Policy paper

Call for Evidence – UK Listings Review

Updated 21 April 2021

This was published under the 2019 to 2022 Johnson Conservative government

I said yes to carrying out a review the UK’s listing regime for two reasons. First, because I believe strongly that we have to get on with setting out a positive vision for the future of financial services in the UK. But second, because I think that the City itself should play an active part in shaping that future.

That’s why the starting point for the review is this Call for Evidence.

Its scope and objectives have been set by HM Treasury; you can find them in the Terms of Reference which are in the annex to this document.

In line with those, I would welcome views on the following specific areas:

• Free float requirements
• Dual class share structures
• Track record requirements
• Prospectuses
• Dual and secondary listing

But as the question of how we encourage deeper capital markets is a broad one, you may also feel you want to make comments or recommendations that go beyond this list. By the same token, while we will be interested in proposals where the government or regulators could take immediate action to generate momentum and show a way forward, we also need to think about longer term issues that go beyond the listings regime itself.

From my work in the EU, I know that UK financial regulators are highly respected around the world. To be a global marketplace, we clearly need to maintain the highest global standards. The question for us here is whether, consistent with global standards, we can improve the flexibility and proportionality of our regulatory system so as to support growth and innovation.

This is a chance for all those with an interest to help us build such a regime. Please send replies to ListingsReview@hmtreasury.gov.uk by 5 January 2021.

Jonathan Hill, Baron Hill of Oareford

Background

As the Transition Period comes to an end, the UK will regain full responsibility for its financial services rulebook. This will permit the UK to tailor requirements more precisely to the needs of companies, investors and markets.

In many cases this will require longer term careful consideration, but there is clearly an opportunity in some areas of financial services to take swift action, which we now can do. In particular, the UK listing regime looks ready for review.

UK equity markets are among the deepest and most liquid in the world. There are currently over 1,100 companies listed on the London Stock Exchange’s Main Market with a capitalisation of around £3 trillion.

These markets have demonstrated their capacity to make a significant contribution to the resilience of the economy since the COVID-19 pandemic, raising over £30 billion between March and October.

However, we want to ensure UK markets remain world leading and fit for the future shape of our economy. This means, for example, recognising an increasing shift in recent years towards fast-growth technology, e-commerce and science companies coming onto public markets, versus more traditional industries.

On 9 November 2020, the Chancellor announced in his ‘Future of Financial Services’ speech to the House of Commons his intention to review listings, and asked Lord Hill to lead this work. The objective of Lord Hill’s review is to propose reforms to the UK listings regime that will attract the most innovative and successful firms and help companies access the finance they need to grow.

The review will report to HM Treasury early in 2021. In advance of that and to ensure that the review’s final recommendations reflect the broader interests and concerns of the financial services industry, businesses and consumers, the review is issuing this call for evidence.

Please check the bottom of the page for updates.

Questions

1) Free Float

The free float requirements define how much of a company’s shares must be available for the public to exchange when a company lists on a market and how it is calculated. The UK Listing Rules state that 25% of a company’s shares must be available for the public to purchase for a company to list, although the FCA does have the ability to accept a lower level on a discretionary basis if it considers the market will still operate properly.

The 25% free float requirement is something that the UK will inherit from the EU rulebook. For certain types of issuers, a 25% free float may represent a high proportion of equity to have to sell when coming to the market and may deter some shareholders from seeking a listing, for example due to concerns around dilution of control, a desire to have a phased exit, or missing out on post-IPO price gains.

Nevertheless, free float requirements can help ensure liquidity for investors and efficient price formation by ensuring a sufficient proportion of stock is available to be bought, sold, and traded.

• Question 1.1 - Is the UK’s 25% free float requirement calibrated at the right level, and should it be changed? If so, how?
• Question 1.2 – Is there evidence that you can provide to assess potential risks to liquidity from alternative levels?
• Question 1.3 – Are there other changes or alternative measures to the free float requirements that the review should consider?

2) Dual Class Share Structures or other owner-control mechanisms

In some listing and market segments in the UK, and in other jurisdictions, companies issue shares that have differential rights, known as dual-class share structures (DCSS) or weighted-voting rights. DCSS can involve the issuance of stock with multiple – or zero – votes per share alongside ordinary shares with a traditional single vote. Currently, the Financial Conduct Authority’s (FCA) Listing Rules for the LSE Main Market’s Premium Segment do not allow for DCSS.

DCSS are sometimes favoured by founder-shareholders as a means of retaining a high degree of voting control over their companies. In some jurisdictions, DCSS are allowed but with limitations over the type of issuer that can use them, as well as market capitalisation requirements or restrictions to certain sectors. These jurisdictions can also allow DCSS with conditions in their terms, including sunset or non-transfer clauses, and exceptions on certain voting terms.

Other discussions around DCSS suggest a prime factor might be to protect a company from initial takeover threats once going public. Therefore, a more limited form of ‘blocking’ voting rights in the case of an attempted buy-out may be an alternative measure.

However, there are concerns that allowing companies to issue shares without equal voting rights risks eroding corporate governance standards and unfairly impinges upon shareholders rights. As a UK Premium listing has a reputation of high standards and shareholder say over certain types of material transactions, DCSS may pose certain risks to this since it would allow shareholders with smaller stakes to control decisions even if a larger number of shareholders had concerns.

