MUCH has been written in recent weeks about the question of safeguarding the high standards of London’s listed equity market in the face of a spate of listings of international commodity stocks.
Many of these articles assume it is the role of the UK Listing Authority (UKLA) to insist on full compliance with the Corporate Governance Code, or to use the free float requirement for all listings (which sets the proportion of shares freely available for trading) as a basis for de-listing or refusing to list certain companies or even, in some cases, that the UKLA should regulate inclusion in relevant stock indices.
This misunderstands the UKLA’s role. It also overlooks the benefits the UK derives from providing markets that are attractive for overseas companies and through which investors can choose (or not) to invest in those companies.
The UKLA’s role is not to require compliance with the Corporate Governance Code. The listing rules require companies to disclose whether they comply with the Code’s principles, and if not, to explain why not. That “comply or explain” approach has consistently had strong support from both companies and investors. The Code’s contents are overseen by the Financial Reporting Council, not the UKLA.
It is also a misperception that the UKLA can use its free-float requirements as an arbiter of whether a stock is suitable for admission to listing. These requirements derive directly from European law, and focus on liquidity alone. There has been no suggestion to date that the companies in question have been admitted to listing without sufficient liquidity to ensure the formation of a proper secondary market.
The UKLA’s powers do include the possibility of taking action for inaccurate market disclosure that breaches the listing or disclosure rules. And it is also worth noting that the related party regime which applies to the companies because of their premium listings here has had an important role, enforced by the UKLA, in ensuring minority shareholders are protected in respect of transactions where controlling shareholders have conflicting interests (as the recent ENRC decision in relation to Shubarkol shows).
These related party requirements sit alongside a broader set of investor protections within the UKLA’s premium listing regime that include the class test regime, where large transactions are automatically put to shareholder vote, and the sponsor regime. This latter allows the UKLA to operate a risk-based approach to regulation – deferring to the sponsor duties of diligence, document preparation and director briefing which it would be too onerous for the regulator to perform. This is not to suggest that the UKLA is passive in its role; merely that its regulatory responsibility is also borne by sponsors, who are themselves subject to high degrees of UKLA supervision.
The UKLA’s document vetting role is in itself an important piece of investor protection, but it has as a guiding principle the idea that clear and prominent disclosure provides sufficient investor protection against most risks. In many cases the UKLA seeks to put the investor in an informed position of choice, by ensuring key risks are drawn out and clarified for an investor, rather than deciding for the market as a whole which companies or investments are, or are not, suitable for investment.
The principle of investor choice, as promoted by the UKLA, can be called into question when investors are perceived as being forced into buying stocks by index-tracking mandates whose parameters may be drawn too tightly, for example, tracking the components of the FTSE 100. While this is a charge that is frequently laid at the door of the UKLA, the UKLA has no input into index requirements and cannot have regard to index rules in considering approval of listings.
This narrow question is being addressed in part by FTSE through its consultation on whether to modify its own selection criteria to exclude companies in the FTSE 100 which, for example, fail to meet a specified free float threshold.
However, the recent discussions have opened up a far larger debate than is likely to be resolved by changes to FTSE’s free float requirements and involves many of the long-standing foundations of the UK’s vibrant equity market. This broader debate draws in questions of whether the comply or explain basis of the FRC’s Corporate Governance Code continues to meet the needs of investors, and whether the current investor protections in the UKLA’s listing regime should be further strengthened. This debate will also play out against the backdrop of the passage of the Financial Services Bill, where broader questions still about the balance between international competitiveness and consumer protection continue to be discussed.
Given the importance of what is at stake, this broader debate should be welcomed by all market participants, but it is essential that this debate takes place on a more fully informed basis than has been the case to date.
Andrew Tusa is the chairman of the Listings Authority Advisory Committee (LAAC).
In many cases, the UKLA seeks to put the investor in a position of informed choice