The Financial Conduct Authority’s new rules for companies listing on the London Stock Exchange came into force on 29 July 2024. The effect of the rules is to loosen requirements and reduce the amount of red tape required for companies to list on the UK’s financial markets.
In this article, partners Lorraine Lanceley and Harry McGowan consider the potential impact of these changes on investor protections and the increasing importance of securities litigation in ensuring the success of the UK’s financial markets.
Why are the new rules controversial?
The FCA has stated that the changes are intended to create a “simplified listing regime with a single listing category, with streamlined eligibility and ongoing requirements, aimed at encouraging a greater range of companies to list in the UK and compete on the global stage”.
Concerns have already been raised by global investors due to the potential watering down of investor protections and corporate governance standards, with the International Corporate Governance Network stating that “the voice of investors, whilst being heard, seems to be being ignored”. However, it remains to be seen whether the changes will ultimately attract more companies to list in London and whether institutional investors will increase investment in the UK given the reduced protections.
While excessive red tape (and the administrative burden that puts on companies) may be off-putting to businesses wishing to list, the perception that the UK financial markets may not be robustly regulated and do not protect investors from bad actors could deter global investors. Investor protections are critical to the success of any financial services market. The FCA’s changes to the listing rules run the risk of undermining confidence in the UK’s capital raising regime and thereby stymying growth due to a lack of investment from global investors.
The role of securities litigation in investor protection
If investor confidence in the capital raising regime is dented, investors may naturally look to “after-the-event” protections that exist by way of a robust and effective liability regime – ie the ability to sue issuers for losses suffered as a result of misstatements to the market pursuant to the statutory regime set out in Sections 90 and 90A/Schedule 10A of the Financial Services and Markets Act 2000 (FSMA).
The securities litigation landscape under FSMA has undoubtedly grown in recent years and we are seeing a rise in shareholder actions brought pursuant to FSMA to remedy losses suffered by investors in listed shares due to bad actors within public listed companies.
However, if investors are going to look to FSMA to plug the inevitable investor protection gap introduced by the listing rules changes, the redress mechanisms need to operate effectively and efficiently to enable shareholders to obtain fair compensation (within a reasonable timeframe and at a reasonable cost) if/when it is revealed that a bad actor has lied to investors when raising money pursuant to the new rules.
Does the introduction of the new listing rules therefore bolster the case for reform – whether of FSMA directly and/or the Courts’ approach when interpreting certain threshold requirements and/or permitting certain approaches to case management of these claims? It remains the case that the cost for investors to achieve redress in the UK is significantly higher than in the USA and this is a further competitive disadvantage when trying to attract global investors to the UK.
Moreover, as the legal landscape stands, there is currently a live risk that the reliance requirement that exists within Section 90A/Schedule 10A could be interpreted by the Courts to deprive nearly half of all institutional investor claims (see Various Claimants v Barclays Bank PLC (FL-2020-000051 and FL-2022-000002)). This is on the basis that index funds, which invest based on algorithms, may be unable to demonstrate that they actively relied on the relevant misstatements and/or omissions (something that was unlikely to be a live issue when Section 90A was introduced given the dominance of active investment at that time).
Conclusions
It is all very well to loosen the UK’s listing rules to attract companies to list on the London Stock Exchange, but there are at least two parties to a transaction and the UK needs to do a much better job of attracting large institutional investors to invest in UK listed companies. Part of that is giving those institutional investors better protections and redress when they have been lied to by dishonest companies.
Policy arguments such as these may very well weigh in the minds of the Commercial Court (when determining the outcome of the strike-out applications brought by Barclays last week in respect of index investor claimants) or the Court of Appeal when it considers later this year whether or not to permit securities cases to proceed by way of representative actions via Civil Procedure Rule 19.8 (see Wirral Council v Indivior plc (FL-2022-000017 and FL-2022-000018) and Wirral Council v Reckitt Benckiser (FL-2022-000019 and FL-2022-000020)). As to the latter, such a move would arguably take the UK securities actions regime one step closer to the class action regimes of the USA and Australia, both of which offer global investors better redress mechanisms.
Whether or not the introduction of representative actions is the right way to proceed, if the UK wants to remain competitive it needs to give investors the confidence to place their money in its capital markets. That requires our legal system to step up to the challenge and show would-be bad actors that it is prepared to hold them to account, as well as giving redress to institutional investors that have lost money due to those bad actors (irrespective of the basis upon which they have invested).
The securities litigation landscape
Our previous article gives further background on how the securities litigation landscape in the UK is changing and the role it plays in investor protection, including the inherent and fundamental purpose of the FSMA regime to scrutinise issuers’ conduct.
You can find further information regarding our expertise, experience and team on our Securities Litigation page.
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