Society responds to the FCA Listing Rule Proposals in CP23/10

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In this IR Society response, which draws on the findings from recent IRO member research on the FCA's proposed changes to the Listing Rules and on current levels of investment research in the UK, the Society was generally supportive of the proposed reforms given most IRO respondents thought the FCA proposals would reduce regulatory barriers for companies and bolster UK competitiveness. However, the Society highlights concern that a lack of shareholder approvals for major transactions could lead to significant legal and advisory costs in the early days, until a more streamlined approach based on successful transactions establishes best practice, and that a generous transition period could be needed for current standard listings to allow them to comply with the more onerous ‘single category’ continuing obligations. The Society also mentions that liquidity, depth of markets, and comparable peers are thought of by IRO respondents as the most important factors in deciding where to list the proposals, with regulation and valuations also seen as significant factors. The response also highlights some more significant issues that the Society believes may also influence the attractiveness and competitiveness of the London markets, including the UK market’s sensitivity to Directors' remuneration and compensation structures, the quality and timeliness of Investment Research, the need to encourage funds flow into UK asset managers, the suggestion of establishing a framework that better enables companies to identify all short-sellers so that they can engage with them (if they wish), and the UK’s overlapping disclosure and filing obligations which could benefit from being streamlined and simplified.

The Investor Relations Society

5th Floor, 30 Coleman Street

London, EC2R 5AL

Primary Markets Policy Team

Financial Conduct Authority (FCA)

By email: cp23-10@fca.org.uk

30^th June 2023

Dear Sir, Madam,

Re: FCA Listing Rules Proposals CP23/10

Introduction

Thank you for giving us the opportunity to comment on the proposed reforms set out in CP23/10: Primary Markets Effectiveness Review – Feedback to DP22/2 and proposed equity listing rule reforms | FCA, which you describe as aiming to enhance the attractiveness of the London market to both prospective new listings and to existing issuers. This response is made on behalf of the UK’s Investor Relations Society (‘the IR Society’).

The IR Society represents Members working for publicly listed companies and investor relations focused service providers, to assist them in the development of effective two-way communication with the markets. It has approaching 800 Members, drawn mainly from the UK, including the majority of the UK FTSE 100 and many of the FTSE 250 constituents, but also including some from companies listed overseas.

The IR Society’s mission is to promote best practice in investor relations; to support the professional development of its Members; to represent their views to regulatory bodies, the investment community and Government; and to act as a forum for issuers and the investment community. As such, our response has been primarily constructed through the lens of an issuer rather than from an institutional investor perspective. 

We recognise this consultation builds on the 2022 Discussion Paper DP22/2 and, before that, CP21/21 ‘Primary Markets Effectiveness Review’ to which the IR Society responded in September 2021 expressing our general support for reform. Consistent with the previous submission, the Society is generally supportive of the proposed reforms, although we make some suggestions of other significant issues that could be addressed to enhance the attractiveness of the London markets.

In formulating our views, we have drawn upon both the expertise and experience of our Policy Committee and wider Board members, but also the insights from a recent Member survey, which included a request for views on certain aspects of the listings review. In addition, we sought Member views on the quality of investment research, this being another issue some have highlighted as relevant to the attractiveness of the London markets. The latter has also been the subject of an independent Review of UK Investment Research, to which we have contributed.

We have attached the findings from that Member survey below, but to provide context for our views we provide a broad summary here.

IR Society Member Survey findings and commentary

The survey was conducted from 25 May to 7^th June 2023 among IR Society Members who are Investor Relations Officers. There were 56 respondents, though not every respondent answered each question.  We set out below an overview of our Member survey findings.

When asked about the most significant factors in deciding where to list, the following responses were notable:

• liquidity, depth of markets, and comparable peers were considered the most important factors by 83%, 80%, and 78% of respondents, respectively, and
• regulation and valuations were also significant factors, with 68% and 66% of respondents considering them important.

Looking at the overall package of proposals, our survey indicates that most of our IRO respondents believe they would reduce actual/perceived regulatory barriers for companies (80%), with over half (57%) believing they would bolster UK competitiveness, 45% thinking they would help attract a more diverse range of applicants, and a lesser 37% considering they would reduce actual/perceived costs for companies (see page 1 of the findings).

We note these findings indicate a potential disparity between our Members’ belief that the proposals would reduce actual/perceived regulatory barriers for companies, but a lower level of confidence the proposals would reduce actual/perceived costs for companies. We attribute this to the fact that, at least in the short term, the removal of the requirement for shareholder approvals could perversely have the unintended consequence of making major transactions more burdensome/costly for companies if company boards are risk averse in the early days and seek additional support and advice (see our commentary on ‘potential concerns over proposed rule reforms’ at page 4 below).

