Will a major revision of listing rules in the UK work?

0:00Before we begin, we'd love to hear a bit more about you and what you like about this show. We're running a short survey and anyone who takes part before August the 29th will be entered into a prize draw for a pair of Bose QuietComfort 35 wireless headphones. You can find a link to the survey and terms of conditions for the prize draw in our show notes.

0:26Pushkin. The UK is embarking on another big rejig of its stock market listing rules in an effort, yes, again, to fire up and modernise its offering to international investors and stop the London Stock Exchange getting eaten alive by the US. It's been the talk of the city over the past week or so, and it's the big one this time. This is one of the bigger rule rejigs that we've seen in decades. So today on the show, we're asking, really? Again? Will it actually work this time? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at the FT in London.

1:12And here to help us get a sense of all this is City Supremo, Michael O'Dwyer. Michael, thank you for joining us. Thank you for having me. You haven't done this before, have you? Not with you, Katie. I'm sure it'll be an experience. Let's see if he ever agrees to do it again. So, look, diagnose the problem for me here. You know, Brits, we're very good at criticising ourselves and beating ourselves up. But why are we beating ourselves up about the London Stock Exchange? Well, I think the London Stock Exchange, obviously, is something that the UK has been proud of historically, but it's just been getting a bit of a battering in recent years, hasn't it?

1:47We've seen big FTSE 100 companies like Flutter, CRH, plenty of others moving their primary listings to New York, looking for higher valuations, deeper liquidity pools. And it's all just felt a bit miserable, hasn't it? And it's failing to attract the big bumper listings that have been more attainable in the past. And so there's this real will both in the city and also now politically in the UK to try and do something about this, whether any of it works, we can get into, but there's a real effort to try and fix it. No, it's not just a London thing, right? European markets are also a bit like crap, frankly, compared to the US in terms of attracting exciting new companies.

2:25I mean, you look over to the US, you've got the magnificent seven tech stocks, and you've got this huge AI boom. And, you know, Europe and the UK are just sort of looking across the Atlantic at this and saying, why can't we have a bit of this? But we can't. Totally. I mean, I think it's certainly not unique to London. What is slightly worrying, I think, for some people here is that London is not the automatic pick, even within Europe, perhaps in the way that it used to be. I mean, you see things like the big CVC, private equity group, floating in Amsterdam this year. And that does hurt a little bit for people in London who think that should have been us.

2:58So it's not just about, you know, there's an argument that the New York horse has bolted, you're never going to catch it now. But if you can at least consolidate your position as being preeminent within Europe, that will be a start. Yeah, within Europe and also like within emerging markets, like one of the great things that London always had going for it as a stock exchange was that we could attract companies that were looking for somewhere neutral to list. So they don't want to list on like a really small emerging market stock exchange somewhere. They want like a kind of gold standard, properly regulated, internationally recognised exchange list on where there's a deep pool of capital, lots of asset managers.

3:32We're not even really kind of getting them anymore either, right? So something's got to give. Yeah, absolutely. And on top of that, then, I mean, it's not just the sort of competition between venues, but also private capital is, as you've talked about plenty of times here, I'm sure it's just totally changed the game, right? It's a different world. It's no longer automatically a requirement that when you reach a certain size, you've got a list. So everyone's having to work a bit harder, not just London. But yeah, so that's just another thing that makes it that bit more difficult. So why doesn't London just like slash all of its pesky, annoying standards and just let anyone through the door?

4:07And is that what's happened with this set of rule changes here? What's changed? Well, it's slightly funny, isn't it? Because you never quite know what will work until you've done it. and no one can exactly say why people chose to list in London historically and which were the most significant factors. I mean, one thing that is interesting about all of this is that effectively rules are being loosened in London and we'll get into what specific things are changing, I guess. But an overall reflection is that London has historically been very proud of the fact that it is a sort of high governance market that you kind of don't get the sort of level of pump and dump type stocks that you might get on other markets.

