WIREDGOV

The Financial Services Authority (FSA) has yesterday proposed a number of changes to the Listing Rules that aim to enhance the effectiveness of the Listing Regime. The Listing Rules set out the requirements for companies listed in the UK and are the responsibility of the United Kingdom Listing Authority (UKLA), operating under the FSA.

The proposed changes follow a consultation in January 2012 on the premium listing regime, amid market debate on the issues of free float, minority shareholder protection, corporate governance and the IPO market in general. 

The FSA has discussed its thinking and proposals with the Financial Reporting Council (FRC), which is responsible for the UK Corporate Governance Code, and FTSE. The proposals fall under two headings:

Free float provisions

The free float requirements are set at an EU level and allow the FSA to consider a free float of below 25% if there is sufficient liquidity.  The amount of shares in public hands potentially plays a role in giving shareholders sufficient power to counterbalance a dominant shareholder.  However, the FSA does not believe that an increase in the free float requirement is a proportionate way to address the governance issues that have been raised in this context.  The FSA proposes:

• detailing the circumstances where we might consider modifying the 25% free-float requirement for premium listings, indicating that any modification beneath 20% would be unlikely; and
• removing the requirement for a minimum absolute percentage free float within the standard segment, provided that sufficient liquidity is present.

Corporate Governance

The FSA proposes to further strengthen the Listing Regime by adopting greater corporate governance requirements for companies with a dominant shareholder.  The FSA will increase the tools available to independent shareholders to influence the governance of the companies in which they have invested. These proposals include:

• introducing the concept of a ‘controlling shareholder’;
• requiring an agreement is put in place to regulate the relationship between such a shareholder and the listed company;
• and ensuring that this agreement is complied with on an ongoing basis. This will ensure that the company is managed independently from that shareholder.  

The FSA also recognises the important role that the independent directors play in these circumstances. Therefore it will also insist on a majority of independent directors on the board where a controlling shareholder exists and introduce a new dual voting procedure to allow independent shareholders to have more say in their appointment.

At the same time the FSA is making clear that certain types of company are incompatible with a premium listing including those with voting arrangements that have the potential to subvert or circumvent the investor protections that the premium listing provides.

David Lawton, the FSA’s director of markets, said:

“We believe that these proposals will strengthen the investor protections afforded by the Listing Regime, particularly for companies with controlling shareholders. Of course, it is primarily the responsibility of shareholders to use these new provisions effectively.”

Following the January consultation the FSA also confirms further changes to the Listing Rules in relation to reverse takeover, sponsor regime, externally managed companies, financial information requirements and transactions.

Notes for editors

1. The consultation paper.
2. The FSA took responsibility for the Listing Regime in 2000, since when the Listing Rules have been reviewed on a regular basis. The last review in 2008-10 introduced the premium and standard segments in order to provide greater clarity for investors.  
3. The Listing Regime - In developing and setting out the proposals the FSA have sought first to explain clearly  the nature of the Listing Regime and the way in which other players and regulatory regimes interact with it, and, second, the FSA’s view  of the key  issues underlying the policy debate. In particular:

• The Listing Regime itself focuses on the eligibility of securities for admission to the Official List and the continuing obligations thereafter.  The UKLA does not have the power to make subjective qualitative judgements about a company’s suitability for listing;
• The Listing Regime is a self-standing regime that sets out for issuers the behavioural and governance obligations that they must meet, and for investors a regime that is based on the provision of information to allow them to make active and properly informed decisions.  So, while the FSA recognises the importance attached to indexation by  both issuers  and investors, the FSA does not believe that the Listing Regime should be driven by the needs of issuers seeking indexation or by the needs of investors who have chosen to base their investment decisions  on passively tracking an index;
• In relation to corporate governance, the FSA believes that the current comply or explain approach against the FRC’s UK Governance Code, as  required by the Listing Regime for premium listed issuers,  is overall the right one.  But the FSA also recognises that an effective framework for securing the high standards of behaviour required within the premium segment needs to accommodate situations where disparate shareholders are less able to exert influence on an issuer’s governance.  This is particularly so where the low number of shares held in public hands means that a single dominant shareholder can exert effective control over an issuer’s decision making. In these situations we believe there is a case for incorporating into the Listing Rules some requirements for Premium issuers that are at present subject only to the FRC’s comply or explain provisions.
• The FSA believes that investors play a very important role in holding companies to account, that an important function of the Listing Rules is to ensure that investors have the tools to exercise this influence and that the effectiveness of these tools will be diminished if investors choose not to exercise their stewardship responsibilities
• In relation to free float, we are keenly aware of the potential role that the amount of shares in public hands plays in giving shareholders sufficient power to counterbalance a dominant shareholder.  But we also believe that free float would be a blunt tool even if used explicitly to ensure effective governance in a company.  In addition we are also aware of the concerns held by the sell-side    that any increase in free float would risk damaging London’s attractiveness as a market for IPOs.

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
5. The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013. The Financial Services Bill currently undergoing parliamentary scrutiny is expected to receive Royal Assent by the end of 2012.