In terms of the specific proposals, we asked Members whether they believed these proposals would improve the attractiveness of the UK markets, and of those who expressed a view:

• 81% thought that replacing premium/standard segments with a new ESCC single segment would improve the attractiveness of the UK markets and only 19% did not.
• 63% thought that removing financial information eligibility requirements would improve the attractiveness of the UK markets compared with 37% did not.
• 81% thought that more permissive dual-class share structures (DCSS) would improve the attractiveness of the UK markets but 19% did not.
• 65% thought removing compulsory shareholder votes/circulars for significant (Class 1) transactions would improve the attractiveness of the UK markets but 35% did not.
• 77% thought removing compulsory shareholder agreement with controlling shareholder received would improve the attractiveness of the UK markets but 23% did not.
• 64% thought removing compulsory shareholder votes/circulars for related party transactions would improve the attractiveness of the UK markets but 36% did not.

We also asked Members whether they believed that the specific proposals would benefit them as a corporate (see page 2 of the attached findings). Our Members are mostly working within issuers that are already listed, many of whom may not be currently contemplating acquisitions or activity for which the proposed changes are relevant, so it is not surprising that fewer respondents believed these measures would benefit them as a corporate, except for the removal of significant transactions which again received strong support.

When we asked a question about whether additional mechanisms were required to support shareholder engagement over transactions in the light of proposed reforms:

• 41% of respondents supported additional mechanisms to enhance shareholder engagement in related party transactions (RPTs), while 19% were against, and 40% did not express a view.
• There was less support for additional mechanisms to bolster shareholder engagement in significant (Class 1) transactions, with only 21% in favour and 18% against. 61% did not express a view.
• Additionally, given it typically takes time for newly listed companies to develop trust with investors, we asked our Members in the survey if they would support a minimum post-IPO period requiring shareholder approval for significant transactions. There was support for this from 44% of respondents, with 15% against and 41% not expressing a view, suggesting this may be something worthy of consideration.

Answers to the questions posed on the quality of investment research indicate that our Member IROs think there is a link between research coverage and valuations, with nearly three-quarters of respondents believing there is a relationship between equity research and valuations for listed companies or those seeking to list.

Society comments on HM Treasury proposals

Below we set out our high level views on the potential benefits of and concerns over the proposed reforms, and also we outline some significant elements that we consider are not addressed and that we believe may be impacting on the attractiveness and competitiveness of the London markets, both for prospective issuers considering London as a listing venue and for existing issuers.

Potential Benefits of Proposed Rule Reforms

Overall, in our view the proposals are helpfully less prescriptive and more disclosure-based, enabling corporates to more appropriately tailor their disclosures and communications in a manner more relevant to their size, sector or business model. We outline the proposals and the potential benefits below.

• There are a number of relaxations in rules, which our Members generally thought would improve the attractiveness of the UK markets survey (see survey findings above):
  • Replacing premium/standard segments with a new single segment for equity shares in commercial companies (ESCC) with a single set of requirements, which would simplify the listing process and enhance market efficiency.
  • Removing the existing financial information eligibility requirements (3-year financial track record, ‘clean’ working capital statement) to provide greater financial flexibility in terms of historic record and thus removing some current barriers to listing for some potential new entrants.
  • Further easing of the rules for dual class share structures (DCSS), enabling high vote shares to cast multiple votes on any resolution (except for discounted share offer), with the removal of existing limits on the voting ratio and extended 10 year 'sunset' clauses, that aim to make the market more attractive to high growth sectors by allowing their founders more control over their strategic direction while accessing public capital markets.
  • Eliminating the requirement for shareholder approvals and FCA approved shareholder circulars for Class 1 and related party transactions, which would potentially reduce timescale, cost and administrative burden, although in practice we expect boards to be cautious as per our detailed commentary on ‘potential concerns over proposed rule reforms’ below).
  • Dispensing with the requirement for a compulsory shareholder agreement with a controlling shareholder, instead moving to a “comply or explain” model and disclosure-based approach in the prospectus, with associated risks to be disclosed in the Annual Report on an ongoing basis, to create a more permissive approach for a wider range of business models and corporate structures.

• We note that investors would have to take greater responsibility, for example in respect of due diligence and engagement with companies to hold them to account in relation to proposed transactions, but from a corporate perspective this would provide greater freedom.
• Amendment of the restrictions around an independent business needing to constitute the main activity and with operational control, which would potentially open up opportunities for vehicles built around franchising, JVs and investments in other entities.

Potential Concerns over Proposed Rule Reforms

As noted above, we recognise that the proposals would transfer some responsibility from the regulator to investors and the company Board, which we support from the point of view of giving companies greater flexibility, but though we acknowledge this would bring some additional burden. We outline our concerns below.

