David Sol
- The UK listing rules are undergoing a major overhaul at the end of July 2024
- What does this mean for the universe of stocks eligible for the FTSE UK Index Series?
- We explain the new Equity Shares (Commercial Companies) listing category and how the FTSE 100, FTSE 250 and FTSE All-Share indices will change.
As the UK financial regulator prepares to simplify its listing rules, the FTSE UK Index Series will evolve to keep pace.
The Financial Conduct Authority (FCA) is poised to undertake what the Financial Times recently called “the biggest overhaul of the country’s listing regime in 40 years”.
What does this mean for the FTSE UK Index Series, the home of well-known benchmarks such as the FTSE 100, the FTSE 250 and the FTSE All-Share?
How the listing rules work currently
The FCA sets the UK share market’s listing rules via its handbook, which all banks, insurers and investment businesses in the UK have to follow.
Since 2010, the rules have specified two types of share listing—premium and standard. In turn, the London Stock Exchange (LSE) maintains two listing ‘segments’ for these two categories of share.
Premium-listed shares are issued by companies that are expected to meet the highest listing and corporate governance standards. Companies issuing standard-listed shares meet minimum standards that derive from European Union legislation.
Currently, before the incoming changes to the listing regime (see the next section) only premium-listed shares are eligible for the FTSE UK Index Series. However, the FTSE Global Equity Series (our family of global equity benchmarks) includes both premium- and standard-listed UK shares.
Replacing the two listing categories with Equity Shares (Commercial Companies)
With effect from 29 July, the Financial Conduct Authority will abolish the premium and standard listing segments, replacing them with a single category called “Equity Shares (Commercial Companies)”.
What does this mean in practice? Among the principal changes to the listing regime, companies listing Equity Shares (Commercial Companies) via an initial public offering (IPO) will no longer require a minimum three-year track record of audited accounts, as the current listing rules require.
There will also be significantly more flexibility under the new regime for dual-class share structures of the type favoured by many Silicon Valley tech companies. And there will no longer be a mandatory shareholder vote for related party transactions.
Why the changes?
Broadly, the rule changes follow the recommendations of the 2021 UK Listings Review chaired by Lord Hill.
In the Review, Hill said that while the premium listing category had been viewed as a gold standard amongst global stock exchanges, it had had an adverse effect on the number and type of companies joining the UK stock market.
“Between 2015 and 2020, London accounted for only 5% of IPOs globally. The number of listed companies in the UK has fallen by about 40% from a recent peak in 2008,” Hill wrote.
“The most significant companies listed in London are either financial or more representative of the ‘old economy’ than the companies of the future. At one point [in 2020], Apple alone was worth more than the combined value of every company in the FTSE 100,” he went on.
Aligning to international standards
Deciding what goes into and what stays out of the stock market has always been the subject of debate and a reflection of changing investor norms.
Take dual-class share structures, for example. These are now very common in the US equity market, where companies as well-known as Alphabet (Google), Meta (Facebook), Dell and Berkshire Hathaway have at least two classes of common stock.
Dual-class share structures were also common in the UK during the post-war period, when many founding families had minority equity stakes but still controlled companies via restricted classes of shares with superior voting rights. However, by the end of the 1960s, split share structures had become much less popular on the LSE as institutional investors shied away from non-voting shares.
But, as we’ve seen, such structures have re-emerged in the US without raising too many concerns. The new UK listings regime will bring the governance standards in the United Kingdom more in line with the standards of other exchanges in major global financial centres. It should also provide easier access for companies to the UK stock market.
Mapping the market
This brings us to the role of the index provider.
FTSE Russell’s indices are designed to reflect the market universe available to investors. In light of the planned changes to the UK listings regime, FTSE Russell engaged extensively with our Advisory Committees, which consist of representatives from the investor community, to understand how (if at all) we should adjust the FTSE UK Index Series eligibility rules.
As a result of these consultations, when the FCA changes the UK listings rules at the end of July, subject to ratification by the FTSE Russell Index Governance Board, Equity Shares (Commercial Companies) will become the eligible index universe for the FTSE UK Index Series, replacing the premium segment.
The index impact of the change is likely to be small in the short term.
Due to the automatic mapping of premium-listed companies to the Equity Shares (Commercial Companies) category on day one of the new regime, there will be no immediate impact on the FTSE UK Index Series’s composition.
Similarly, closed-ended investment funds with a premium listing will also map automatically to a new closed-ended investment fund category and retain index eligibility.
What about companies with a standard listing? In time, some of these companies may join the FTSE UK Index Series if they decide to transition to the new Equity Shares (Commercial Companies) category. Initially, however, companies with a standard listing will join a new “transition category” under the post-July listing regime.
To give an idea of the potential future index impact, in January 2024 three UK companies with standard listings were provisionally eligible for the FTSE 100 index because of their size (collectively representing 3.71% of the index by weight).
FTSE Russell’s role is to ensure that its indices remain fit for purpose. Central to the evolution of indices is a constant dialogue between pension funds, insurance companies, asset managers, banks, regulators, academia, consultants and other stakeholders on the best way forward.
The latest changes to the universe of stocks underlying the FTSE UK Index Series are another good example of this interaction amongst professional participants in the financial market.
For more detail on the impact of the proposed changes to the UK listing regime on the FTSE UK Index Series, please read our summary and FAQ on the subject.
Disclaimer
© 2024 London Stock Exchange Group plc and its applicable group undertakings (“LSEG”). LSEG includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) FTSE (Beijing) Consulting Limited (“WOFE”) (7) Refinitiv Benchmark Services (UK) Limited (“RBSL”), (8) Refinitiv Limited (“RL”) and (9) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL, and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “Refinitiv” , “Beyond Ratings®”, “WMR™” , “FR™” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of LSEG or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator. Refinitiv Benchmark Services (UK) Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by LSEG, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical inaccuracy as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or LSEG Products, or of results to be obtained from the use of LSEG products, including but not limited to indices, rates, data and analytics, or the fitness or suitability of the LSEG products for any particular purpose to which they might be put. The user of the information assumes the entire risk of any use it may make or permit to be made of the information.
No responsibility or liability can be accepted by any member of LSEG nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any inaccuracy (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of LSEG is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of LSEG nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indices and rates cannot be invested in directly. Inclusion of an asset in an index or rate is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index or rate containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index and/or rate returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index or rate inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index or rate was officially launched. However, back-tested data may reflect the application of the index or rate methodology with the benefit of hindsight, and the historic calculations of an index or rate may change from month to month based on revisions to the underlying economic data used in the calculation of the index or rate.
This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of LSEG nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of LSEG. Use and distribution of LSEG data requires a licence from LSEG and/or its licensors.
