FCA: Primary Markets Effectiveness Review - Consultation
On July 5, 2021 the Financial Conduct Authority (FCA) published Consultation Paper CP21/21 (Consultation) on a series of proposed reforms to improve the effectiveness of UK primary markets, together with a discussion of how the FCA might continue to develop the regime to ensure the UK remains a competitive and dynamic market.
Both the recent UK Listing Review and the Kalifa Review of UK FinTech highlighted specific elements of the listing regime that act as barriers to companies listing and they made specific recommendations for improvements to the regime. For these reasons, the Consultation has two purposes.
The first is to open up a broad discussion of the functioning of the listing regime so that the FCA can better understand the purpose and value to both issuers and investors of listing. This will provide key input into how the FCA can improve the regime to make it more efficient and accessible, while keeping high standards for the UK public markets. In this context the FCA discusses a number of different potential models with the intention of drawing out views on what value the listing regime and the FCA’s oversight of listed issuers currently has for investors, issuers and wider market participants. Responses will be used by the FCA to further develop proposals for concrete changes to the listing regime for future consultation. It is noted that this wider discussion of the future of the listing regime will be taken forward in conjunction with reforms to the prospectus regime over a longer period than the targeted changes being consulted on (for which see below).
The second purpose is to consult on targeted changes to the existing regime to remove barriers to listing and to improve the accessibility of the FCA’s rulebooks. These targeted changes are forward-looking and are not intended to affect issuers with existing listings, only new applicants. They relate to dual class share structures, minimum market capitalisation, free float, track record, and other minor changes intended to ensure the rules remain up to date and reflect modern technology and business practices as summarised below.
Dual class share structures
The Consultation proposes facilitating the use of dual class share structures within the premium segment in certain limited circumstances. The FCA proposes to achieve this by introducing an exception to the current rule that restricts votes on matters relevant to premium listing to holders of premium listed shares only. The exception would enable holders of unlisted weighted voting rights shares, a specific kind of dual class share structure, to also participate in these votes for a period of up to five years from the date of initial admission of the company’s premium listed shares.
In addition to the five-year duration, and in line with the UK Listing Review’s recommendations, the class of shares with weighted voting rights would need to meet the following conditions:
- a maximum weighted voting ratio of 20:1
- may only be held by directors of the company or beneficiaries of such a director’s estate
- weighted voted rights would only be available in two limited circumstances: (i) a vote on the removal of the holder as a director at any time and (ii) following a change of control, on any matter (to operate as a strong deterrent to a takeover)
- conversion to ordinary premium listed shares upon transfer to anyone other than a beneficiary of the director’s estate.
The Consultation notes that the specific features of the regime have been designed to meet the needs of founder-led growth companies, and address the specific barriers to these companies listing in the premium segment. However, the scope of the regime is not limited to these companies, with the FCA instead preferring to set objective criteria that different types of company may meet.
It is not proposed that sovereign controlled commercial companies listed under Chapter 21 or closed-ended investment funds listed under Chapter 15 of the Listing Rules would be allowed to make use of the exemption.
Minimum market capitalisation
The FCA proposes to change the Listing Rules to increase the minimum market capitalisation requirement for issuers (other than closed-ended investment funds or open-ended investment companies) seeking a premium or standard listing of shares from £700,000 to £50 million. This is because the FCA considers that companies with a low market capitalisation are better suited for admission to other markets such as AIM or AQSE Growth Market.
Minimum number of shares in public hands – ‘free float’
For both premium and standard listings the FCA proposes to reduce the minimum level of free float from 25 per cent to 10 per cent (both at listing and as a continuing obligation). The Consultation notes that data suggests a significant number of main global IPOs take place at a free float of below 25 per cent but very few at a free float of below 10 per cent. The FCA believes that reducing the Listing Rules requirement to 10 per cent would therefore allow most issuers flexibility to structure their IPOs in the way that suits them.
The FCA also proposes to remove the provisions allowing issuers to apply for a modification to the free float requirements, meaning that the FCA would not accept a free float lower than 10 percent. The Consultation also notes that if an issuer was in breach of the continuing obligation to maintain a free float of 10 per cent, the FCA would no longer allow it to show liquidity via other means, but instead ask it to present a plan for coming back into compliance with the rule as soon as possible.
Track record requirements
In the Consultation the FCA explores the case for changes to the existing premium listing eligibility requirement (under LR 6.2.1) for an issuer to have a three year financial track record covering at least 75 per cent of the business.
The FCA considers that (because of the interaction with the prospectus regime) the benefit from any changes to this requirement would be limited. It also notes there is potential for broader unintended consequences from any changes and that only relatively few issuers find the 75 per cent requirement burdensome.
Given this, the FCA does not currently propose any changes to the track record requirements, but it seeks views on this approach.
In relation to alternatives for specialist companies, the Consultation notes that the UK Listing Review proposed that current exemptions to the premium listing track record requirements for certain categories of specialist issuer should be broadened to include a wider range of high growth innovative companies from other sectors that are also able to show that they are sufficiently mature in ways other than though having positive revenue earnings. Before proceeding with any proposals in this area the FCA would like to be clearer about what specific types of high growth innovative companies find meeting the current requirement to be a particular barrier to listing and how this may differ from those companies included in the existing regime for specialist companies. The FCA will then seek further views and evidence on possible proxies for the track record that could be demonstrated by these types of companies.