4:43It's a bit more shareholder control than there is elsewhere. And so in sort of trying to compete internationally, they're having to give some of that up. And some investors are really not happy about that. So it will be interesting to see how it plays out, but it's almost there's a danger here that the biggest selling point is good governance. And that reputation arguably is going to get diluted by this. So what's the selling point of London if it gives that away in an effort to compete? So who's responsible for changing the rules and what are the main things that they've changed? Right. So this all sits with the Financial Conduct Authority, which is the main financial regulator in the UK.

5:20And the listing rules, basically, there's tons of interlocking sets of rules that lawyers get very excited about and still keep paper copies of on their desk. You know, you don't just have the listing rules, which is what we're talking about, but the separate rules around disclosure and transparency. There's other rules, the corporate governance code about who can be on your board, how long they can sit there. All of that still sits on that sort of pile of lawyers' papers, if you like. Like what's changing in the listing rules? These are the rules that basically govern sort of the day-to-day of listed companies in the UK and also some things around IPOs.

5:50And three changes, I think, to pick out primarily. First is a set of changes that make directors more powerful vis-a-vis shareholders than they used to be. It will allow them to make big decisions for the company without seeking shareholder votes in a way that used to be required once a transaction was of a certain size. Everyone wants to be Mark Zuckerberg, basically, right? Everyone wants to be the big founder that retains a huge amount of control over their company. Is that what this is about? Well, that's part of it as well, isn't it? And I think certainly the decision-making part is about speed a little bit.

6:21Right. But also, to your point about the Mark Zuckerberg thing, the second big set of changes, I suppose, is the loosening of rules around dual-class share structures. So exactly what you described, Katie, where usually a founder is able to keep a separate class of shares and they'll be able to have, I don't know, 100 votes compared to the ordinary shareholder like you and me who will only get one vote per share. And so that allows them to sell down their stake but maintain control. And that's really attractive to many founders because they want to be in control of the ship, even if they're taking investors' money.

6:55and it's something that was harder to do. Not impossible to do, interestingly, in London previously, but no premium listed company had ever used the facility that was there. So query whether this is definitely the big thing that's going to change it. But that's the second big set of changes that's coming. And I suppose the last thing to flag is just that they're simplifying it. In London, you had this sort of twin track, if you want to call it that, process. You had some companies with what's called a premium listing, which had more exacting standards than the standard listing. and a premium listing was something you had to have if you wanted to be included in the FTSE indices.

7:29And obviously people do want to be on those because you get all of that dumb money flowing in through index funds and so on. But there were some extra requirements and effectively what they're doing is they're getting rid of that distinction and you're going to get something in between. So it's less onerous than the old premium setup, but probably a bit more onerous than the standard setup. And so the idea is that that will lead to greater simplicity at least in theory. Of course, in practice, it might be a bit more complex because they're keeping what's called a transition category for companies that are currently on the standard list or standard segment who don't want to move and have higher or better governance immediately.

8:07So how long those guys hang around and stay in this transition period will be interesting. I mean, they could stay there for ages, potentially, in which case the simplification might not lead to that much simplicity at all. Now, in the time that I've been at the FT for the past sort of nine years or so, This is like roughly the three millionth effort to fire up the London Stock Exchange. Why should this all work where all the previous 2 ,999 ,999 have not? Well, maybe it won't work is the first thing to say. But to be a little bit more positive if we can. This is not to be seen in isolation, I think.

8:44The FCA and the government, including the new government here in the UK, and city executives are running around the place sort of trying to do everything they can to you know, zoop up interest in London and not just on the sort of efforts like this to change rules to make London more attractive to companies but also to try and increase the amount of investment in UK companies and that includes things like trying to push more of UK pension funds money into UK stocks for example and the idea is that if you do those two things in tandem You also sort of really lean on the regulators to be effectively less pro-regulation and more pro-business, as the entrepreneurs would put it.

