Background to proposals

The Financial Conduct Authority (FCA) published a discussion paper on 26 May 2022 in which it is seeking views on the proposed replacement of the standard and premium segments of the Official List for equity shares in commercial companies with a single segment instead.

The proposals follow on from Lord Hill’s recommendations for changes to the U.K.’s existing listing regime. For more information on the listing review, please see our article here. A number of changes have already been made to the existing listing regime, including:

• Increasing the minimum market capitalisation (MMC) threshold for both the premium and standard listing segments for shares in ordinary commercial companies from £700,000 to £30 million.
• Allowing a targeted form of dual class share structures within the premium listing segment to encourage innovative, often founder-led, companies onto public markets sooner and so broaden the listed investment landscape for investors in the U.K.
• Reducing the amount of shares an issuer is required to have in public hands (i.e., free float) from 25% to 10%, reducing potential barriers for issuers created by current requirements. This applies both at the time of listing and as a continuing obligation.

One of the recommendations contained in Lord Hill’s report was that the standard market segment of the Official List should be rebranded. Underpinning this recommendation was an intention that listing should be open to all types of companies, that the FCA should set minimum standards of eligibility for listing to ensure quality is maintained and also a need for flexibility. As a result of this recommendation, the FCA launched a consultation on the purpose of conducting a listing in order to understand what features a rebranded standard listing segment should have. The latest discussion paper sets out the feedback received by the FCA and its proposals for significant reform and seeks further views on those proposals.

What are the key objectives of the review?

The objectives of the reforms are:

• to ensure that the value of listing is simpler to understand by removing complexity that is not serving a genuine and defined purpose;
• to 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;
• to 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
• to allow issuers and investors flexibility to agree where additional shareholder engagement, overseen by the FCA, is appropriate.

The current listing framework

Admission to the FCA’s Official List is distinct from the admission to a trading venue. Currently, the Official List is divided into two segments, although within each segment there are also a number of listing categories for different types of securities to be admitted. Different rules govern these different categories and set both the eligibility criteria for being admitted to the Official List for the first time and additional obligations that are applicable on an ongoing basis.

Under the existing framework, equity shares can be listed in either the premium or the standard segment, with most other securities only capable of being listed in one of the two listing segments.

The primary reason for having two listing segments is as a result of EU minimum standards that were set under the Consolidated Admissions and Reporting Directive and Transparency Directive. The super-equivalent corporate governance standards which applied to a listing on the Official List prior to the introduction of the standard segment were retained in the premium listing segment instead.

Following the U.K.’s departure from the EU, the U.K. is no longer required to maintain a market with minimum standards, which has given the U.K. Government greater flexibility to decide how it wishes to organise the London markets going forwards.

Reasons for changing the current listing regime

The main reasons for changing the current listing regime are:

• To reduce the complexity associated with two segments for one type of security as well as multiple public markets for the same type of security.
• Now that a market based on EU mandatory minimum standards is no longer required, it is not clear what purpose the two segments serve for equity shares in companies.
• Eligibility requirements that have been in place for around 40 years, subject to minor revisions, may no longer meet the needs of new economy companies or more sophisticated investors.
• A multiple segment model suggests a hierarchy within the markets, where one segment is considered superior to the other. A standard segment should still provide the flexibility that companies see as lacking in the existing premium segment to be accommodated alongside the high level of shareholder protection that investors expect.

Key features of the single segment

The key features of the single segment would be:

• A single set of universal eligibility criteria based on the current premium listing requirements.
• A robust, minimum set of continuing obligations following listing (“mandatory”) with issuers having a choice to adopt further additional obligations (“supplementary”).
• All issuers would be denoted as having a "UK Listing" without segmental distinction, although levels of continuing obligations compliance would be clearly labelled.
• The sponsor regime would be retained and the appointment of a sponsor would be extended to all companies listing on the new single segment.

Eligibility requirements

The new single segment would have a single set of universal eligibility criteria based on the current premium segment eligibility requirements.