Minor changes to the Listing Rules, Disclosure Guidance and Transparency Rules and the Prospectus Regulation Rules
The FCA is also consulting on a range of minor changes to ensure its rules remain up to date and reflect modern technology and business practices. These changes are not intended to change market practice but to update the rulebook to:
- remove conflicting requirements, some of which result from changes to the Prospectus Regulation, made before EU withdrawal
- update for technological changes, for example by removing the need for multiple copies of documents, or to remove gender-charged terms.
Comments are requested by September 14, 2021. Subject to consultation feedback and FCA Board approval, the FCA will seek to make relevant rules before the end of 2021. On the discussion areas, the FCA will provide feedback and potentially consult further on wider listing regime changes in due course, if appropriate.
(FCA, Primary Markets Effectiveness Review, Consultation Paper CP 21/21, 05.07.2021)
(FCA, FCA consults on reforms to improve the effectiveness of UK primary markets, 05.07.2021)
Takeover Panel: New edition of Takeover Code, amended Practice Statements and checklists
On July 5, 2021 the Takeover Panel announced that the Thirteenth edition of the Takeover Code (Code) has been published on the Takeover Panel’s website, together with a number of amended Practice Statements and checklists for offers.
The Thirteenth edition of the Code applies in relation to all firm offers which are announced in accordance with Rule 2.7 on or after July 5, 2021 (the “implementation date”), except where to do so would give the amendments retroactive effect. Any ongoing firm offers which straddle the implementation date, and any offers announced on or after the implementation date which are in competition with such ongoing offers, will continue to be subject to the Twelfth edition of the Code.
The majority of the amendments incorporated into the Thirteenth edition result from the consultation on PCP 2020/1 (“Conditions to offers and the offer timetable”). The amendments were adopted in RS 2020/1 and made by Instrument 2021/1, which were published on March 31, 2021. In addition, minor amendments have been made to replace gender specific terms in the Code with gender neutral terms. These amendments were made by Instrument 2021/2, which was published on April 15, 2021.
Practice Statements Nos 5 and 29 have been updated to reflect current practice. In addition, consequential amendments have been made to Practice Statements Nos 10, 11, 22, 24, 26, 28, 30 and 31 to reflect the Code amendments referred to above.
Updated checklists for offers which are subject to the Thirteenth edition of the Code have been published on the Checklists page of the Panel’s website.
(Takeover Panel, Panel Statement 2021/10, 05.07.2021)
FRC: Statement of Intent on Environmental, Social and Governance challenges
On July 7, 2021 the Financial Reporting Council (FRC) published a Statement of Intent which sets out areas in which there are issues with environmental, social and governance (ESG) information if companies are to report in a way that meets the demands of stakeholders, looks at how to address some of these demands and provides information about the FRC’s planned activities in this area.
The FRC has identified a number of challenges that it has grouped into six stages as follows:
- Production – Better internal information leads to better decisions and better insight for stakeholders but companies face challenges in how they measure, manage, control and assure ESG data.
- Audit and assurance – Reported information should be robust and reliable and where companies commission independent assurance, it is very important to be clear about what is assured and what level of assurance is provided.
- Distribution – Information should be made accessible to interested parties but ESG information is often located in separate places, reports and media at different dates and often not in an accessible or reusable format.
- Consumption – While ESG information leads to better decision making by stakeholders, users can often have difficulty obtaining ESG data and, where it does exist, it is often based on incomplete frameworks and differing methodologies, has limited comparability, or is not timely.
- Supervision – ESG information and activity needs to be appropriately monitored and requirements enforced in light of increasing expectations of more and better reporting on ESG issues.
- Regulation – There is a need to ensure that international ESG standards work effectively alongside a domestic framework, and as the international activity develops there is a need to address any gaps at a national level since coordinated and coherent regulation will lead to efficiency.
To meet these challenges, the FRC plans to develop Codes, standards, guidance and expectations and work with and influence standard setters, regulators, market participants and other stakeholders to build a system that is forward-looking and fit for purpose. It wants to ensure the development of appropriate standards and controls, delivering robust internal information which is considered strategically and then reported externally where relevant through high quality disclosure, in a useable and useful format, leading to better stakeholder and investment decision-making, all in the public interest.
By way of example, the FRC will:
- Continue to consider the role of the UK Corporate Governance Code in ensuring boards are taking appropriate account of ESG issues in their consideration of the long-term success of the company and amend it as appropriate, recognising the challenges in doing so.
- Continue to support the appropriate assessment of ESG issues within financial statements and engage on the development of international standards as necessary.
- Consider ESG-related amendments within future revisions of auditing and assurance standards.
- Continue to monitor investors’ approaches to ESG within their UK Stewardship Code reporting, and work with other regulators to align requirements and build an effective market for consideration of ESG in stewardship activity, including how this information needs to flow through the chain.
- Continue to assess the degree to which auditors ensure that companies take appropriate account of ESG issues in their annual report and accounts.
- Continue to influence the development of IFRS, via the UK Endorsement Board, where the FRC thinks there are specific issues relating to ESG.
In the accompanying press release, the FRC states that it supports global standards for non-financial reporting and welcomes the activity of the IFRS Foundation Trustees to set up an International Sustainability Standards Board. In 2020, the FRC announced an expectation that public interest entities should report against the Task Force on Climate-related Financial Disclosures framework and the Sustainability Accounting Standards Board (SASB) sector-specific metrics relevant to the entity as building blocks towards this international approach and to assist investors to understand material ESG issues at companies. The FRC has assessed UK SASB reporting practice and has also published a snapshot of market practice, showing an increase in uptake, but that more and better reporting is needed.
(FRC, Statement of Intent on Environmental, Social and Governance challenges, 07.07.2021)