9:27And then in combination, you start to see a cultural shift. You start to see the conversation around London being more positive and that it sort of establishes itself, if not as a true rival to New York, then at least as the sort of preeminent listing venue outside of the US. So that's the theory. Let's see. Let's see how it goes. Yeah, because London's been really good at getting really clever, flinty biotech and fintech companies and all these sorts of things, bringing them up by their bootstraps from nothing in the UK. There's loads of venture capital funding kicking around. There's loads of private equity funding kicking around.

10:02And when they get big enough and hairy enough to say, right, we're going to go and list on a stock exchange. We'll see you later. We're going to New York. That's seemingly what officials have just had enough of, right? Totally. And you can kind of understand why. I mean, it's this sense that the UK has become an incubator for great companies and great ideas, has amazing universities. It has a well-educated workforce. It has loads of stuff going for it that you would absolutely kill for in other markets. But then as soon as it reaches a certain size, as you say, these companies just wander off to the US.

10:35And that's over time. I mean, a venue, a listing venue is only a listing venue. It's not determinative of where you do your business in theory. But I think talking to people around the city, they say, look, the reality is that jobs centre of gravity influence the type of people on your board and the geography they know will over time be the US. You just gravitate there, don't you? You just don't see the UK as being quite so important to your existence. And I think that is one thing that's quite interesting because this Labour government that's just come into power in the UK is really talking about trying to boost economic growth.

11:06And I think it sees the financial services sector and the London Stock Exchange to a degree as a sort of a means to an end. I mean, they probably wouldn't say this out loud, but the sense I get speaking to people is that they kind of see financial services as an enabler. If they can find ways and levers to pull that help businesses to stay here, to grow here, to create jobs, to make people better off, to stop economic growth, frankly, being through the floor as it has been for the last decade, then that's what they're really interested in. And if they can sort of instrumentalise capital markets as part of that, then great.

11:38And I think that's their interest in this. It's all part of a bigger whole. So what can go wrong here? I mean, one of the bits that really struck me from your coverage of all this is that even the FCA, which is pushing through this set of changes, even the regulator is saying this is all going to lead to more investors losing their money. And, you know, we're going to have to be careful. people are going to have to be much more aware of the risks of investing in UK companies that are listed through this different sort of framework. So, you know, while you sort of sit around, you know, sipping coffee in the city with city bigwigs, what are people saying to you about what they think the risks are, what can go right and wrong?

12:15Well, I think the first thing to say is the FCA knows exactly what's going to happen as soon as one of these scandals or not even scandals, just bad businesses, collapses, right? They're going to get the blame. They're going to get hold in front of parliamentarians who are going to say, I don't know what any of this is about, but how did you let it happen? You were asleep at the wheel. And of course, it's the MPs, it's the politicians who set the rules in the rules of the road in terms of telling the FCA that it has to be more pro-business. So I think the FCA has been in an interesting position because it's having to read the room a little bit and being like, guys, we're not so hot and wanting more regulation in the UK these days.

12:49We need some more economic growth. And they've been told to actually prioritise that as one of their core objectives. That's new in the last year. And so they're having to sort of read the room, but also be very conscious of the fact they're going to be blamed as soon as anything goes wrong. But, you know, there is cause to be concerned as well. I mean, some of the big investor groups are absolutely furious about this. They say the one thing that London is known for, as I mentioned at the top, is high governance, good governance. We sort of hold the line on that. And now just handing power to management and saying, don't worry, you'll still get disclosure if you're an investor and you can decide not to invest if you don't want to, it just doesn't cut it for a lot of them.

13:26And you had some of the big groups, you know, ICGN, which sort of represents something like 70 trillion, I think, of assets under management from various of the big international asset managers, said I think that it was a disappointing day for shareholder rights, which I think was probably more understated than what people in that part of the world might say, you know, behind closed doors. But I think there really is a fear among some that you risk losing the golden goose. Yeah, we're just letting in any old Tom, Dick or Harry, but, you know, potentially in an effort to kind of boost the numbers.

