FCA listing reform unlikely to make London more attractive

After months of speculation and anticipation, the Financial Conduct Authority (FCA) gave the green light to long-awaited stock exchange listing reforms in July, calling them the biggest changes in three decades.

The reforms were introduced as part of a planned overhaul to bring UK regulation more in line with international market standards. Key areas of focus include providing greater access to information for investors, greater flexibility in voting rights for listed companies and enabling “a wider range of companies to list their shares on a UK stock exchange” while removing the “premium” and “standard” listings in favour of a single category.

In short, the FCA sees these reforms as key to taking the fight to the New York IPO market and enabling London to regain some of the international capital market clout it has lost since Brexit.

But do they really make London a more attractive home for issuers thinking about listing? I would argue that it is quite the opposite.

Quality over quantity

First, it is wrong to assume that looser regulatory standards encourage companies to list in the U.S., where in reality regulations and costs are much more burdensome.

The extensive regulatory, legal and compliance risks and requirements associated with the listing process, as well as the time it takes, present significant barriers for most companies, regardless of size.

For example, registration with the Securities and Exchange Commission and compliance with the Sarbanes-Oxley Act are costly and burdensome requirements for companies wishing to list their shares on U.S. stock exchanges.

The UK already has significant advantages over the US in terms of costs and relative regulatory and legal burdens, so reducing them further will bring only marginal benefits at best.

Putting the investor first

Secondly, and expanding on this point, limiting investor protection is a dead end, and chasing company ratings at the expense of investor protection is never a good idea.

We looked at 213 companies that were delisted from U.S. exchanges in 2023, with most of those companies being delisted for failing to comply with their exchanges’ current standards. Many of these securities would be considered penny stocks if not for an exemption granted to publicly traded companies.

It is often retail investors who suffer the most from the listing of these shares on the stock exchange.

Rather than competing, those involved in this process need to focus on making the UK a more attractive place to invest more broadly.

This fact should worry regulators and investors who believe that a stock market listing is a kind of seal of approval for investing in a company. To protect investors, the focus should be on quality, not quantity. The FCA takes this into account.

Moreover, companies must therefore carefully consider whether they are of the right size and at the right stage of development to meet initial and ongoing requirements, and thereby not expose investors to losses.

To illustrate, we looked at 99 deals that occurred in companies with market capitalizations below $500 million on the NYSE and Nasdaq in 2023; 82% of these IPOs had a negative return on their offer price. If a company is not eligible to list, it doesn’t matter where it lists.

Coming home

Third, looking at the bigger picture, much of the hype around the US being a better market for companies to list focuses on the narrative around access to liquidity and the breadth and depth of its investor pool. Simply put, the UK will not and cannot compete with the offerings that US listings offer.

Rather than competing, those involved in this process need to focus on making the UK a more attractive place to invest more broadly.

For example, as the UK Share Association noted last year, the Treasury should consider cutting taxes, particularly the stamp duty reserve tax (under which investors pay a transaction tax of 0.5%), as one way to boost investment.

We agree that this is an example of a tax which merely acts as a barrier to investment and whose abolition would only make UK shares more attractive.

Companies of tomorrow

Finally, the reforms are aimed at attracting the largest players and so-called “unicorns”, while more attention should be paid to the smaller markets of Aim and AQUIS. The companies of tomorrow are not unicorns, but small venture-stage companies that need to be nurtured and developed.

There needs to be a place for public venture capital, but Aim makes that difficult with high costs, excessive regulation, and a Nomad structure that makes liquidity difficult, not helpful.

Similarly, AQUIS is trying to support companies, but similar obstacles are emerging. The FCA and LSE need to look to their counterparts (such as the CSE in Canada, First North in the Nordics, and even the major OTC Markets listings) to understand how best to support early-stage companies, balancing adequate investor protection but removing unnecessary regulation.

To protect investors, the focus must be on quality, not quantity. FCA, take note.

Venture capital companies are by definition higher risk investments and require proportionate regulation when backed by public capital.

On a broader level, the battle between New York and London need not be absolute. Companies can have the best of both worlds. They can remain domestic champions, list in their home market and still have access to US investors – adding liquidity to a London listing, closing the valuation gap and supporting a global IR strategy.

By providing this through cross-market trading, companies gain access to the US at a much lower cost and without having to move away from the regulatory framework of their home market. Winners are created at every turn.

The way forward

While the FCA reforms are an important start, demonstrating a commitment to creating a supportive environment for companies that are not large or large-cap to grow, it is crucial that the UK is able to compete for global listings because of its excellent reputation for investor protection, its links with global investors and a listing regime that is more efficient, less costly and less burdensome than those in the US.

By focusing on maintaining a strong investor protection regime, making the market more efficient for investors and focusing on early-stage companies, London can once again become a leader without the distraction of exclusive competition with its competitors.

Jason Paltrowitz is Executive Vice President, Corporate Services, OTC Markets