All issuers listing on the new single segment would also be required to appoint a sponsor. This would, in the FCA's view, remove any eligibility differential between issuers at the point of listing.

The paper also proposes replacing the current premium financial eligibility requirements with a disclosure-based regime that would allow investors greater scope to consider the financial characteristics of each issuer on an individual basis. This would remove the long-standing premium listing requirement for a three-year representative revenue earning track record, three years of audited historical financial information representing at least 75% of the issuer's business and a "clean" or unqualified working capital statement (which the FCA acknowledge in any case may remain important to investors).

Sponsor regime

The paper outlines that the FCA considers the existing sponsor regime is key to delivering its desired outcomes for the U.K. equity markets. The FCA is, therefore, seeking views on whether the sponsor regime should generally remain the same as now but be expanded to all issuers of equity shares in commercial companies listing on the single segment. The 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 may be required after initial listing, as part of fulfilling the continuing obligations of issuers in the new single segment, would depend on the design of the single segment.

Whilst the FCA considers that its proposals would extend the sponsor regime to a wider range of issuers, other changes (such as making the significant transactions regime "supplementary" or raising the class test thresholds) may result in fewer occasions across an issuer's life cycle where a sponsor is needed. This could reduce the need for support from sponsors. 

The paper also acknowledges feedback received on possible inefficiencies in the sponsor regime and seeks further input on these, including record-keeping obligations, conflicts of interest and fee structures.

Dual class structures

The FCA is seeking views on the eligibility of dual class structures for the new single segment. One option proposed by the FCA would be to restrict the new single segment to dual class structures that satisfy the recently introduced requirements for premium listing. These include restrictions on when the weighted voting rights are exercisable and a requirement for the weighted voting rights shares to be held by directors. The FCA acknowledges that this approach would be less flexible than the current regime, which allows dual class structures that do not meet these requirements to list on the standard segment. However, it notes that when consulting on the recent premium segment changes, the FCA received considerable negative feedback in relation to permitting less extensive safeguards than those that were ultimately implemented.

Continuing obligations

As described above, the FCA is proposing to offer companies the choice of complying with supplementary continuing obligations on top of mandatory obligations that would apply to all issuers in the single segment. An issuer would decide during its IPO process whether to opt into the supplementary obligations.

The FCA has proposed that mandatory continuing obligations should focus on transparency and protecting shareholders where the interest of management or a significant shareholder may differ to that of the shareholders. Supplementary continuing obligations are those existing premium listing obligations that provide enhanced protections for shareholders.

The proposed split is as follows:

Mandatory

• Control of business (retaining the adjusted regime for mineral companies)
• Related party transactions
• Constitutional arrangements (one share one vote)
• Shareholder approval for Cancellation of Listing
• Rights issues/open offers
• Externally managed companies
• Employee Share schemes
• Discounted option arrangements
• Dealing in own securities and shares
• Pre-emption Rights
• Comply or explain provisions (U.K. Corporate Governance Code, climate-related financial disclosures and diversity and inclusion related disclosures)
• Disclosure Guidance and Transparency Rules
• Market Abuse Regime

Supplementary

• Controlling shareholder regime
• Independent Business
• Significant Transactions (including shareholder vote for reverse takeovers) – additional consideration being undertaken regarding class test thresholds.

Transitional provisions

The FCA is proposing that there would be transitional arrangements for current standard listed companies. Current standard listing issuers would not be forced to either move to the new single segment or de-list. Conversely, those companies that want to move to the single segment would be able to do so, but would need to undergo an eligibility assessment with the FCA.

For existing premium listed companies, the FCA is proposing that those companies would be able to decide which obligations they wanted to adhere to (mandatory or mandatory and supplementary), discuss this with their shareholders and seek shareholder approval for their decision.

Next steps

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

Disclaimer: This publication is provided by Armstrong Teasdale Limited for informational purposes only. The information contained in this publication should not be construed as legal advice. Any questions or further information regarding the matters discussed in this publication can be directed to Armstrong Teasdale’s U.K. Capital Markets team.