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UK Primary Markets Effectiveness Review

Letter to the Financial Conduct Authority, 28 June 2023.

We refer to the Financial Conduct Authority’s consultation on the Primary Markets Effectiveness Review: Feedback to DP22/2 and proposed equity listing rule reforms (CP23/10). We appreciate the opportunity to contribute our perspective. 
Norges Bank Investment Management is the investment management division of the Norwegian Central Bank (Norges Bank) and is responsible for investing the Norwegian Government Pension Fund Global. NBIM is a globally diversified investment manager with 12,429 billion Norwegian kroner at year end 2022, 51,7 billion of which invested in the shares of UK companies. We are a long-term investor, working to safeguard and build financial wealth for future generations.

NBIM is a long-term investor supporting well-functioning and transparent markets. NBIM primarily invests in equities listed on regulated markets, therefore we have an interest in these listed markets reflecting the value creation of the economy, including new and growing businesses. NBIM understands the objective of maintaining the attractiveness of the UK as a global capital market, and recognises the challenges linked to the reduced number of IPOs over recent years. However, we are concerned that the suggested reforms to the listing rules would result in weaker investor protection and could harm the UK’s reputation as a market with high corporate governance standards.

We do see some scope for simplifying the requirements in the listing rules or the corporate governance code, but this should not come at the expense of weakening investor protection. We appreciate the FCA’s openness about the consequences of the proposed reforms in terms of higher risk being shifted onto minority investors, and the resulting need for market-based due diligence by the largely institutional investor base in UK equities. However, the required monitoring is likely to result in increased costs and reduced efficiencies.

We are concerned about the FCA’s proposal to broaden the availability of dual class shares and to remove shareholder votes on both related party transactions and significant transactions. We believe that the “one share, one vote” principle is the best regime to secure the fair treatment of all shareholders. Voting rights should be aligned with cash flow rights to ensure that shareholders have the appropriate incentives when exercising their voting rights on fundamental decisions concerning the company. Any deviation from this principle, to incentivize founders and owners to seek listing or otherwise, should be strictly contained in both magnitude and duration. At the very least, the FCA should maintain a sunset clause aligned with the current limited dual class share regime, i.e. at 5 years, rather than extending it to 10 years. The reforms could also have consequences for the FCA’s work on stewardship. As the FCA is encouraging investors to play a greater role in their engagement with companies, broadening the use of unequal voting rights could decrease their influence. Voting is an important tool that allows shareholders to hold boards into account and can be used as an escalation tool as part of stewardship strategies.

Furthermore, we believe that the shareholder approval for related party transactions (RPTs) and significant transactions has effectively reduced the incidence of value diluting corporate events and has been an efficient tool protecting the interests of minority shareholders. We are not convinced by the argument that the insignificant number of RPT votes held in 2017-22 points to the limited added value of this rule; on the contrary, be believe that it proves how the requirement has acted as a powerful dissuasive mechanism. We also note that a majority of jurisdictions surveyed by the OECD in its Corporate Governance Factbook require shareholder approval under certain conditions.

In respect to the FCA’s proposal to replace the existing premium and standard listing categories with a single category, we believe that it would diminish the flexibility of the current system, under which companies seeking to list can either elect the premium listing category and associated stricter requirements, or decide to list on the standard segment and benefit from the simpler regime. If the FCA wished to test its assumption that the suggested reforms could incentivise companies to list in the UK, an alternative could be to create a third listing category where all the proposals could be tested without weakening the investor protection standards of the premium segment. 

We thank you for considering our perspective and remain at your disposal should you wish to discuss these matters further.

Yours sincerely

Carine Smith Ihenacho,
Chief Governance and Compliance Officer

Elisa Cencig
Senior ESG Policy Adviser

Download the letter (pdf)