The Financial Conduct Authority has launched a review of the UK listing regime. It has published a discussion paper on the effectiveness of the listing regime and a consultation paper on some more detailed changes to the Listing Rules regarding eligibility for premium listing and the application of the class tests.
Review of the UK Primary Markets landscape
The discussion paper forms part of the FCA's commitment to review the structure of the UK primary markets to ensure that they continue to meet the distinct needs of issuers and investors.
The FCA notes that the standard listing regime is seen as an unattractive option, because of a lack of clarity as to the purpose of the regime and the required standards for listing. The FCA is especially interested in whether it should continue to avoid treating UK and non-UK companies differently.
The FCA observes that traditional secondary listings by large overseas companies are declining in number and that, when a premium listing is not available, the favoured option for overseas issuers is a listing of Global Depositary Receipts. A listing of GDRs is typically targeted at sophisticated investors and inaccessible to the retail market.
The FCA asks whether there should be a distinct international segment for overseas issuers who wish to access the UK listing regime but for whom the existing UK listing requirements are not wholly appropriate. The FCA notes that for such segment to be successful, a package of investor protections, "appropriate to the segment's aims and capable of fostering investor confidence" would need to be developed. The FCA asks for feedback on what a package might contain.
The FCA is also interested in whether a new name for the standard listing segment might be helpful to attract prospective applicants.
Open-ended investment companies
Currently a super-equivalent premium listed regime applies to open-ended and closed-ended investment funds, effectively removing their access to the standard segment. The FCA asks whether premium listing obligations for open-ended investment companies should be removed (except for the requirement to be authorised/recognised). This would allow open-ended investment companies access to the standard segment.
Science and technology companies
The FCA is interested in whether the UK's primary equity markets are adequately supporting growth for science and technology companies. The FCA seeks views on how to improve the provision of "scale-up" capital (which it defines as capital raised by companies starting with at least 20 employees and with an average growth in employees or turnover exceeding 20% per annum over three years) and notes that the resulting risk to investors also needs to be addressed. The FCA highlights that some stakeholders view early-stage companies as inappropriate for public markets.
The FCA also considers some of the changes that have taken place in the UK's secondary capital markets over the past ten years, including a perceived shift towards algorithmic trading strategies and the separation of primary from secondary markets. The FCA notes that some market commentators believe that secondary market activity is increasingly characterised by short-term trading rather than long-term investment considerations. The FCA is keen to explore some of the themes that have emerged in its previous discussions with stakeholders in this area, including whether alternative market structures might better support "patient capital" (investment based on long-term considerations). One question asked by the FCA is whether a primary market requires a continuous secondary market (noting the example of crowd-funding) and, if so, what features a secondary market needs to have.
The FCA also considers measures that might be taken to improve the effectiveness of the UK primary listed debt capital markets (for example, whether there is an opportunity for a new wholesale bond Multilateral Trading Facility and how the prospectus regime addresses retail participation in debt markets).
Enhancements to the Listing Regime
The associated consultation paper looks at a number of technical proposals aimed at ensuring that the Listing Rules continue to meet the needs of issuers and investors. Most proposals relate to the premium segment of the listing regime.
Eligibility for premium listing
Chapter 6 of the Listing Rules sets out the requirements an applicant has to meet to obtain a premium listing. The FCA is proposing changes to LR 6 to ensure that the drafting better reflects the intention of the rules and how they are applied in practice. The FCA is also proposing new technical notes to provide additional guidance.
The proposals include:
- clarifying the application of LR 6, including that a new top holding company which is inserted on top of an existing issuer to undertake a transaction will not necessarily be treated as an applicant for premium listing other than on a reverse takeover; and that LR 6 does not apply to further issues of shares of the class already listed unless this occurs in conjunction with a reverse takeover;
- requiring additional financial information on acquisitions during the three-year track record period to be audited;
- clarifying that the FCA will expect the three-year track record to cover revenues generated in the applicant's desired line of business. The FCA is also proposing a technical note with additional guidance on how to interpret the track record requirements;
- deleting the existing guidance in LR 6.1.13G to LR 6.1.15G on when the requirement for a track record/financial information may be waived (this is misleading, as the FCA does not normally waive the requirements);
- clarifying that that the requirement for a revenue earning track record does not apply to mineral companies. Where a mineral company has been in existence for less than three years, the FCA is proposing that the requirement for representative historical information should only apply to the period for which the mineral company publishes or files its historical financial information;
- splitting LR 6.1.4R (independence of an issuer's business) into three separate provisions (clarifying the need for independence and control of the business) as well as adding additional guidance supplemented by a new technical note; and
- deleting the guidance in LR 6.1.17G and LR 6.1.18G on when the sufficient working capital requirement may be waived, as the FCA has not waived this requirement in recent years and is unlikely to do so in the future.