14:00So, Michael, say I managed to convince you to come back on this podcast in a year's time and we're sitting here looking back on this effort to fire up the London Stock Exchange. Do you think it will be, you know, three millionth time lucky? Do you think this is the set of reforms that's really going to work? I think the IPO market globally might be more open. And so you might see a little bit of activity. I think a lot of the other changes that I mentioned around pension funds and so on will really be still only in their relative infancy. And this is a package of measures. And to be honest, I don't think there's a view, even from many of the supporters of these changes, I don't think there's a view that they're going to move the dial instantly or immediately.

14:37And it's very much if we hit every button and pull every lever all at the same time, hopefully some or all of it in aggregate will work. And I think that's the hope, really. I'm not sure that we'll be sitting here in a year, Katie, and saying, excellent, that's sorted. What's next? Right. But I think the thing that strikes me is, you know, it's a bit like with the change of government over here. It's a signal to investors, even if the, you know, the actual nuts and bolts of what have changed, what's changed might not make that much difference sort of individually. it's this kind of it's this big message that okay new government new broom new impetus new effort to kind of get this all going you know it's hard to see that as a bad thing right totally and i think i think if you listen to people like julia hoggett who's the ceo of the london stock exchange or mark austin who's one of the corporate lawyers who's sort of really been involved in sort of the the sort of boring weeds of drafting a lot of the sort of reports and so on endless reports about the future of London that we've all been reading and talking about in the city for ages now.

15:37They sort of talk about this as a moment and a chance to sell London internationally and say, look at all these things we're doing. We're back. We're listening to the concerns that are there. It gives them talking points. It gives them an excuse to sort of go in and make their pitch and say something positive. And it's at a delicate moment now, right? I mean, if you've got a couple of big listings or a couple of big wins from companies that might have listed elsewhere, then all of a sudden you know the UK starts to starts to look a bit more attractive maybe build a little bit of momentum on the flip side if you don't um maybe this all begins to look a bit like tumbleweed and so you know it's hard to say in advance which of those two things it's going to be yeah I'm all in favor of the good vibes so good luck to them that's what I say right we're going to be back in a sec with long shorts

16:35Alrighty, it's time for Long Short, that part of the show where you can go long a thing you love, short a thing you hate. I know you're new to this, Michael, but it can be anything. TV programme, something that you hate or love on the internet, or something to do with markets. What have you got? I am going to say I'm long professional services as an industry. Good stuff. They are just so good at making money and they just never seem to stop making more of it. You look at all kinds of things, accountants, consultants, law firms. We seem to be writing about them all the time in the FT. Private equity wants to invest.

17:09Partners are getting rich and richer in lots of these firms. And they're just our absolute juggernauts. You look at things like Accenture, the world's biggest and most boring company, just incredibly good at making money. And the pandemic has just juiced all of this. You have these big corporates paying loads of money to put in new tech into their businesses. and apparently you need really expensive consultants to help you figure out how to actually do that. And it just is a juggernaut. And I think there's loads of money being made and loads more money to be made in that industry. So all those clever clogs that I was at university with who went into consultancy and I thought, I don't know what the hell you're talking about.

17:46Turns out they were right. Well, you're probably better fun at parties, but I don't know what that's with. So I am going to be long shorts. I think it's around that time of year where people have this dilemma around, is it okay to wear shorts in the office? It's hot outside. And I think, yes, I think wear shorts in the office. Are you going to do it? I'm probably not, but I'm probably just self-conscious about my hairy legs. You're obviously not having lunches though in private members clubs. I just bumped into a colleague who had been trying to get into a lunch at a private members club and was told, we're very sorry, sir, you're going to have to take yourself to a shop around the corner and buy yourself a blazer because we insist that you dress properly in our establishment.

18:31I mean, that's craziness. It's sunny outside. I hate private members clubs. Maybe that won't be a problem for you then. You can wear shorts and avoid private members club. Okay, listeners, we're going to be back in your feed for more such weighty matters on Tuesday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free.

19:08A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

19:32We'll be right back.