Ten of the UK’s largest pension schemes have condemned the Financial Conduct Authority’s (FCA) proposals to reform the UK equity listing regime, warning that they would “roll back fundamental investor protections” as well as harming the ability for schemes to carry out stewardship.
The signatories include some of the largest DB schemes in the UK, including Railpen, USS, and Brightwell, which manages the BT Pension Scheme. The Church of England Pensions Board has signed, as have HSBC’s UK staff scheme and Nest. The total assets represented by the letter is around £300 billion ($379 billion; €347 billion).
The FCA launched a consultation on wide-ranging reforms to listing rules in May, as part of its goal to make the UK a more attractive location for companies to list. The FCA proposes to merge the standard and premium listings on the London Stock Exchange, a process that would involve watering down requirements on dual class share structures, and removing compulsory shareholder votes on significant transactions and related party transactions.
The letter says that the proposed reforms will not lead to “healthy capital markets” and would in fact make companies less attractive to long-term investors. The reforms would “diminish the UK’s reputation and attractiveness as the world’s ‘quality’ market, and its role as a beacon for high corporate governance standards and robust investor protections”, it says.
It would as making it more challenging for investors to carry out stewardship activities, the letter says.
Based on discussions with portfolio companies, asset managers and IPO advisers, the schemes say that companies are primarily looking for fair valuations, a stable policy and economic environment and a deep pool of domestic and international capital. Policymakers should look to develop these areas instead, they say.
Finally, the letter says that the necessary evidence to support further changes to the regime 18 months after the previous set has not been provided.
Association opposition
The responses to the consultation were also broadly negative from a wide-ranging series of trade associations and advocacy groups, particularly on the proposals to remove shareholder protections.
While the Investment Association said that overly restrictive listing requirements had put some companies off a London listing, it also said that as currently drafted “the proposals place greater stewardship responsibilities on some investment managers but offer a diminished ability to implement them”.
The influential body said it supported the “vast majority” of proposals, but that the watering down of shareholder protections significantly reduced the means available to assets managers to protect their clients and hold companies to account.
The Pensions and Lifetime Savings Association was more critical, calling for an evidence-based, cross-governmental investigation into the decline in listings, saying it is not proven that governance standards required by the premium listing segment are the root cause of IPO decline.
“As they are set, the current proposals may not result in more companies listing, but will reduce the standards expected of existing companies (diluting quality universally),” said Joe Dabrowski, the group’s deputy director of policy. “The new rules run the risk of having a contrary effect to what is hoped for by potentially reducing the pool of institutional and retail investors willing to invest in UK-listed companies.”
Looking beyond the UK, the International Corporate Governance Network said in a letter that it is unclear whether the proposed changes would help attract listings, and it was concerned that they will harm the UK’s reputation.
It highlighted the proposals on dual class share structures, significant transactions and related party transactions for particular criticism, and warned that “ultimately, the proposals will expose investors to further undue risk, with potentially significant implications for underlying beneficiaries”.
Similarly, the PRI warned that some changes could expose institutional investors to undue risk and undermine stewardship, recommending that the FCA reconsider the proposed reforms.
“The UK serves as a global reference on corporate governance, and relaxation of existing standards can have a ripple effect on corporate governance practices globally,” said Betina Vaz Boni, its governance manager. “The proposed changes by the FCA could curtail escalation opportunities and undermine the impact of stewardship efforts. They also contradict the FCA’s efforts to enhance investor stewardship and align companies’ governance, incentives, and competencies with sustainability considerations.”
James Wootton, partner and co-head of the equities practice at Linklaters, said that the drive to “re-energise London as a market” for equity capital was to be welcomed, but warned that it was “vital that a balance is struck between affording greater flexibility to issuers and founders and maintaining the UK’s global reputation for gold-standard governance and shareholder rights”.
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