trading has created an investment climate that instead favours shorter investment strategies, rather than longer-term capital investment.

Stakeholders also noted the tangential impact of increased market regulation on the declining longer-term capital environment, including the priority given to the immediate and general dissemination of public company information. In considering this, the FCA noted that stakeholders point to an increased regulatory approach to encourage more patient forms of capital, including the implementation of Financial Reporting Council’s Stewardship Code and the establishment of the Investor Forum.

Having deepened its understanding of the issues with public markets and the departure from an investment trend towards longer-term investment strategies, the FCA considered whether the current market structure impose a sharp transition from a fully private to a fully public market. It also assessed stakeholder opinions on the viability of a ‘transition’ stage, with specific regulation tailored for companies looking for longer-term capital.

In recognising the increased growth in popularity of many crowd funding platforms, the FCA has also reflected on the practical question of a continuous secondary market.

The Listing of debt securities and debt multilateral trading facilities (MTFs)

The paper also discussed the current regime for the UK debt market regarding the potential introduction of an effective UK debt MTF, similar to European equivalents in Ireland and Luxembourg. In particular, the FCA noted from market participants’ feedback was that the disclosure requirements of the current UK debt offering encouraged UK issuers to seek listings on overseas recognised stock exchanges (RSE), where the disclosure burden was less onerous but the range of reliefs and other tax treatments relevant to holding and trading securities on a RSE still applied. We have seen several such listings in jurisdictions like Bermuda, Cyprus and the International Stock Exchange (Formerly the Channel Islands Exchange).

In the background to the Discussion, the London Stock Exchange Group created a new International Securities Market (ISM). Since it went live on 8 May 2017, the ISM has operated as an exchange-regulated MTF to service institutional and professional investors’ desire to invest in primary debt.

The Discussion examined how MTFs could lead to the establishment of a ‘global debt’ option for large, emerging market issuers without an equity listing in the EU; and noted the significant interest in foreign denominated bonds issued to institutional investors in non-domestic markets. Interestingly, on the day the ISM went live, NTPC Ltd, India's largest utility generation company, issued a five-year rupee-denominated bond on the market, followed a few days later by another five-year rupee-denominated bond issued by the National Highways Authority of India.

The FCA noted that the UK primary debt capital markets had a relatively limited share of international high-yield bond markets and that more could be done to promote this. In particular, it highlighted that UK issuers have made use of the Irish and Luxembourg MTFs, which it believes is an indication that UK issuers may welcome the opportunity to issue debt on a MTF platform. Perhaps it is a sign of things to come that Virgin Money decided to dual-list its existing issue of AT1 capital securities on the ISM – having originally listed them on the Luxembourg Stock Exchange’s Euro MTF.

The Discussion demonstrated a proactive investigation of possible reforms to the structure of the UK’s primary markets. The next step is for the FCA to circulate further consultation papers, where specific policy proposals will be put forward.

Should you wish to discuss this further, please contact Jonathan Morris (jmorris@thrings.com) on 020 7766 5670.

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