In an effort to encourage more companies to float on the London Stock Exchange, and presumably encourage more people to invest in them, the FCA (Financial Conduct Authority) has unveiled a new listing regime which comes into force at the end of July.

The rules – described by the FCA as ‘Big Bang 2.0’ in a nod to the reforms of the mid-1980s – are weighty, running to nearly 200 pages, and we at Shares can’t claim to have read them in full, but they do indeed represent the biggest change to the regime in more than three decades.

So, what are the key points? For starters, instead of Standard and Premium listings there will be a single, ‘streamlined’ listing process with fewer eligibility requirements to make it easier for companies to join the market.

The UK will also move to a ‘disclosure-based’ system where rather than companies having to put big decisions before shareholders for them to vote on, the FCA hopes they will ‘put sufficient information in the hands of investors so they can influence company behaviour and decide how they want to invest’.

As Lindsey Stewart, director of investment stewardship research at Morningstar, says, the operative word here is hope.

‘The new listing rules represent a big gamble that cutting red tape for company founders and executives will unleash a wave of new and innovative businesses listing and raising capital in London’, says Stewart.

However, that ‘red tape’ includes a number of long-cherished shareholder protections which are integral to the UK’s culture of strong corporate governance, says Stewart, and a number of institutional investors claim the rollback of these protections would simply attract more companies with inadequate arrangements to the UK market.

‘It feels as if the reforms could make the UK market a riskier place for investors if we get a wave of companies of questionable quality taking advantage of the relaxed rules and listing in London,’ cautioned AJ Bell investment analyst Dan Coatsworth.

‘The FCA even says that access to a wider range of companies may result in increased risk of exposure to individual company failure. Ultimately, the reforms will put a greater onus on investors to do thorough research before making an investment.’

If we want to make the UK a more attractive investment destination, then rather than watering down the rules to attract lower-grade companies surely we should be tightening the rules on corporate governance to offer better protection to investors, particularly where new and smaller companies are involved.

Along with the ‘de-equitisation’ of the London market as more companies are taken private, there is a steady stream of firms quitting – particularly on AIM – because they claim being listed no longer suits them.

On Monday this week, Destiny Pharma (DEST:AIM) notified shareholders it planned to cancel its listing arguing it stood a better chance of raising funds for clinical trials and product marketing as a private company.

The company already has the backing of 26% of the votes, presumably held by directors and institutions, while minority shareholders have the option to decide on the delisting at a general meeting at the end of the month – which is a case of turkeys voting for Christmas as there will be no official market in its shares, rather there will be a ‘matched bargain facility’.

Shares in the company tanked 65% on the announcement, with more than eight million shares traded compared with an average daily turnover of less than 100,000 as investors tried to salvage something from the dying embers.

According to the Financial Times’ Lex column, more than 100 companies have gone from AIM since early 2020 which is around a fifth of those listed at the start of the decade.

As one reader wrote in the Letters section of last weekend’s FT , ‘The private investor experience of most of these exits from AIM would have, in many instances, offered a significant disincentive to want to support this market again.’

The author of the letter was an investor in a firm which delisted over four years ago arguing, like Destiny and at least a dozen more companies we could name which have thrown in the towel this year, that access to capital would be a lot easier away from the glare of public markets.

In practice, writes the investor, ‘further multiple fundraisings have been agonisingly slow, and shareholder updates have been sporadic and partial’ with no consolidated accounts published for four years and no general meetings, while the matched bargain facility was never put in place.

They go on to add: ‘It would be fanciful to conclude the shareholder covenant implicit in the legally verified de-admission circular has ever been met, but the London Stock Exchange, responsible for the regulation of AIM, seems not in the slightest bit interested in following this up.’ 

Rather than bringing in looser regulation, actually applying the existing rules could do a great deal more to encourage retail investors to support the UK’s push to attract ‘growth companies’ and reinforce confidence in The City.

‘Having invested under AIM’s much-heralded protections and protocols, private shareholders have in effect been abandoned’, laments the investor in closing.

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The editor (Ian Conway) owns shares in AJ Bell. 

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