The FCA’s consultation on the future of the UK’s public markets
The health of the UK’s public markets and their long-term prospects have long been a source of anxiety. The number of companies listed on UK markets has dropped by 40% since the 2008 financial crisis; and the UK's share of the market capitalisation of all companies listed globally has nearly halved in the last 10 years.
The UK’s markets are dominated by ‘old economy’ stocks - financial services and energy companies - while other jurisdictions, notably the US, buzz with glitzy tech unicorns and landmark IPOs. Despite high-level lobbying, ARM Holdings is the latest to head stateside.
It is easy to see why politicians’ heads have been turned and a series of reviews commissioned. The most recent of these was published last week by the Financial Conduct Authority (FCA), setting out proposals to improve competitiveness on a global scale.
It is also easy to overdo the soul searching - the UK markets franked their undoubted worth during the pandemic, with a deep pool of sophisticated investors funding £30bn of investment in 2020. “Old economy” may be muttered in denigrating tones, but from the last year’s newsreels, banking and energy self-evidently remain fundamental. Tech and pharma companies are no stranger to UK markets. AstraZeneca has transformed itself from potential prey for US-listed Pfizer in 2014 into today being the larger entity. There is much to play for.
There are no simple solutions. The FCA admits as much, noting that the recent proposals will only work in the context of a shift in approach and attitudes from all market participants - regulators, issuers and investors alike. The FCA has set out its stall in a 100-page consultation paper that it is in a hurry to implement - it is slated to take effect at the end of 2023.
The key proposed changes are:
- Simplification: one set of rules for all listed companies - collapsing the existing premium listed segment (seen as too unwieldy) and the standard listing segment (seen as a second-class status) into one.
- Lighter touch regulation: removal of procedural requirements that are perceived to be unduly burdensome - on an IPO, the need for a 3 year trading record and clean working capital statement; and then once listed, the ongoing obligations for shareholder approval for “class 1” and significant related party transactions.
- Encouragement for “new economy” companies: allow listed companies to have dual class share capital, with founders retaining voting control for up to 10-years post-listing - a lure for tech entrepreneurs; and a bespoke regime for SPACs, special purpose acquisition vehicles, that allows accelerated listing of growth-phase companies for high-risk investors.
- Governance: this fundamental cornerstone of UK markets is not forgotten - the UK Corporate Governance Code will be enshrined as the default; and the principle of “comply or explain" will be extended to scrutinise founder-controlled companies and require them to justify these arrangements.
What to make of this?
The key takeaway is that these proposals strike at what has been the settled bargain of UK investment for many years: that shareholders own the company.
Removing the controls to veto significant transactions, as well as the level of information that shareholders have on an IPO shifts the balance of power and control significantly towards management, who would clearly be “driving the bus”. It is a move towards a more American-style approach where, rather than owning the company, equity investors buy a ticket and (hopefully) enjoy the ride.
This is no bad thing - management can take a longer term view, embracing more concern for enlightened stakeholder values, as well more risk to transact and grow quickly. This will create friction with institutional UK shareholders who are used to a right of veto for significant transactions; the risk profile of their investment portfolios will rise commensurately. A potential downside is more spectacular corporate failures through the lack of oversight from shareholders; although it is not as if these have entirely been absent in recent years. To retain a degree of control, investors will need to become ever more engaged - both in regular dialogue and through the threat of activism.
This all ups the ante for management and can only lead to upwards pressure for executive remuneration to reflect the new bargain. As unpalatable as that sounds in the context of the cost of living crisis, it will allow the public markets to compete against private equity as a source of funding for growth businesses. Indeed, the level of autonomy on offer to management from these proposals, compared to a standard private equity approach, may well be a pull factor towards the listed markets, away from PE.
Finally, regulation of the markets is often seen through the lens of the largest listed companies. And yet the markets need to work for all participants. The de-equitisation of the markets has been found most acutely at FTSE250 level and below as companies looking for transformational change find more opportunities in the private arena. These businesses are collectively the engine of the UK economy, where most people make their livings, and their interests need to be at forefront of all the policymaking.