FCA New UK Listing Rules 2024: Updates and Next Steps

In December 2023, the Financial Conduct Authority (“FCA”) announced an imminent reform of the rules for listed entities. The new rules are expected to be published through a Policy Statement on July 26th, 2024 and will apply from July 29th, 2024. The new UK Listing Rules (“UKLR”) are a welcome change for market participants, who have long advocated for simpler rules. Its effects will not only be felt by listed entities but also by prospective issuers, investors, sponsors and index providers.

Between 2008 and 2020, the number of companies listed in the UK declined by 40%. In the past year alone, initial public offerings (“IPOs”) fell far behind the US in volume and nominal value, lagging behind Germany and the Netherlands. A sharp decline in listings has led to fewer investment opportunities, wreaking havoc on market sentiment and investor confidence, which in turn further decreased interest in IPOs.

The UKLR aims to revitalise the UK public markets by simplifying the listing regime. As the summer deadline inches closer, preparedness will be the differential factor between losing out on greater flexibility and harnessing the full benefits of the new rules. Looking ahead, listed firms will require a plan to navigate through the most consequential reform to the listing rules to date. By seeking a bespoke understanding of the UKLR’s implications and elaborating a thorough compliance plan, the uncertainty ahead can be traded for a competitive advantage in the new and reformed UK public market. This article considers six key areas firms should monitor to stay ahead of the UK Listing Rules that will apply from 29 July 2024.

Under the Financial Services and Markets Act 2023, the FCA has a secondary objective to facilitate the growth and international competitiveness of the UK economy. The FCA’s CP23/31 gave us a preliminary look at the new UKLR. The reform, which aligns with its secondary objective, aims to increase the attractiveness of the public market. The most important changes concern, but are not limited to: (a) simplifying rules towards a disclosure-based regime, which removes mandatory shareholder votes in specific circumstances, (b) removing the premium and standard listing categories and creating new categories and (c) modifying sponsor-related requirements.

After consultations, the FCA identified cost-related concerns for issuers seeking to participate in global mergers and acquisitions. The “price premium” reported by UK issuers limited their ability to engage in global M&A because of the additional burden of time delays, costs and uncertainties with shareholder vote requirements. As a result, the FCA opted to change its supervisory approach and removed mandated shareholder votes for transactions below takeover level, giving more decision-making powers to executives.

The FCA acknowledges that this reform may lead to decreased investor protections, but also recognises the importance of trade-offs in facilitating growth. With nearly 58% of shares in UK-quoted issuers held by investors outside the UK in 2022, the investor base for UK-listed companies is increasingly global. It is also important to note that other international financial centres do not generally impose shareholder votes for major transactions. Reforming policy around this area will only be a welcome change for investors in UK companies, who are likely to be accustomed to simpler rules. Moving forward, the FCA will emphasise disclosures and transparency as essential to investor protection in its new and scaled-back approach to regulation meanwhile also ensuring the new rules align the UK with international counterparts and attract companies to list in the UK.

Structural reforms are key to turning around the public markets’ misfortunes. The UK Listing Review revealed that premium listing standards are regarded as overly burdensome and as a deterrent for companies listing in the UK. In comparison, the standard listing offers much greater flexibility but is still nevertheless poorly perceived by companies and investors. Choosing a standard listing means exclusion from the FTSE Series indexes and less investor exposure, as opposed to the contrary if opting for the premium listing. The benefit of the premium listing, however, does not outweigh the cost of higher regulatory standards. There were no discernible valuation benefits stemming from a premium listing when compared to US-listed companies. Being undervalued and excluded from global M&A is not a selling point for London’s struggling capital markets.

The UKLR addresses this issue by merging the premium and standard categories into a single “commercial companies” category. This amendment aims to simplify the rules and give companies the same chances to grow and evolve through access to capital. Once the UKLR is operational, existing premium listed issuers will automatically be transitioned to the commercial companies category. Standard listed companies will be allocated to a “transition” category, which will act as a legacy category to the standard listing segment. To move into the commercial companies category, the standard listing issuers will need to abide by certain conditions, such as the appointment of a sponsor. Subject to consultation, the transition category may be removed altogether in the medium term. This means that issuers will need to be prepared for the UKLR to allow for a smooth transition to the new regime. In some cases, the FCA may move certain standard issuers into a “shell companies” category or an “international secondary listing” category after relevant assessments, highlighting the need for issuers to assess their respective situations and prepare for upcoming changes.

By modifying the listing categories, the FCA has also upended index providers’ criteria. Currently, the FTSE UK Index Series is only accessible through a premium listing. Upon abolishing the premium and standard categories, index providers will have to reconsider which criteria they consider most appropriate to determine the constituents of a given index.

The UKLR reduces costs across the board, including sponsor-related costs. The new rules generally reduce the requirement for sponsor appointments. When conducting a significant transaction or related party transaction, sponsors will no longer be needed. That said, they remain necessary when listing or when carrying out a takeover. In addition, the FCA’s expectation towards the competence of sponsors has recently changed. Sponsor competencies were amended in April 2024. The new rules, which are enclosed in FCA/TN714.4 and FCA/TN/715.3, will carry on to the UKLR, once published. However, existing sponsors will remain on the list of approved sponsors. The FCA noted that sponsors will remain very important in safeguarding appropriate standards in the market, especially when dealing with companies which may have a shorter track record when coming to the market. This may signal a bespoke approach to sponsor appointments, for instance, when issuing shares in special purpose acquisition companies.

?The UKLR will be published on July 26th, 2024, and will go live on the 29th. With short deadlines and a rapidly progressing timeline, listed companies should keep track of these six key areas to not fall behind:

• Regulatory risk assessments: With major reforms in the public market’s constituent categories, standard issuers may be pulled into three different categories. To limit disruption and regulatory risk, issuers should aim to understand which category they may fall into and conduct relevant regulatory engagement to stay on top of compliance duties.
• Compliance framework amendments: While premium listed issuers may see a reduction in regulatory compliance expenses, standard issuers will need to put new measures in place to stay compliant with new standards. Transparency and disclosures will also be key in ensuring investor protection, so while the UKLR enables flexibility, new frameworks should not degrade investor protection.
• Final listing rules: The FCA will enact the UKLR, but the exchanges could have a say on the final rules. Although unlikely, the LSE may mandate slightly different rules on certain occasions. It is important to vet the UKLR against the LSE Listing Rules to verify if there are any divergences.
• Compliance monitoring: After implementing a compliance framework, compliance functions should monitor the effectiveness of these frameworks. It is imperative to continuously improve frameworks by iterating in order to stay compliant, properly flag discrepancies and respond accordingly.
• Stakeholder engagement: Understanding the UKLR’s effects on different stakeholders will be essential to managing relations and limiting friction throughout the transition to the new regime. Investor stewardship will be a crucial expenditure to ensure that shareholders obtain the correct information to navigate a regime, which removes some shareholder protection rights.
• Disclosure and transparency standards: The UKLR emphasises a disclosure-based regime, replacing the mandatory shareholder vote for significant transactions. This gives shareholders significantly more information to inform their investment decisions, which mitigates the risk of reduced shareholder protections.

The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.

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