The UK is trying to do something about its dwindling listings. Britain’s financial watchdog wants to spur domestic IPO markets by weakening shareholder protections. Yet making London appealing to fast-growing foreign firms requires wider reforms, and lower standards are only a good idea if investors punish bad governance.
The Financial Conduct Authority isn’t the only watchdog to water down its listing rules, but it has more reasons than most to up its game. The UK prides itself on being a financial hub, but accounted forof global IPOs between 2015 and 2020. Britain is even losing ground in Europe: in 2021, it made up just over a quarter of regional listings by value, according to Breakingviews calculations using PwC data, compared with over half 10 years earlier.
Yet IPO red tape is far from the only stumbling block. There are wider reasons why UK stocks trade at a discount to U.S. ones. Deeper U.S. markets assign higher values to fast-growing technology companies, while regional bourses in the Middle East or Asia are growing. The UK is also making unforced errors: the Conservative government’s messy exit from the European Union means the volumes of shares traded in London is falling, hurting liquidity.
Meanwhile, the new FCA-endorsed weakening standards may lead to bigger shareholder losses and scandals. They may deter some investors, actually hurting liquidity. The UK lacks the same litigious culture in the U.S. that helps inhibit executive excess. Ideally, the FCA’s looser stance will need to be offset by more vigilant investors, but that requires the recent vogue for environmental, social and governance investing to do a lot of heavy lifting.
As such, the new rules may not create a bonanza of London IPOs. To stand up to New York, the UK domestic market will need a deeper pool of sophisticated investors, able to nurture companies before they go public, and follow them afterwards. That will probablyfewer, bigger pension funds for example, more heavily invested in growth equities. Stock market investors may even have to swallow their opposition to U.S.-style executive pay.
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