UK investors sound alarm over London exchange rule changes

Investors expressed concerns about the erosion of shareholder rights set on Wednesday as part of the UK’s financial regulator’s planned overhaul of UK listing rules.

Several fund managers in the UK said a proposed amendment by the Financial Conduct Authority, which would make it easier for companies to register on the London Stock Exchange, would weaken investors’ voting rights and leave them exposed to riskier stocks.

The plans are to boost competitiveness in London in a bid to avoid a corporate exodus from the London Stock Exchange, where the number of companies listed has fallen by 40 per cent since 2008. This year alone has seen Cambridge-based building and materials company Arm. CRH Group eschews the UK for its New York listing.

The FCA’s proposals would eliminate the need for companies to have three years of audited accounts and merge the standard and premium London markets into one category, making them more attractive to early-stage companies to list.

The changes will also be “more lenient” to dual-class shares, which give the company’s founders greater voting rights over common shareholders.

“The whole thing is the deterioration of hard-won protections for shareholders, who give their capital to support companies,” said Richard Buxton, UK equity director at Jupiter, who called the proposals “a massive lowering of governance standards.”

He added: “Allowing changes like dual-class shares is a huge step backwards… If you succeed in attracting companies without three years of audited accounts, for example, there will be scandals and disasters.”

“What we need to tackle this is not the erosion of shareholder equity but reform to develop savings for UK equities. Defined contribution schemes, for example, should be heavily invested in UK equities.”

Caroline Escott, senior investment manager at Railpen, which oversees £37bn of pension assets, said dual-class stocks were “hitting the heart” of “fair and democratic financial markets” by removing voting rights.

David Cumming, head of UK equities at Newton Investment Management, warned that retail investors in particular would lose out on some collateral. “There is a consequence that if you do that, you take on higher risks as an investor. The problem is for (individual) investors who are not well equipped, and they may be vulnerable.”

Meanwhile, Chris Cummings, chief executive of the Investment Association, which represents UK asset managers, said there needed to be “appropriate safeguards in place to provide real benefit to retirees and savers invested in listed companies”.

But other fund managers applauded the proposed changes. Stephen Yu, director of the Blue Well Growth Fund, said the move could encourage more tech companies. “We’ve been investing in the US for technology stocks pretty much over the last few years. There’s a huge ecosystem out there. It’s great that there are changes now in the UK, but the argument is, are we too late?”

Skadden’s solicitor, Danny Trico, defended the move by the regulator. “The FCA must ensure that disclosures are appropriate. However, it should not be the FCA’s job to say that transactions . . . do not meet the rules and therefore cannot be done. This only harms listed companies and therefore their shareholders and investors.”

Simon Thomas, head of UK capital markets at Clifford Chance, also backed the regulator, saying that “the benefits of reform outweigh the (larger) risks of (failure).”

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