NBIM warns of ‘consequences’ for FCA stewardship work under listing proposals

News comes as the FCA issues stern warning over quality issues and possible conflicts of interest in sustainability-linked loan market.

person with their thumb down

Norges Bank Investment Management (NBIM) has opposed many of the Financial Conduct Authority’s (FCA) proposals to reform the UK listings regime to make it more attractive for companies, warning that changes to dual class share structures “could have consequences for the FCA’s work on stewardship”.

In its response to the FCA’s consultation, published on Friday, the giant Norwegian sovereign wealth fund said that while it recognised the regulator’s challenges, it was concerned the reforms would weaken investor protections.

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.

In its letter, signed by chief governance and compliance officer Carine Smith Ihenacho and senior ESG policy adviser Elisa Cencig, NBIM raised concerns over the proposals on dual class shares. They said that as a minimum the FCA should maintain the five-year sunset clause, which it is proposing to extend to 10 years.

Broadening the use of unequal voting rights could decrease investor influence, even as the FCA is encouraging investors to play a greater role in engagement, they added.

The proposals have proven broadly unpopular with investors and industry associations in the UK. On Wednesday, 10 of the country’s largest schemes wrote to the FCA warning that the reforms would risk undoing progress made on stewardship, and “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”.

Industry groups including the Pensions and Lifetime Savings Association, the Investment Association and the PRI all also came out in opposition to some of the moves.

NBIM went a step further than many other respondents, opposing the core proposal to merge the premium and standard listing categories. Companies hoping to list on the premium category must accept stricter requirements, and NBIM said that merging the two would diminish the flexibility of the current system.

To road test the idea that proposed reforms would incentivise listings, NBIM suggests instead setting up a third listing category without weakening investor protections in the premium segment of the market.

SLL scrutiny

On Thursday, the FCA also published the results of a review into practices in the sustainability-linked loan market. Although it does not directly regulate the loan market, the regulator launched the review after hearing concerns from market participants.

Among key findings from conversations with stakeholders was that concerns were widespread across both banks and borrowers. The former were concerned about weak targets, while the latter were worried about unwelcome scrutiny if they did miss targets.

One firm the FCA spoke to said that of its 250 SLL transactions, only 30 percent were deemed fit for purpose and only 50 percent of KPIs were viewed as robust.

The FCA said it noted “a general sentiment” among banks that client relationships mattered more than sustainability credentials, which may disproportionately drive decisions to take part in SLL transactions. It also raised concerns that staff may be incentivised by remuneration linked to achieving financing targets, and banks more broadly by achieving sustainable finance “quotas” that may encourage the acceptance of weak SLLs.

The regulator concluded that it would not step in to introduce regulatory standards or a code of conduct, “but we will reconsider this if the market needs it”.