British Regulator Easing Rules to Stem Company Outflow From UK Stock Markets

The London Stock Exchange Group offices are seen in the City of London, England, on Dec. 29, 2017. REUTERS/Toby Melville

Britain’s top financial regulator announced plans to make stock markets in the United Kingdom and its overseas territories more attractive to companies.

The Financial Conduct Authority (FCA) has discussed simplifying financial regulations to make the United Kingdom “more competitive” with foreign stock markets, but there are some concerns that the proposals could hurt shareholders’ rights.

The move comes after UK-based tech firm Arm and other companies decided to leave the London Stock Exchange (LSE) and only list its shares on the Nasdaq Index in New York.

The British chipmaking giant’s decision to move to New York is a blow to the LSE, one of the top global financial markets.

Detailed plans by the FCA were unveiled by the country’s financial watchdog on May 2.

London’s appeal as a top financial hub was weakened in the post-Brexit era, with companies increasingly moving their listings to rival hubs like New York, and also because of protracted negotiations with the Europena Union.

Although the United Kingdom has been Europe’s biggest financial hub for generations, listings in the country have dropped by 40 percent since 2008, according to a government report.

Fears that British firms were being taken over by overseas competitors have further pushed authorities into improving the country’s chance at competition.

Tech Companies Critical of UK Regulations

One of the primary goals for the post-Brexit government has been to update the rules for science and technology in order to encourage economic growth and prevent more companies from listing abroad.

Arm, a Cambridge-based tech firm, is one of the world’s major microchips designers and reportedly had plans to raise up to $10 billion from investors.

The company’s statement in March that it would not list its shares in London had caused shockwaves in the United Kingdom.

The chip firm’s co-founder, Hermann Hauser, told the BBC this week, that the Nasdaq was “much deeper” than the LSE since Brexit tarnished the UK’s image as a place to do business.

This comes after Microsoft was blocked last month from buying the American gaming firm Activision by the UK’s Competition and Markets Authority.

Microsoft’s president Brad Smith slammed the British regulators, calling the European Union a better place to start a business.

Smith told the BBC that the move was “bad for Britain” and was Microsoft’s “darkest day” after four decades operations in the country.

Top Regulator to Ease Rules to Bring in More Business

The regulator said that the rules that companies are required to follow to list their shares in the United Kingdom must be made “more effective, easier to understand, and more competitive.”

The FCA is looking into replacing the current system of “premium” and “standard” listing categories with a single one as part of a reform package designed to simplify the country’s listings rulebook.

Current regulations have been accused of being “too complicated and onerous,” but the FCA said that decisions by firms to list are based on other factors such as taxation and investment opportunities.

However, businesses which choose list shares on any of the FTSE indexes, including some of the world’s largest firms, must hold a premium listing in order to comply with the UK’s regulation standards and pay substantial costs.

It also suggested removing the requirement for shareholders to have a vote on transactions such as acquisitions, which will reduce barriers for companies pursuing their business strategies.

“We want to encourage more companies to list and grow in the UK, versus other highly competitive international markets,” said FCA chief executive Nikhil Rathi.

The British watchdog began reviewing potential changes to its listing rules in March, with more detailed proposals undergoing a further round of consultations through June 28.

The FCA said that a single equity category would ease eligibility requirements that deter new startups and make things more permissive on dual-class share structures.

Rathi told BBC Radio, that this will simplify the rules and “make it easier for companies to join the market quicker,” but he added it will allow the founders of technology firms to hold onto controlling shares for longer.

He did admit that there would be more risk for investors who would need to “know companies better” before investing.

Changes to Regulations Appear Welcome Despite Some Skepticism

Most investment groups generally welcomed the suggested reforms to listing regulations.

Andrew Griffith, economic secretary to the Treasury, called the proposals an “important step forward” in improving the international competitiveness of the United Kingdom.

“We are the largest financial centre outside the U.S., but we recognize that companies and investors have a choice, and it is important our rulebook keeps pace with practices elsewhere while still benefiting from the high-quality reputation of our markets,” said Griffith.

While the UK regulator continues to uphold its commitment to maintaining high standards, some experts have warned that the current proposals could erode shareholders’ rights and undermine market standards.

“We strongly support the principles behind listing rule reform ... but eroding shareholder rights risks undermining market standards, and this is not the right answer,” said Richard Wilson, CEO of trading platform Interactive Investor.

Wilson called the removal of mandatory shareholder votes on transactions a “major red flag”.

The FCA said it aimed to make “substantial progress” on the reforms by the end of this year.

“If implemented, London would be able to stand toe to toe with our international competitors,” Jonathan Hill, the author of a 2021 government-backed review into UK listings, told the BBC.