Proactive Investors - The stage is set for a massive shake-up in the London capital markets with the UK Financial Conduct Authority (FCA) launching a consultation that could lead to major deregulation of one of the world’s premier stock exchanges.
Changes in the pipeline include a streamlining of the standard and premium listing requirements, easing up rules around dual-class share structures and a scrapping of mandatory shareholder votes on certain business decisions such as mergers and acquisitions.
“Like a bouncer at a night-club, the London market has traditionally adopted a stricter dress code than most when it comes to listing rules, whether in the form of restricting dual-listings, votes on major transactions or requiring fuller levels of disclosure when raising capital,” said Kevin Doran, managing director of D2C and investments at AJ Bell.
Doran’s take on today’s proposals?
He called them the “effective equivalent of asking the club-goers whether they’re willing to let the trainer-wearing ruffians in, in order to keep the party going”.
Which beggars the question, will these ruffians cheapen the party?
In other words, will London plc valuations, already heavily discounted in comparison to those across the pond, fall even further if The CIty’s elitist attitude gets taken down a notch?
Stay classy London
Liberalising the regulations around dual-class structures, which give preferential voting rights to certain shareholders, would be an enticing offer for company founders hoping to retain a controlling interest in their company.
But dual-class structures could also end up driving investors away.
One wonders how different the Facebook-cum-Meta story would be if Mark Zuckerberg didn’t have an iron grip on voting rights, all because of the social media giant’s dual-class structure.
There also remain questions over sponsor requirements and revenue criteria, which differ between standard and premium tiers.
For instance, companies do not require a listing sponsor under standard listing rules, but must nominate one for a premium listing.
“I think there's a risk that if you just go for a single category, potentially it would be the worst of both worlds,” said Nigel Gordon, capital markets partner at London law firm Fladgate.
“I think it's useful to have the two categories because people know that at the premium level, you get a lot more disclosure, there's a lot of rules and so on,” he added.
If the Square (NYSE:SQ) Mile pips for a lower bar of entry, Gordon reckons that “if you had exactly the same company, and one was on a more regulated regime than the other (i.e. US), probably you would put a higher valuation on the one that had more regulation”.
However, Gordon said he would “cautiously welcome the proposed changes”, stating that the recent spate of companies moving from London to Nasdaq (or going directly to Nasdaq) shows that change is necessary”.
The flipside to the valuation argument is that a regulatory overhaul would have a minimal impact, if any, when comparing the influence larger macro factors have on the markets.
Doran suggested that the discounts applied to UK plc are more a “result of the declining allocations of UK stock in the global index” and any pivot on regulatory standards is unlikely to change that.
Furthermore, we don’t yet know what will come out the other end of this consultation, or if, indeed, the ruffians will end up ruining the party after all.