That sound is a “dirty great hoover . . . on full suction mode”. Lord Jonathan Hill, who two years ago began the process of reforming London’s listing regime with his eponymous review, was referring to the US Inflation Reduction Act sucking investment out of Europe. He may as well have been talking about London’s capital markets.
The risk, ironically, of subsidies in drawing money towards the land of the free, said Hill, is that it “reinforces the mentality that the US is . . . where you want to be for business.”
It is that sense of emergency that rightly underpins the UK financial regulator’s proposal for the biggest shake-up of listing rules since the 1980s, loosening rules around dual-class share structures and ditching other treasured planks of investor protection in the London market.
The threat of London-listed groups opting to move their listing stateside, such as CRH and Flutter, and public companies being gobbled up by private equity could get worse before it gets better. With no initial public offerings, unoccupied equity market types are spending their time on strategic listings reviews for marquee clients, say advisers. There seems little chance of a recovery in listings this year, breathing new life into a shrinking market.
Private equity is back with a bang: there have been nine take-private approaches so far this year, according to Refinitiv, compared with one in the same period last year. Buyout groups themselves think it’s a terrible time to sell, something that should give boards pause for thought: secondary buyouts from one private equity shop to another have vanished. That trains more firepower on the public markets where, said one banker, owners tend to be “pragmatic” (or short-termist) about valuations.
There is a danger of a self-fulfilling prophecy here. The idea that the US is a lightly regulated, easy-going market is laughable. Companies that move or list there don’t automatically flourish, particularly as inclusion in the index is down to the S&P committee’s discretion. Companies (and bosses) who moan about the attention they get in the UK may get a dose of ‘be careful what you wish for’ when they’re ignored in New York.
But the sense of crisis has pushed the Financial Conduct Authority to move further, faster.
It is proposing to scrap London’s premium market segment, with its higher governance requirements, in favour of one listings route. A confusing proposal made last year to maintain optional “supplementary” obligations is gone. Rules on dual-class shares — first permitted in limited fashion by the Hill review — will be more liberal. The related-party regulations, which use shareholder votes to prevent a controlling investor taking advantage of their position, would shift in favour of disclosure and a third-party fairness opinion.
This absolutely amounts to a watering down of investor protection in the London market. But there is limited virtue in being the safest market in the world that nobody wants to use. The regulator has found a reasonable balance. The intention is that dual-class shares, say, are available only on listing and to company founders, with a 10-year sunset clause.
Disclosure-based standards, or the caveat emptor approach, rely on good, productive, robust engagement between investors and the companies selling shares — a relationship that many in the London market would tell you has become entirely dysfunctional. The next challenge could be thrashing out a better understanding between companies and big investors on tricky issues including remuneration — where the City seems impossibly torn between European social angst and US capitalist excess.
Meanwhile, the best defence against a relentless race to the bottom on standards is to address other problems, such as the availability of domestic capital.
Regulation, as the FCA has said on repeat, can’t do everything. That means difficult, long term reforms to consolidate pension pools — a matter for the government. And quite possibly a change of attitude. Julia Hoggett, chief executive of the London Stock Exchange, has suggested that London got complacent as the dominant centre in Europe and needs to be “scrappy and hungry” to compete.
This overhaul feels like the end of an era: one where London successfully held up its “gold standard” of governance as a competitive advantage globally. The question, as yet unanswered, is what London thinks it can be next.