The UK Financial Conduct Authority (FCA) issued a statement last week announcing rule changes designed to boost share listings on UK exchanges.
At the beginning of 2021, the Kalifa Review of Fintech was published providing a roadmap for the UK to maintain and improve the digital transformation of financial services. This report included recommendations for Fintech along with advice as to how to increase listings on stock exchanges.
Clare Cole, Director of Market Oversight at the FCA, commented on the new rules:
“We need to act to meet the needs of an evolving marketplace. These changes ensure the UK’s markets maintain their reputation for dynamism, helping support the new types of companies seeking the investment that drives economic growth and by giving investors more choice with appropriate protection. Over the last few months, we have moved quickly to address areas where our rules could be improved to encourage innovation in primary markets. By taking this agile approach, we are pleased that new IPOs in 2022 will be able to benefit from the revised rules.”
The Kalifa Review proposed:
“Improve the listing environment through free float reduction, dual-class shares and relaxation of pre-emption rights: Out of the 3,787 initial public offerings (IPOs) at the world’s major stock exchanges between 2015 and 2020, the US alone accounted for 39% (via the NASDAQ and the NYSE), while the UK trailed with 4.5%.”
The Review also suggested a desire to increase the number of Fintech listings on the London Stock Exchange (LSE) noting that Fintechs are missing out in accessing public capital.
Additionally, the Kalifa Review said policymakers should:
“… consider how the trading of tokenised securities can be facilitated on investment exchanges – and in particular, whether and how blockchain-based ledgers can be used to record transactions in securities; and consider whether the operational burdens of transaction reporting requirements under MiFID and EMIR may be alleviated by the creation of digitised systems.”
So what changes has the FCA announced to improve listings on UK exchanges?
The following updates were revealed last week:
- Allowing a targeted form of dual-class share structures within the premium listing segment to encourage innovative, often founder-led companies onto public markets sooner and so broaden the listed investment landscape for investors in the UK.
- Reducing the amount of shares an issuer is required to have in public hands (i.e. free float) from 25% to 10%, reducing potential barriers for issuers created by current requirements.
- Increasing the minimum market capitalisation (MMC) threshold for both the premium and standard listing segments for shares in ordinary commercial companies from £700,000 to £30 million. Raising the MMC will give investors greater trust and clarity about the types of company with shares admitted to different markets.
The new rules came into effect on December 3, 2021.
While there are no indications that blockchain, or the tokenisation of securities, will take place anytime soon, the FCA could announce a transition in that direction next year. There are multiple companies around the world that can provide the technology to facilitate digital securities – a change the could remove intrinsic friction from public markets while perhaps making it easier to trade securities in smaller firms as well as enabling alternative assets.
While these updates may not go as far as the Kalifa Review suggested, the FCA states that it intends to provide further feedback on recommendations with responses due by the first 6 months of 2022. This will also include “proposed next steps.”
Last week, Paul Marshall, Chairman of Marshall Wace, wrote in the FT that the “UK stock market is becoming a global backwater as US and Chinese markets forge ahead.”
“London is becoming the Jurassic Park of stock exchanges,” stated Marshall… “The UK is not alone in falling behind. All European bourses are more or less moribund, relatively speaking. Daily volumes so far in 2021 have averaged $554bn in the US, $174bn in China and $47bn in Europe. The biggest US stocks each now trade more than the largest European markets. Apple trades $12bn per day and Tesla $21bn a day compared with the Euronext exchange at $8.1bn a day in total and the London Stock Exchange just $6.1bn.”
It is Marshall’s opinion that the income fund sector should be “phased out,” replaced by “funds that are more focused on growth than dividends.”
London has long been a vital center of global financial services as well as the leading Fintech hub in the world. Yet, pushback by entrenched players can make change exceptionally difficult to accomplish. The unknown means risk while requiring new skills and managers able to embrace the need to alter course. It will be interesting to see how the FCA acts over the next year to make the UK financial services sector more competitive in the eyes of the world.