On February 14, 2017 the Financial Conduct Authority (FCA) published a discussion paper which seeks feedback on how the UK primary capital markets can most effectively meet the needs of issuers and investors. The FCA has structured the discussion paper based on the initial feedback received from stakeholders as part of its review of the effectiveness of primary markets (effectiveness being reviewed by reference to providing access to capital for issuers and investment opportunities for investors). These initial discussions identified a number of areas where immediate technical enhancements could be made to the listing regime to increase its effectiveness, and therefore the FCA has published a consultation paper alongside the discussion paper to address these issues.
The discussion paper covers the following topics:
The primary market context
In order to provide context for the discussion, the FCA provides an overview of the UK’s primary markets, the place within this of the listing regime, and of its own regulatory role. The FCA also sets out some key trends in the UK’s primary equity markets.
The current split between standard and premium listing
The key components for inclusion in the premium listing segment are broad equivalence between economic ownership and voting rights (typically expressed through single-class share structures), pre-emption rights and the need to demonstrate an independent business. The FCA’s discussions with stakeholders have provided strong endorsement for the existing regime. It is widely regarded as having evolved in line with market feedback to serve the interests of investors and issuers. It is also seen as an example of high corporate standards leading to high levels of investor confidence and, in turn, a vibrant market. However, the FCA has identified some important questions about whether the boundary of the premium listing regime is appropriately drawn, and whether re-drawing that boundary might improve effectiveness for issuers and investors.
The listing regime currently offers overseas issuers a choice of three routes to access UK markets. Overseas issuers can apply for a premium listing or standard listing of global depositary receipts (GDRs) or a standard listing of equity shares.
The FCA’s discussions with stakeholders, and experience of IPOs since the segmentation of listing was introduced, suggest that the listing regime could be usefully reconsidered for overseas issuers. The FCA has observed very few issuers seeking a standard listing of equity shares because issuers for which premium listing is an inappropriate option overwhelmingly favour a standard listing of GDRs. However, GDRs are securities generally targeted at sophisticated investors and may therefore be inaccessible to a large body of investors who might wish to invest in mature overseas companies. A number of stakeholders have also questioned whether there should be a route to listing for overseas companies that wish to observe higher standards of conduct, though UK corporate structures required for premium listing may be inappropriate.
Exchange traded funds (ETFs)
When the premium and standard listing segments were created, the FCA decided that premium listing should be the exclusive route to market under the listing regime for investment trusts and investment companies. Taking into consideration the broader regulatory framework which those issuers operated within, the FCA considered this to be necessary to ensure appropriate levels of investor protection.
The FCA remains of the view that this decision was correct, and notes that there are no significant calls for it to be revisited. However, the FCA would like to discuss further whether requiring premium listing is unnecessarily demanding for ETF issuers when compared with the limited benefits provided by the requirements in Chapter 16 of the Listing Rules.
A broader question that stakeholders raised, and which the FCA discusses in this paper, is whether standard listing is sufficiently understood or valued by issuers and investors to be effective. Closely linked to this question is whether the current split of listing into standard and premium segments is too binary and could be revisited to produce more effective outcomes.
Potential gaps in the UK’s primary market framework
When the FCA takes a broader view, it sees potentially more fundamental gaps that may not be properly accommodated by the current market structure.
Supporting the growth of science and technology companies
A number of stakeholders raised concerns about the effectiveness of the UK’s primary equity markets in providing growth capital, particularly for early-stage science and technology companies. In its Green Paper published in January 2017, ‘Building our Industrial Strategy’, the Government also explored this issue, noting the argument put forward by supporters of dual class share structures that the enhanced voting rights they give to companies’ founders allow those individuals to focus more on long-term performance, and less on short-term market pressures.
However, the Green Paper also noted that institutional investors and shareholder representative groups in the UK have opposed dual class shares structures due to the risk they perceive to high-quality corporate governance and the interests of minority shareholders. At present under the Listing Rules the FCA permits such structures only for companies with a standard listing of shares. The FCA is keen to explore further the effectiveness of the UK’s primary equity markets in providing patient capital, and particularly to discuss the extent to which different primary market structures might provide a solution, and the role primary market regulation might play in helping to shape those structures.
The listing of debt securities and debt MTFs
The FCA has committed to give further consideration to whether there is a role for a UK primary debt multilateral trading facility (MTF) market, similar to those in Luxembourg and Ireland, and, if so, how it should be structured. The FCA takes this discussion forward in this paper, and sets out some options for further consideration.
Retail access to debt markets
A number of market participants have called for measures to support greater retail participation in debt markets, particularly in relation to routine issuance by established issuers. Some stakeholders have suggested the FCA’s current approach, requiring that prospectuses relating to retail issuance be easily analysable and comprehensible, discourages issuers from issuing such securities to retail investors.
Other potential areas for reform
The FCA has sought to structure this paper based on the initial feedback it received from stakeholders. This has resulted in a focus on specific areas within a wide-ranging subject. The FCA remains keen to receive feedback on other areas relating to the UK’s primary markets not mentioned in this paper where stakeholders consider that enhancements could be made.
The FCA has requested responses to the discussion paper by May 14, 2017.
(FCA, Discussion Paper DP17/2 – Review of the Effectiveness of Primary Markets: The UK Primary Markets Landscape, 14.02.17)