Global investors warn UK on overhaul of listing rules

Global investors are warning that a proposed overhaul of listing rules to attract more growth companies to the UK market will erode shareholder rights, undermine the country’s reputation for corporate governance and harm its attractiveness as a financial centre.

The International Corporate Governance Network, a group of global institutional investors with $77tn of assets under management, has written to UK chancellor Jeremy Hunt and to the Financial Conduct Authority regulator — which drew up the planned changes — criticising what the FCA has called “the most far-reaching reforms in the UK’s listing regime in three decades”.

Recipients also included the Financial Reporting Council accounting watchdog and the London Stock Exchange.

“We are concerned that the suggested reforms to the listing rules would result in weaker investor protection and could harm the UK’s reputation as a market with high corporate governance standards,” said signatory Carine Smith Ihenacho, chief governance and compliance officer at Norges Bank Investment Management, which runs the world’s biggest sovereign wealth fund.

Among the letter’s signatories are some of the world’s most powerful institutional investors, including NBIM, and large US pension funds Calpers and Calstrs; PGGM, one of the largest Dutch pension fund managers; and AustralianSuper, the country’s largest pension fund. More than three-quarters of the assets they represent are based outside of the UK.

The FCA’s proposals are a response to government concerns about the decline in the number of initial public offerings in London.

A 2021 UK listings review chaired by Lord Jonathan Hill highlighted the need to encourage more companies to list in the UK amid an exodus from the LSE and a two-decade decline in UK pension funds’ share of the domestic equity market.

The FCA called for the standard and premium segments of the market to be replaced with a single listing category, making it more attractive for early-stage companies to list. The regulator also proposed a range of deregulatory measures, including removing the need for companies to present three years of audited accounts.

One of the investors’ biggest concerns is the planned introduction of a more permissive approach to dual-class share structures, which give company founders greater voting rights than ordinary shareholders.

They are also worried about the removal of shareholder votes before significant moves, such as takeovers and related-party transactions. They believe that collectively the proposals will expose investors to undue risk.

Kerrie Waring, chief executive of the ICGN, said the proposals “risk undermining investor confidence to invest in UK assets”. They “are likely to harm the UK’s reputation as a market with robust investor protection, high corporate governance standards, strong reporting and a stable policy environment”, she added.

Waring argued a potential unintended consequence of the measures was it could lead to the reduction of the pool of institutional and retail investors willing to invest in UK-listed companies, saying it was not clear the changes would attract listings to the country.

Instead, they “may be detrimental to corporate governance standards and shareholder protections, thereby undermining the UK’s economic growth and attractiveness as a global financial centre”, said the ICGN.

Caroline Escott, senior investment manager at Railpen, which oversees about £34bn of pension fund assets, urged UK policymakers to “reconsider their decision to roll back the vital corporate governance protections everyday savers need”.

She said: “We believe recent steps have been taken on UK corporate governance policy which will hinder, not help, the UK’s financial markets and economic recovery, to the potential detriment of members of pension schemes such as ours.”

Bim Afolami, economic secretary to the Treasury, said in a statement that the government strongly supported the regulator’s proposals.

“Together, we have a wide programme of reforms in place that seek to put UK capital markets on a level playing field with other leading jurisdictions, particularly the US.”

Afolami said he “fundamentally disagrees” with the ICGN’s comments, adding that “there is absolutely no point in having the safest graveyard”.

“These proposals are not an erosion of shareholder rights, and the FCA has worked to strike the balance between the interests of shareholders and of companies raising capital, given the breadth and ambition of these reforms it is normal to attract a wide range of views,” he added.