4 May 2023

The FCA’s listings reforms are welcome – but regulation alone won’t lure firms to London


With promising companies either leaving London or deciding not to list here in the first place, this week’s reforms to the UK’s stock market regime could not come soon enough.

Despite intense government lobbying, Cambridge-based software design company Arm recently confirmed its intention to list on the Nasdaq. In March, Irish-based CRH, the world’s largest building materials company, announced its plans to move its primarily listing from London in favour of New York. It follows in the steps of Ferguson, formerly Wolseley, the plumbing and heating products distributor, which did the same in May last year. Meanwhile, last month, Flutter, the owner of Paddy Power and Betfair, announced it plans to pursue a secondary listing in New York.

There is a fear that this list of companies may grow further still. On top of this, private equity has shown a renewed interest in UK plc. There have been nine take-private approaches so far this year compared with one in the same period last year, according to Refinitiv. The LSE is facing threats wherever it turns.

It’s in that context that the Financial Conduct Authority, the UK’s financial regulator, has come up with a package of reforms to bolster London’s status. Although some media reports have led with how the changes will ‘pass greater risk to investors’, a fairer characterisation of the whole package is that it’s a bold but appropriate set of changes to help a flagging part of the financial services industry keep up with intense global competition.

As the examples above indicate, New York remains our primary competitor, but all exchanges globally are upping their game, both in Europe and across the Middle East and Asia. It therefore makes sense for the UK to habitually review both its listing regime and the wider financial regulation environment to make sure we’re doing things as well as possible.

Unfortunately, the recent trend away from the capital is just the tip of the iceberg. Since 2008, the number of listed companies in London has fallen by 40%. And between 2015-20, the UK accounted for just 5% of global initial pubic offerings (IPOs).

Other metrics paint an equally discouraging picture; March was the 22nd consecutive month that UK funds suffered outflows and since December 2020 UK equities have suffered outflows of £12.1bn.

While some may point to 2021 being a record year for IPOs on the LSE, with over 120 companies listing raising £16.8bn, this needs to be put in a global context. It did encouragingly show that a London IPO is still seen as a viable route for some high-growth companies, but IPO markets globally were their most active that year in two decades following renewed market optimism, aided by vaccine rollouts and significant government stimulus.

All of which means we really do need significant action to enhance the status of both the LSE and UK equities more broadly.

So what does the FCA have in mind?

Some of the specific measures announced yesterday included: scrapping the ‘primary listing’ category, providing concessions to enable founders of newly floated companies to retain more power; removing rules surrounding related party transactions having to be put to a vote of all shareholders (something Arm cited as a factor in its decision); scrapping the requirement for companies to provide a three-year financial track record before listing; and removing the requirement for listed companies doing acquisitions of more than 25% of their market capitalization to put the deal to a shareholder vote.

These follow the targeted changes the FCA made in 2021, such as lowering free float levels and introducing dual-class share structures. These were primarily aimed at improving the attractiveness of the LSE to tech companies and built upon Lord Hill’s (a Centre for Policy Studies board member) influential Listing Review in 2021.

The point here is that a lot of good and detailed work has been done to improve the UK’s listing regime. That said, regulatory change alone won’t make companies flock to the City, and the decline of the LSE is symptomatic of significant failures elsewhere in the UK’s wider financial eco-system.

Among them is the significant decline of UK pension and insurance funds’ investment in equities. Another problems is that the UK remains underpowered in terms of both growth capital and patient capital, which means businesses based here are too often unable to reach their full potential, and either remain stuck in a state of incremental growth or decide to prematurely sell. We also lack research analysts, which means high-growth companies often do not feel they are well understood by the London market.

There are also cultural issues to contend with – scepticism about high executive pay, over-cautious attitudes to risk and a widespread suspicion of corporate success. As the FCA’s chief executive Nikhil Rathi puts it, ‘regulators cannot conjure a culture in which success is lauded just as readily as failure is criticised’.

So ultimately, while the FCA can certainly do its bit, and regulation will also be an important lever, regulators can only do so much to lure businesses to London.

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Gerard B Lyons is Business Researcher at the Centre for Policy Studies.