Steve Banfield
Industry Director at EQ
Here are some of the key changes to the financial service industry that we can expect to progress during 2024.
FCA consultation on the new UK listing regime – Closing 22 March 2024
Following Lord Hill’s UK Listings review and the FCA’s consultation paper (CP23/10), in December 2023 the FCA published a new consultation paper (CP23/31) setting out detailed draft amended Listing Rules. The stated aim is for UK markets to work as effectively as possible for both issuers seeking capital and those allocating it on behalf of investors, to promote growth and sustainable returns for all.
This language mirrors that of the CMIT as detailed in my December edition. It is clear to see how Govt., regulators, and other industry bodies and authorities are pulling in the same direction. Collectively, they are trying to: increase the attractiveness of the UK market, increase retail investor interest in UK equities, reverse the current draw away from the UK for private companies seeking finance and public companies considering an overseas listing, or facing approaches from overseas companies or Private Equity. The widely anticipated key changes include:
- Revised listing segments
The merging of premium and standard listing segments into a new single segment, with a separate transitional segment providing existing standard listed issuers time to adapt. An international secondary listings regime for non-UK incorporated companies with a “primary” listing on a non-UK market. This is hoped to not only encourage UK companies to remain in the UK but also attract overseas companies to list in London and access the UK Capital pools. Expect a further consultation paper detailing the way the new segments will work later in Q1 2024.
- Significant transactions
The current requirement to have to issue FCA approved shareholder circulars and gain shareholder approval for Class 1 transactions is proposed to be removed. Such events will no longer require a shareholder circular and vote or a working capital statement, instead an issuer will only be required to release a transaction announcement.
- IPO eligibility
Certain current listing requirements that are considered key barriers to listing, including the premium segment requirements for a three-year financial and revenue-earning track record and a “clean” working capital statement, will be removed. This is intended to be introduced immediately once the new regime is implemented (H2 2024) with companies that are part way through a transaction being able to operate under the new rules.
- Related-party transactions
Larger related-party transactions will no longer require shareholder approval or shareholder circulars. Instead, a transaction announcement and a fair and reasonable opinion from a sponsor will suffice.
- Dual class share structures
These structures enable company founders and early investors to benefit from fund raising whilst not diluting their voting control of the company. They are common in the US, especially with historical family-owned businesses, and offer benefits to private company owners as they look to IPO. In order to raise the UKs competitiveness, it is proposed that UK companies wishing to issue dual class shares will face fewer regulatory restrictions, with the FCA deciding on what is acceptable. Some of the key proposals will enable weighted voting shares to be held by directors, employees, and natural persons who are investors, and will be able to be exercised on a wider range of matters.
The Investment Research Review
I have mentioned in previous editions that EQ sits on many All Party Parliamentary Groups (APPGs), and through these forums I have discussed with MPs and peers, how, with all of these proposed changes favouring the issuer, investor protections can be ensured. All of those that I have spoken with recognise the issue and agree that the role of the regulator is key, especially as it is proposed to delegate them more powers. One of the key potential changes that would support investors is being proposed through an investment research review.
The review recognises that the UK has a robust investment research ecosystem, however since the 2008 crash investors have diversified away from equities to the guarantee of fixed income bonds. This report identifies this decline in equity investment, which coupled with the constant introduction of regulation over the same period designed to prevent corporate failure, has led to an overly burdensome regime and subsequently a decrease in new UK listings.
To halt the decline the report proposes a secure and sustainably funded research platform to help encourage greater market interest in publicly listed and smaller cap companies. It also suggests amending regulations governing how investment research is paid for and removing any barriers that prevent UK buy-side firms from paying for investment research in other jurisdictions.
Acknowledging that retail investors represent a material element of liquidity, it proposes industry harness the knowledge and experience within our universities to support research on innovative companies and sectors and to help train the next generation of research analysts.
In response, the FCA states that it supports high regulatory standards in the UK and aims to make sure our capital markets are dynamic and effective for all participants. The FCA will carefully consider the report and its recommendations, in line with their own objectives, and intends to consult on changes in H1 2024 that could introduce more options on how to pay for investment research that would provide value for money to institutional and retail investors.
UK Corporate Governance Code changes
The new code issued in January demonstrated the strength of the industry voice when it responds strongly to proposed changes that it consider detrimental to business. The result was limited changes that encourages a move away from tick-box reporting to coherent and well documented company explanations if diverging from the code, particularly around board decisions, company culture, diversity and inclusion, and risk and management controls.
Having spoken to many of our issuer clients, a couple of main areas of the new code stand out. The first relates to the encouragement of ‘explain’ and ensuring that this satisfies the proxy advisors, who have been known to revert to ‘tick box’ on occasion. The FRC recognises this, and their new CEO Richard Moriarty recognises their lack of regulation, encouraging responses to the FRCs root and branch review of the Stewardship Code (announced February 27th). This will provide an opportunity for industry participants, including issuers, to provide their thoughts on what effective Stewardship and proxy advice looks like.
The FRC plans to progress this review in 3 phases:
- Initial consultation with issuers, asset managers, asset owners and service providers over the next few months
- Public consultation after the 2024 AGM season
- Revised code published before the 2025 AGM season
In addition, Provision 29 of the Code remains a challenge as it results in oversight from Directors to existing internal controls so that they can be confident to describe their effectiveness, in the broad areas of finance, operational, reporting and compliance. Although this change won’t impact until Jan 2026, I know from discussions that a ‘dry run’ in 2024/25 is considered a good practical exercise.
Spring Budget - March 6, 2024
On the back of a £16.7bn Govt. finance surplus the Chancellor will announce the Govts. tax and spending plan alongside an OBR economic forecast. In a GE year the budget can provide an opportunity to introduce vote pleasing reforms, however a balance will have to be struck in the current climate of how any cuts can be responsibly funded. Alternatively, the chancellor may choose to focus this Spring budget using the surplus to increase public spending.
Reduction in dividend tax allowance - April 6
The dividend tax allowance reduced from £2,000 to £1,000 in April 2023, and will reduce again in April 2024 to £500. This means that at a time when companies are starting to increase their dividend payments, more shareholders are likely to find themselves above the new allowance threshold for the first time and be required to file a tax return. If, as is likely, the best advice is to hire an accountant to assist with the return, then this could add further costs to long term non-sophisticated or employee investors. EQ will be providing wording to advise of the changes on our Shareview site.
Closing thoughts
There is quite a lot of change happening at the moment which will impact significantly on both UK issuers and investors. HMT, the FRC and FCA, CMIT and the Taskforces that are currently operating, are all focused on making the UK a more attractive listing venue, encouraging companies to grow and remain in the UK, and to develop deeper capital pools through encouraging a diversification of retail investment back to equities.
The encouragement of retail investment will depend on many factors as we move toward a fully digitised market. Factors such as adequate investor protections being in place, clear and effective investment information being freely available, the preservation of shareholder rights, the ability for overseas and low value/low transaction investors to hold shares, and ensuring there is an option to hold shares free of charge.
I’ll be keeping you up to date with further information on key industry developments, however, should you wish to discuss any of the content in this bulletin please contact your Client Relationship Lead.
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