While the United States continues to pursue a rule-upon-regulation strategy that undermines public listings, increasing cost and compliance requirements, the UK is looking to improve the number of public firms by simplifying its listing rules. The policy objective has been discussed for years, and today the UK Financial Conduct Authority (FCA) is discussing some proposed changes.
In a speech last month, FCA Chief Executive Nikhil Rathi stated that “recent decisions by some UK-based corporates to seek alternative or additional pastures to raise capital or list their equity have focused minds.”
“In many cases, these decisions flow from a shift in the geographic sources of revenues and future focus of the companies concerned. Rather than simply lamenting these decisions or insisting that a few regulatory levers would change the outcomes, it is important to recognize that there has not until now been a fundamental discussion about the entire ecosystem. Nor has this been a priority area for public policy for decades.”
Rathi added:
“…if we are to embrace risk but stamp out wildfires, we must all – regulators, industry and government – align behind a commitment to growth, a commitment to innovation and a commitment to underpin our entire ecosystem with global ambition, high standards and proportionate regulation.”
The FCA now wants to streamline listing rules and lure a wider range of companies while improving choices for investors. Rules need to be easy to understand and competitive, explains the regulator. The current listing regime in the UK is considered by some issuers “as too complicated and onerous.”
The FCA notes that following Brexit, it did reform the listing regime to boost growth and competitiveness, but apparently not enough. And while the UK has been the financial hub of Europe for years, publicly listed firms have dropped significantly since 2008 – by 40%.
The FCA states that it is proposing a single category for shares – no longer offering a standard or premium listing option, with a single category that aims to remove eligibility requirements that can deter younger firms that will provide a broader range of options for investors.
The regulator seeks:
“… an open discussion about the change to risk appetite that a listing regime based on disclosure and engagement, rather than regulatory rules, would require.”
The FCA adds that it will also publish rule changes to improve how equity secondary markets operate.
Rathi said in a public announcement that their proposed reforms would “rebalance the burden of regulation.” This will provide investors with greater choice as to the risk they are willing to shoulder. Rathi said this will take a concerted effort from the government.
“We want to encourage more companies to list and grow in the UK, versus other highly competitive international markets.”
While the increase in onerous and costly rules is not the entire picture, it is the most important factor in the decline of public firms.
According to a report from last year by the American Council for Capital Formation – completed in partnership with EY, the number of public firms peaked in the US in the mid-1990s at around 8000. This number has dropped by about 50% in the past 20 years – experiencing a brief increase during the SPAC boom, which has now diminished.
ACCF Chief Economist and Executive Vice President Pinar Çebi Wilber commented at that time:
“The cost of doing business on US exchanges has become significantly higher in recent years due to [the] passage of landmark regulations like Sarbanes Oxley Act and Regulation Fair Disclosure by the SEC, and more regulations are on their way such as climate or human capital disclosures. It is important to understand the degree which the complexity and burden of these existing requirements have put a chilling effect on companies that are willing to go through the IPO process.”
At the same time, institutional money or wealthy investors have learned to jump ahead of the investing queue backing promising young firms before they pursue a public listing (if they ever do) – largely cutting out retail investors.
An article in the Hill from 2021 explained:
“… those companies that delay their IPOs because of compliance costs end up generating more money for investors who have the ability to put money into a startup, which is not possible for most investors. That means ordinary investors with most of their wealth invested in mutual funds via their retirement accounts miss out on those companies that are likely to have high growth rates, which exacerbates wealth inequality.”
While the UK’s top securities regulator appears to be addressing the challenge head-on, the US Securities and Exchange Commission is, counterintuitively, looking to undermine public markets further with more rules that will certainly chill public listings further.
The FCA’s proposals may provide a path for its larger brethren – once leadership is in place that is willing to pursue policy designed to improve public markets.