• Question 2.1 - Should dual class share structures be permitted in the Premium listing Segment of the London Stock Exchange? If so, what limitations should apply?
• Question 2.2 - What demand is there for DCSS among issuers and what are the benefits and risks for investors? Do you have any evidence to support this?
• Question 2.3 – Are there other ways of ensuring London’s high standards of corporate governance are maintained while allowing DCSS in the Premium segment?

3) Track Record Requirements

For a company to be admitted to Premium listing, the FCA’s Listings Rules state it must have a proven track record of earning revenue and be underpinned by a business model that is profitable and sustainable, as well as 3 years of accounts covered at least 75% of its business.

The track record requirements are intended to put prospective investors in a position to make an informed assessment of a business that is seeking to list and give confidence that the business will be sustained into the future.

However, unduly strict or inflexible track record requirements could potentially deter some companies from listing.

• Question 3.1 - Do track record requirements prove a barrier to certain types of company? If so, should the UK consider allowing further flexibility in track record requirements?
• Question 3.2 - What kind of extra flexibility could be offered regarding track record requirements?

4) Prospectuses

Prospectuses provide investors with a standardised and comparable set of detailed information on a company’s financial health, its business model, its corporate structure, and more. They are intended to help potential investors understand the risks and opportunities involved in investing in a given company.

Currently we have one set of rules governing when a prospectus is required both for admission to trading on a regulated market, and when offering securities to the public. Prospectuses are however lengthy and costly to produce. The requirement to create a prospectus may in some cases act as a barrier to prevent a company coming to market or pursuing a follow-on issuance.

In the UK, the current rules – set to be inherited from the European Union – mean a prospectus is required when raising funds over €8m, or if offering securities to more than 150 non-qualified investors. These thresholds – while perhaps appropriate for 28 EU Member States as a whole – may not be well calibrated for UK markets.

Furthermore, there are questions about whether, given the high degree of information that listed companies must disclose to the market on an ongoing basis, whether they add value for investors when companies are undertaking follow on issuances.

• Question 4.1 - Are the prospectus requirements and situations in which prospectuses are required appropriate? Are the thresholds for a prospectus to be produced calibrated appropriately to the size and depth of UK markets, or for types of issuer already held to high disclosure standards?
• Question 4.2 – How might current prospectus requirements be changed to better reflect the UK markets and the types of issuers listed on them?
• Question 4.3 - Should the loss of disclosure or liability attached to a prospectus document be replaced by any alternative measures if the general exemptions to a prospectus are widened?

5) Dual and Secondary Listings

Companies that have a dual or secondary listing (i.e. list their securities on exchanges in two different jurisdictions) can benefit from access to greater pools of investors, specific sectoral expertise, or enhanced international profile. It can allow for continued trading across multiple time zones as well.

When a company dual lists, it must comply with the listing requirements of both markets (e.g. the London Stock Exchange, and New York Stock Exchange rules, regulatory requirements in both jurisdictions, etc.). This can be costly for the company and may act as a barrier to pursuing a dual or secondary listing, without necessarily improving investor protection.

The UK’s standard listing segment has its origins in a secondary listing regime, providing an easier way for companies that are already listed elsewhere to access UK capital markets. However, the high standards for entry into the premium listing segment, as well as prospectus requirements may be deterring companies that are already listed from coming here. Thereby reducing opportunities for UK investors.

With modern technology, shares listed in other jurisdictions are generally accessible to institutional investors with relative ease, although potentially less easily accessed by smaller investors, so a reliance on standards of reputable home markets are already accepted.

• Question 5.1 - Are the UK requirements around dual and secondary listing a barrier to dual listing in the UK? If so, what could be changed to further encourage dual and secondary listings here?

6) Other issues

This set of questions and issues is intended to be non-exhaustive. Comments are welcome on other immediate actions the Government or Regulators should take to encourage listings in UK markets.

In addition, and aside from rules and regulations, there is a range of factors that can make a jurisdiction an attractive place to list and do business. These might include (but are not limited to): the strengths of the wider business ecosystem; the visibility of public companies and IPOs; the presence of a pro-investment culture; or the prestige associated with a market.

• Question 6.1 - Are there any other immediate issues the review should consider?
• Question 6.2 – Are there any non-regulatory, non-legislative actions that could the UK take to promote the use of public equity markets?

How to respond

The call for evidence is open for 4 weeks from 19 November 2020 to 5 January 2021. Please submit your responses by email: ListingsReview@hmtreasury.gov.uk

CALL FOR EVIDENCE: UPDATE – 16 December 2020

In the light of questions we have received, we thought it would be helpful to provide the following guidance:

• Respondents should not feel obliged to answer all the questions raised in the Call for Evidence nor to follow any particular format.

• Please do not feel that you can only respond to the specific issues raised in the Call for Evidence: as we emphasised at the time of its launch, we are keen to encourage a broad discussion as to how we might strengthen the UK’s capital markets and the City’s role in developing them.

• While we are keen to receive formal responses to the Call for Evidence, we also intend to hold a series of discussions in January where we can explore issues further, so the Call for Evidence itself is only part of the consultative process.

• Given the short timescales involved in the Call for Evidence (so that the Government can receive recommendations early in 2021), we do not expect all responses to be exhaustive: short, headline contributions will be welcome, and can be developed later.

• A list of respondents will be published, but individual contributions will not be published.

ADVISORY PANEL: UPDATE – 18 December 2020

An informal advisory panel to assist with the Review has been established. Initial members are listed below. Further members may be added as the Review develops.

Mark Austin

Ed Cook

Richard Cormack

Chris Locke

Lucinda Riches