Ringing in the changes - will regulatory reform boost the UK’s IPO market?

Much has been made of the ‘parlous’ state of the UK’s IPO market of late. Some commentators have described the US listings of companies such as ARM and CRH as ‘blows’ to London, citing better valuations and liquidity prospects in the US, together with the UK’s complex and expensive regime, as key reasons to look Stateside. But companies looking to list should exercise caution. The US is not suitable for all companies, especially those with a smaller market cap who could fail to make even the smallest of ripples across the pond.

Generally, the number of listings across all major Exchanges is down compared to previous years, and so there is a tendency to over-analyse each IPO. Each listing turns on a unique set of facts and no IPO (or lack thereof) should be taken as a bellwether for the general state of the UK markets. Rather than dwelling on the lack of UK listings, it's far more interesting to consider the steps being taken to reinvigorate the UK markets and how successful they are likely to be.

It is easy to lose track of the incoming and proposed regulatory reforms and they are all intricately interlinked. The announcement of the Air Astana dual listing scheduled for February was welcome news, but only a few brave companies are likely to undertake a listing whilst the regulatory landscape is changing and costs unknown.

Reform of the UK Listing regime is underway. The Financial Conduct Authority is working on a new framework for UK flotations and public offers (replacing the existing prospectus regime originating from the EU) and on major reforms to the Listing Rules (with changes to the Listing Rules slated for H2 2024). The aim is to make the UK a simpler and cheaper place to list and grow.

As part of the reforms, the ‘Premium’ and ‘Standard’ listing segments of the Main Market will be replaced by a single ‘commercial companies’ category. Younger companies should also find it easier to meet initial financial reporting requirements. Welcome changes to the need for shareholder approval for significant transactions and related party transactions will also mean listed companies are nimbler in pursuing opportunities to grow and to participate in competitive sales processes.

The secondary markets are also changing. New measures should enable companies to raise funds quicker, more frequently (with adequate shareholder support) and reduce regulatory oversight of larger fundraises.

The UK share ownership regime for traded companies will also become fully digitised (remaining paper share certificates will be dematerialised) but we do not yet know what this will look like and who will bear the cost. The Government’s Digitisation Taskforce put forward and consulted on three primary proposals and is to expected to issue final recommendations by March 2024. Digitisation will likely require changes to the Companies Act 2006 so change isn’t imminent.

A new UK Corporate Governance Code was published on 22 January 2024 (effective 2025), however this came after the Government withdrew earlier draft regulations introducing risk, dividend affordability and sustainability reporting as part of planned wider corporate governance and audit reforms. The Financial Reporting Council followed suit, dropping many of its suggested changes to its UK Corporate Governance Code following consultation and noting that it kept changes to “the minimum that are necessary”. This backpedaling was bought about by companies voicing concerns that instead of simplifying and enhancing the quality of reporting, more onerous requirements were being imposed.

All of this smacks of the age-old paradoxical theory of change. In trying to make the UK more competitive and regulation more streamlined, are the various reforms compounding the problem? They shouldn’t, provided changes are properly scrutinised (corporate governance reform being a good example). But reform is needed quickly. Many companies are holding off making decisions at present.

Whilst indicative timescales for some of the reforms have been outlined, with a looming general election regulatory reform is at risk of drifting and this could be the real ‘blow’ to the UK’s markets.

With interest rates expected to peak, appetite for other investments may dwindle and drive investment in equities. The UK just needs to ensure that it’s open and ready for business.

Emily Dobson is a Senior Associate in the corporate team of law firm Charles Russell Speechlys