FCA eyes radical reform in Primary Markets Effectiveness Review

FCA eyes radical reform in Primary Markets Effectiveness Review

On 20 December 2023 the Financial Conduct Authority ("FCA") published Consultation Paper CP23/31 which sets out its proposals for significant reforms to its Listing Rules as part of its Primary Markets Effectiveness Review. The publication follows the FCA's consultation published in May 2023 (the "Consultation") and what has been a comprehensive engagement process  with market participants, including multiple roundtables with Senior and C-Suite representatives, a meeting with the Listing Authority Advisory Panel and receipt of nearly one hundred formal written submissions in response to the Consultation.

The FCA's proposals largely reflect the approach set out in the Consultation with amendments  in response to feedback. Its aims have not changed: seek to encourage a more diverse range of companies to list and grow on UK markets, ensure market integrity and investor confidence and streamline the rules, in particular for listings of equity shares by commercial companies.

Revolution, not evolution

The proposals are aimed at reform and seeking to enhance the attractiveness of the UK Listing Regime for a wider ranger of companies. Many of these also maintain the FCA's intention to shift to a more disclosure-based framework:

A single listing category

Companies seeking to list to the Main Market will need to apply to one of five listing categories, each of which will be underpinned by a set of listing principles. For commercial companies, there will be a single category for equity shares, replacing the current premium and standard listed share categories for commercial companies.

The FCA will be taking a mapping exercise for existing "standard" listed commercial companies and will contact issuers in advance confirming which category it proposes they move into. As well as new "shell companies" and "international secondary listing" categories, certain issuers will be mapped to a new 'transition' category. Closed to new applicants, this category will require compliance only with the current rules for standard listed shares, with no fixed end date (although the FCA reserves the right to review the transition category in the future as numbers of participants might reduce due to transfers or other types of exit). Designated issuers in this category will be able to apply, with targeted assistance from a Sponsor, to transfer into the commercial companies category.

Financial information requirements

In relation to financial eligibility, the listing requirements will be less prescriptive and more disclosure-focused. An issuer seeking a new 'primary' equity listing in the UK will not be required to meet minimum track record requirements or provide a clean or unqualified working capital statement. However, prospectuses will continue to require the disclosure of a financial track record up to three years and a working capital statement. 

Independence and control

Companies will no longer be required to have an independent business that possesses operational control over its main activities, although it will need to demonstrate that is it capable of being carried on independently of any controlling shareholder. 

Controlling shareholder situations are one area where the FCA has retreated from its position outlined in the Consultation: accepting that the existing controlling-shareholder regime continues to play an important safe-guarding role, it will remain largely unchanged. New applicants to listing will need to demonstrate independence in running its main business from any controlling shareholder (via a controlling shareholder agreement); and the FCA will continue its 'premium-segment' approach to approving the cancellation of listing and the appointment or re-election of independent directors for companies with a controlling shareholder. 

Dual class share structures

The rules surrounding dual-class structures will be relaxed as initially discussed in the Consultation. Issuers will be allowed to have dual/multiple class share structures at admission with enhanced voting rights to be held only by specified persons- that category itself widened, to include (amongst others) natural persons being employees and shareholders of the issuer. Time-related 'sunset clauses' on such rights will no longer be mandated, instead allowing market practice to develop the consensus on  what is appropriate. There will be restrictions on rights to vote on certain matters which could damage ordinary shareholders economically i.e. placings and share offers at a deeper than 10 per cent discount, but otherwise enhanced voting rights will be permissible on reverse takeover proposals and the election and re-appointment of independent directors when there is a controlling shareholder.

Significant and related party transactions

The rules surrounding significant transactions have been significantly reduced, partly to assist listed issuers competing on the global M&A stage. Transactions meeting the current Class 1 threshold (25%+) will require disclosure to the market but would not- other than in the case of a reverse takeover-  need to be approved by shareholders or by the FCA via a circular. Although such transactions will be subject to enhanced market notification requirements - including an announcement by the board that, in its opinion, the transaction is in the best interests of security holders - the FCA is aiming to prescribe only the most useful information currently required in class 1 circulars by premium listed issuers so that investors fully understand the transaction in question. Even then, the content requirements themselves will be less arduous (particularly regarding financial information) than currently required for class 1 circulars, with no working capital statement needed and no pro forma information to be prepared to prospectus standards.

There will be no continuation of the disclosure requirements currently applicable for Class 2 transactions (i.e. those between 5% and 25% under the various class tests).

The related party regime for cases where related parties meet the 5% threshold of the current tests will also be framed as a more disclosure-based regime with a few additional protections to reflect the nature of related party risks. The mandatory shareholder vote will disappear, leaving board approval, market notification and a 'fair and reasonable statement' (with confirmation by the Sponsor).

Sponsor regime

The role of Sponsors in listings will remain largely unchanged. However, following IPOs the ongoing role of Sponsors supporting listed companies is expected to be more limited. Sponsor input and advice will be restricted to further issuance listing applications with a prospectus, "fair and reasonable" opinions for related party transactions, and providing support where issuers need guidance on the application of, alterations to or seeking waivers of, the FCA rules.

The FCA is looking to widen the factors demonstrating a Sponsor's competency, including by:

  • extending the time period the Sponsor needs to have submitted a Sponsor declaration to the FCA from three years to five years; and
  • recognising that experience providing specified corporate finance advisory services to issuers with securities admitted to a UK recognised investment exchange may be evidence a firm's competence (providing this was undertaken in the previous 5-years at a market capitalisation of greater than £30 million).

Maintaining momentum now key

Further information about the proposals can be found on the FCA website.

With the publication of its revised proposals, it is evident that the potential reforms initially arising from the Hill Review in 2021 continue apace and the FCA has built some momentum behind what will represent a significant overhaul of the UK listing regime. Now it is important that this momentum is maintained. The emphasis must move quickly to finalising and implementing the new rules supporting these changes so that, if and when the global equities markets rebound London is in position to market what it expects will be a more internationally competitive regime.

Responses to the proposals must be submitted by 22 March 2024, except for those in response to the proposed changes to the Sponsor competence requirements which must be submitted by 16 February 2024 to allow Sponsors to manage the transition to the new regime.

The FCA expects to publish the final rules in second half of 2024 with them coming into force two weeks later.


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