Proposals to attract more high-quality, growth companies and give investors greater choice have been published by the FCA as part of its ongoing review of the effectiveness of the UK's primary markets. Central to the proposals is a new listing regime for equity shares in commercial companies in which a single segment would replace the current premium and standard segments.

Background

In recent months, the FCA has made a number of specific changes to the UK listing regime, including new rules on dual class shares structures in the premium segment, reducing the free float requirement to 10% in both the premium and standard segments and setting a minimum market capitalisation of £30 million for new listings in both segments.

As well as making these specific changes, the FCA initiated, as part of its July 2021 Primary Markets Effectiveness Review, a high-level discussion on the purpose and value of listing, with a view to informing how the listing regime may be made more effective in the longer term. This latest discussion paper, Primary Markets Effectiveness Review: Feedback to the discussion of the purposes of the listing regime and further discussion (the Discussion Paper), sets out the feedback it has received, its proposals for significant reform and seeks further views on those proposals.

Core objectives

To address the concerns identified with the existing listing regime for equity securities, in particular around the complexity of the regime, the costs associated with a listing and the barriers to entry for certain companies, in particular high-growth, innovative companies, the core objectives of the proposals in the Discussion Paper are to:

• ensure that the value of listing is simpler to understand by removing complexity that is not serving a genuine and defined purpose;
• promote broad access to listing for a wider range of companies while continuing to set clear, simple and robust minimum ongoing standards for listed companies;
• empower investors to conduct their own decision-making over the suitability of listed issuers to meet their investment needs through clear, high-quality disclosures; and
• allow issuers and investors flexibility to agree where additional shareholder engagement, overseen by the FCA, is appropriate.

Overarching the proposals is the FCA's intention to uphold the principle that listed markets should represent the highest standards of transparency, corporate governance and shareholder engagement available on UK public markets.

The single segment

Key features

The FCA considers that these outcomes can best be achieved through a listing regime based on a single segment for equity shares in commercial companies which sits alongside unlisted markets.

Key features of this single segment would be:

• a single set of eligibility criteria;
• a robust, minimum set of mandatory continuing obligations;
• the option for issuers to choose to adopt further supplementary continuing obligations; and
• the requirement for a sponsor.

Eligibility criteria

To meet the objective of broadening access to listing to a wider range of companies, the Discussion Paper proposes removing the current financial eligibility criteria for a premium listing that act as a barrier for certain high-growth, innovative companies. These are the requirements for:

• a three-year representative revenue earning track record;
• three years of audited historical financial information that represents at least 75% of the issuer's business; and
• a clean or unqualified working capital statement.

Under these proposals, the single segment would move to a disclosure-based regime, with an appropriately crafted prospectus regime ensuring that investors received sufficient information through disclosures in the prospectus. The Discussion Paper emphasises that the move to a disclosure-based regime for these eligibility requirements is not intended to reduce standards. Rather, it is a move from an inflexible one-size-fits-all standard set by the regulator to an approach that allows investors to consider each issuer by reference to its own characteristics.

In order to eliminate duplication and complexity, the FCA is also considering whether to remove as eligibility criteria those current premium listing eligibility requirements that are also continuing obligations with which an issuer must comply as soon as it is listed. These include, for example, requirements relating to control of the business, carrying on an independent business, controlling shareholders, externally managed companies and constitutional arrangements relating to the company's share structure.

Listing Principles

The Discussion Paper seeks views on whether to apply the current Premium Listing Principles to all listed companies in the single segment, resulting in one common set of listing principles to which all issuers of equity shares in commercial companies would have to adhere. It would, for example, extend to all issuers the principles relating to one shareholder one vote, the equal treatment of shareholders of the same class and communicating so as to avoid false markets. This addition would maintain high standards for all issuers of equity shares in the new segment.

Continuing obligations

Under the proposals, existing continuing obligations in the Listing Rules would be re-categorised into two groups: one mandatory for all issuers, the second supplementary. Key elements of the proposals include the following.

• During an IPO process, an issuer would decide, based on the characteristics of its business and ownership etc., whether to opt into the supplementary continuing obligations. To avoid complexity, the FCA considers that this should be on an all-or-nothing basis
• The mandatory continuing obligations would consist of requirements that focus on:
  • transparency; and
  • protecting shareholders where management's, or a significant shareholder's, interests may be different from that of ordinary shareholders.

• The supplementary continuing obligations would be those premium listing requirements that provide for shareholders to have a greater role in holding the company to account on an ongoing basis.
• The intention would be for the division between the mandatory and supplementary requirements to be narrower than that which currently exists between standard and premium listing, giving issuers a more genuine choice as to whether to apply the supplementary obligations.

The Discussion Paper includes the following suggestions for the split between mandatory and supplementary continuing obligations.

Obligations under the Market Abuse Regulation and the Disclosure Guidance and Transparency Rules would continue to apply as part of the wider continuing obligations.

Scope

In relation to dual class share structures, the Discussion Paper suggests that only those dual class structures permitted to premium listing since December 2021 should be eligible for the single segment.

The Discussion Paper envisages the FCA retaining separate listing requirements, based on the current standard listing eligibility requirements, for the following:

• secondary listings by overseas companies of equity shares in commercial companies;
• special purpose acquisition companies (SPACs);
• shares which are not equity shares (e.g. preference shares);
• debt and debt-like securities;
• certificates representing securities (though the Discussion Paper specifically requests views on whether depositary receipts should be eligible for listing in the single segment);
• securitised derivatives;
• those shares of premium listed closed-ended investment funds that are currently permitted to have a standard listing;
• open-ended investment companies; and
• miscellaneous securities (includes warrants and options and other similar securities).

In relation to the listing regime for closed-ended investment funds, the FCA notes that it has not identified the same drivers for change as for commercial companies, as the reasons for listing and the considerations regarding choices of market are different. However, it is interested in views as to whether any elements of its proposed reforms would also benefit the regime for closed-ended investment funds.

Transitional arrangements

It is likely that the FCA would allow existing standard listed issuers of equity shares in commercial companies to retain their listing in the standard listing segment. This means that those companies that are unable to meet the requirements of the new single segment would not have to delist or change their business structure. Standard listed issuers that wanted to move to the single segment could undergo an eligibility assessment with the FCA and, if eligible, do so.

For existing premium listed companies, the FCA proposal would be to encourage dialogue between a company and its shareholders as to whether the supplementary continuing obligations are appropriate. This would then be put to a shareholder vote.

The role of sponsors

The FCA considers that the role of the sponsor will be key in helping to ensure that robust minimum standards are supported in the single segment, particularly when an issuer first lists.

The Discussion Paper notes that, as the sponsor regime does not currently apply to standard listed companies, a greater range of issuers will be within scope of the sponsor regime on initial listing.

The extent to which a sponsor would be required after initial listing, as part of fulfilling the continuing obligations of issuers in the single segment, would depend on the design of the single segment.

It is possible that certain changes could reduce the need for that support, e.g. if the significant transaction regime were only applied to companies that opt into the supplementary continuing obligations.

More generally, the Discussion Paper asks whether the current rules on sponsor record-keeping and sponsor remuneration could be improved as part of the FCA's overall package of reforms.

Next steps

The deadline for providing feedback to the FCA on the topics in the Discussion Paper is 28 July 2022. The FCA will then provide feedback and consider whether to issue a consultation paper or whether a further discussion paper is appropriate.