The FCA’s stock market reform proposal is both pessimistic and pragmatic

Do the regulations governing listed companies on the UK stock market require the most significant change since the 1980s? Well, it’s difficult to deny that something has gone awry – and was already going awry before the Japanese proprietor of Arm Holdings delivered the latest snub by choosing to list the Cambridge chip-maker, the UK’s tech champion, in New York.

Since 2008, the number of companies listed on London’s main market has decreased by 40%. Meanwhile, pension funds and insurance companies in the United Kingdom have fled to bonds due to their perceived protection. They held 52% of the market in 1990, but now only hold 4%. The atmosphere is not what it once was. And because a dynamic stock market tends to coincide with broader economic health, decline is significant.

Therefore, the default position for evaluating FCA proposals should be openness to change. London must be made “more accessible, effective, understandable, and competitive,” as the chief executive of the regulatory body, Nikhil Rathi, describes it.

Herein lies the issue, however. The grand scheme could be summed up as “if you can’t beat ’em, join ’em” – referring to US markets that have never shared London’s concerns regarding shareholder rights and board governance. It appears that the UK’s financial authorities, under pressure from ministers, have concluded that principles are wonderful until they begin to cost money.

The FCA’s primary proposal is to implement a single listing class. So long to London’s “premium” segment, which could only be claimed by businesses adhering to rigorous governance standards. And, just as in the United States, companies would no longer need shareholder approval for very large transactions or those with related parties.

In addition, London would open the doors wider to tech companies with unequal voting structures similar to those in the United States. As many of us have argued for decades, “equal rights for equal economic risk” is a wholly laudable cause. Thus, it is difficult to generate genuine enthusiasm for the FCA’s vision. In terms of governance, it appears to have regressed by roughly half a century.

However, herein lies the problem for us purists: there is little sense in attempting to administer the world’s most protection-heavy and moral stock market if fewer and fewer people wish to use it. This path leads to irrelevance.

And since speculative governance safeguards have proven ineffective in preventing disasters like Carillion and NMC Health, it is reasonable to question whether London’s lofty aspirations were always a mirage. Consequently, it is feasible to view the regulator’s policy reversal as both depressing and pragmatic.

Not only does the United States not use the perplexing “premium” and “standard” categories, but almost no other country does so either. Yes, one can commend the principle behind shareholders’ deal-blocking rights while also recognising how they can deter new entrants. A UK premium-listed company that is presently required to issue a prospectus to conclude a large transaction is at a disadvantage when competing to acquire the same asset as a foreign-listed competitor.

Whether or not the related party regulations were the deciding factor in the Arm case (accounts vary), it is evident that listing in London is viewed as involving complications. Prestige may still matter in some circles, but not all. Sir Jonathan Symonds, chairman of GlaxoSmithKline, stated last week that the “scales are tipped against” listing in London, a statement that holds true for the lesser companies in his industry. Biotechnology is a growing industry in the United Kingdom, but a significant number of the finest corporations have relocated to New York.

Rathi concedes that the proposed new structure “will entail transferring greater investment risk to investors and increasing shareholder accountability for the companies they own.” In other words, protect your own interests because the regulator will not be looking out for you. Yes, it is best to be straightforward about what this new philosophy would entail: increased hazards. There are no complimentary meals.

One suspects that the FCA will come under pressure to modify a few of its proposals, particularly those pertaining to the ability of shareholders to reject foolish transactions proposed by overly ambitious management. And the leading index provider, FTSE Russell, could do everyone a favour by developing a product that excludes companies led by aspiring Zuckerbergs brandishing filthy gilded shares.

However, the FCA’s concepts deserve a reasonable hearing in the round. The current trajectory of the British stock market is towards the graveyard of stability. That is inappropriate.

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