• In Class 1 transactions Director responsibilities would increase and investors would be reliant on the Board’s judgement, creating more of a burden on Boards. Similarly, for related party transactions the Board would have to confirm that the proposed transaction is ‘fair and reasonable’. The company’s sponsor would have obligations to support the Board’s opinion and advise the company, although it is not yet clear what the proposed new sponsor regime would look like.
• During the initial years post introduction of the new rules, in order to proceed with major transactions without shareholder approvals, boards may incur significant legal and advisory costs in order to perform suitable due diligence. We believe in reality that substantial deals would still require significant investor engagement and, in the absence of familiar ‘guardrails’/investor protections, it may take time for companies to establish a more streamlined approach based on successful transactions that establish best practice. We also suggest consideration of a minimum post-IPO period during which recently listed entities would require shareholder approval for significant transactions, as per the proposal supported in our Member survey.
• It is not yet clear what information (currently included in the circular) could/should be prescribed for announcement ahead of major transactions to assist in testing market sentiment and enabling shareholder engagement within the market abuse / wall crossing rules (DTR 2.5.7).
• There is likely to be, in our view, a need for a generous transition period for current standard listings to allow them to comply with the more onerous Main Market/ESCC obligations. We also note the value of the ‘comply or explain’ basis of the Corporate Governance Code and the FCA’s TCFD framework, which may prove especially helpful to newly listed or smaller listed entities that would previously have had less onerous disclosure obligations as standard listed businesses.
• There is no sight at this point of the new Listing Rules, which the FCA intends to rewrite. However, the FCA have intimated that they will increase the focus on the role of directors and their obligations around maintaining appropriate systems and controls, understanding their obligations etc.  This could create a factor deterring some good Board candidates (alongside the FRC’s proposed reforms to the Corporate Governance Code regarding the number of directorships that any individual should hold, which may also reduce the attractiveness of becoming a director for both executives and non-executives). It will also be important to have harmonisation with the revised Code (and, in due course, Stewardship Code).
• Companies would be required to provide contact details of key their personnel, which would increase their regulatory compliance burden.
• We recognise there would also be implications for index providers and passive fund managers, to take account of these changes in their indices in order to provide appropriate investment solutions to their customers.    

Other IR Society concerns

Whilst the IR Society is generally supportive of the proposed reforms with some caveats as highlighted above, we also note some more significant issues that we believe may also influence the attractiveness and competitiveness of the London markets.

1. Remuneration: The UK market is often sensitive to Directors' remuneration and compensation structures and, for instance, investors can be restrictive in regard to short term (bonus) and long term (LTIP, RSU etc) incentive frameworks. This arguably creates a disadvantage for some in attracting or retaining global talent within London-listed companies and may also deter companies from listing here. We will also be raising this in our response to the FRC’s revised Corporate Governance Code.

2. Quality/timeliness of Investment Research:

Our recent survey revealed that, whilst ourMembers are satisfied

We note that our survey indicates that our Member IROs think there is a link between research coverage and valuations with nearly three-quarters of respondents believing there is a specific link between equity research and valuations for listed companies or those seeking to list, which underscores the crucial role played by research in shaping market perceptions and determining the fair value of companies, and also suggests that potentially improving the quality of research on companies could positively impact valuations.

A particular issue was that some analysts were not updating models sufficiently frequently. This was attributed to analysts covering an increasing number of stocks and having less time for each one. Analyst estimates should be informed and up to date, so that the market has a reasonable expectation of financial results. If analysts fail to update their forecasts, this can lead to inaccurate consensus estimates that may give rise to a need to correct the misapprehension, which is a cumbersome and potentially damaging process.

A significant number of companies now provide their own consensus estimates and publish them on their investor relations website, which is in line with IR Society best practice guidelines. However, investors are also influenced by estimates published by third party providers, which are often the most easily accessible, but these can sometimes contain inaccurate or old data.

We suggest that have been updated within, say, three months following a material announcement, .

3. Relative attractiveness of the UK Markets. Our Members consider the most significant factors in deciding where to list are liquidity, depth of markets, and comparable peers, with regulation and valuations also significant factors (see survey findings above). In addition, verbatim comments made in our survey indicate some Members consider there is a need to encourage funds flow into UK asset managers, and are concerned about the reduction in UK ownership of equities. The de-equitisation of UK pension funds has driven concerns about the relative attractiveness of the UK markets, heightening the perception that there is a deeper pool of cash in the US.

4. Short positions: One issue that has been raised, is a concern there is some lack of visibility/transparency in relation to shorting of stock. For example, corporates have no visibility of individual funds which maintain a short position below 0.5%, who may have a common shared view of a company’s position and prospects, as there is no public disclosure requirement. Establishing a framework that better enables companies to identify all short-sellers so that they can engage with them, (if they wish), would be a helpful step to further improve market transparency.

5. Overlapping disclosure and filing obligations: The proposals also do not address the UK’s overlapping disclosure and filing obligations. For example, companies file their accounts with Companies House and NSM, and (worse) the annual report and accounts checklist covers LR, DTRs, Co Act 06 plus other (increasing) disclosure obligations. To help make listing in London more attractive, the disclosure obligations may need to be streamlined and simplified. We are aware that the FCA is considering simplifying the FCA rule books, and that their ambition is to reflect changes in technology etc.

We hope you find these comments useful. Please do not hesitate to make contact if you have any questions.

Your faithfully,

Laura Hayter

Chief Executive Officer of the Investor Relations Society

(Email: enquires@irsociety.org.uk, Tel: + 44 (0) 20 7379 1763)

Published 30 June, 2023