Concessionary routes to premium listing
One of the requirements for premium listing is a three-year revenue earning track record. The FCA recognises that, in certain sectors, investors use non-financial statement metrics to assess the relevant company's prospects rather than a three-year track record. There are therefore specific rules ("concessionary routes") to listing for companies in those sectors, enabling relevant companies to gain a premium listing by complying with other conditions.
The existing concessionary routes to listing relate to mineral companies and scientific research based companies. In its consultation paper, the FCA proposes a new concessionary route to premium listing for certain property companies that cannot meet the track record requirements in LR 6. These are likely to be companies established within the previous three years which predominantly hold mature assets which generate rental revenue and companies that have been developing long-term projects for at least three years, but which may only be revenue generating at some point in the future.
The FCA notes that investors will typically value these companies by the value of the property assets that they own, rather than by their revenue generation. It is proposing replacing the requirement for a three-year track record with a requirement on the company to:
- demonstrate that it has three years of development represented by increases in the gross value of its assets, supported by a property valuation report; or
- publish a property valuation report that shows that 75% of the applicant's assets by value are revenue-generating at time when they made their application for listing.
The FCA is also proposing new technical notes to give guidance on the existing concessionary routes to listing for mineral companies and scientific research based companies.
Class tests and reverse takeovers
In response to stakeholders' feedback, the FCA is proposing two changes to its approach to the profits test on class transactions for premium listed issuers:
- it will treat the profits test as anomalous and disregard it where the result is 25% or more and all other class tests are under 5%. This will result in the transaction being treated as unclassified. Premium listed issuers would not have to consult with the FCA about this but must still seek the guidance of a sponsor under LR 8.2.2R. The consultation stresses the importance of a sponsor's judgement and highlights the fact that there may be some situations where the sponsor may not think it appropriate to regard the test result as anomalous. For example, this may be where an issuer is to acquire a loss-making entity and the relative size of the target's losses will have a significant effect on the issuer's medium term prospects; and
- in limited circumstances where the
test result is 25% or more and is anomalous, the FCA will allow
premium listed issuers to make certain adjustments to the profit
figures they use to calculate the test. An issuer should apply any
adjustments consistently to itself and the target to ensure a
like-for-like comparison. The consultation proposes that the issuer
can adjust profits in the following situations, as long as the
items are genuine one-off costs:
- costs incurred by the issuer or target in connection with its IPO; and
- closure costs incurred either by the issuer or target, that are not part of an ongoing restructuring that will span more than one financial period.
- In assessing whether the item is a genuine one-off cost, the consultation refers sponsors and issuers to the guidance in the Technical Note – Classification tests (UKLA/TN/302.1).
- The FCA also proposes that the issuer or target may adjust the profit figure for historic financial costs where it has recently completed its IPO and undertaken a capital restructuring.
- All these changes will only apply where the:
- transaction would otherwise be a class 1 transaction or reverse takeover; and
- the issuer has a premium listing. Standard listed issuers must still consult with the FCA before adjusting the class tests or disregarding any results.
At the same time as consulting on these changes the FCA is also seeking views on whether to change the figure used to calculate the profits test. Currently the profit before tax figure is used but the FCA is considering whether other measures may be preferable.
Figures used to classify assets and profits
The FCA proposes to move its guidance in Technical Note - Classification Tests (UKLA/TN/302.1) to the Listing Rules themselves. The guidance states that, in relation to both an issuer and target, class test numbers used to classify assets and profits must be adjusted to take account of transactions completed since the last year end, which are class 2 or larger.
Currently the FCA has discretion to suspend the listing of any securities "if the smooth operation of the market is, or may be, temporarily jeopardised or it is necessary to protect investors". To date the FCA has considered that a suspension of listing may be necessary in a reverse takeover because the market will not have adequate information to operate smoothly. The FCA proposes to change its assumption that a suspension is usually needed on a reverse takeover, because sufficient information should be available to the market by virtue of the company's other disclosure obligations. The FCA proposes keeping its existing approach for shell companies.
The proposed change addresses FCA experience as well as stakeholder feedback that suspending a listing is a disproportionate action which harms investors because it means they cannot trade in the securities of the acquiring party, potentially for a long period of time. Stakeholders have told the FCA that issuers want to avoid any possibility of suspension but are concerned that they may not be able to give the FCA the specific information it needs to decide not to suspend their listing. Feedback to the FCA also suggested that this has the practical effect of deterring some issuers from pursuing transactions altogether and that the current rule could be distorting companies' behaviour when they consider potential transactions.
The FCA requests responses to both papers by 14 May 2017. Revised rules on the matters covered in the consultation paper will be published in the second half of 2017. If the FCA decides to proceed with any recommendations arising from the discussion paper, it will publish a consultation later in the year.
Click here for the FCA consultation paper CP17/04 on changes to the listing rules.
Click here for the FCA discussion paper DP 17/02 on the review of the effectiveness of the listing regime.
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