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UK investors sound alarm over London exchange rule changes

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Investors have voiced concerns over an erosion of shareholder rights outlined on Wednesday as part of the UK financial regulator’s planned overhaul of British listing rules.

Several UK fund managers said the proposed shake-up by the Financial Conduct Authority, which would make it easier for companies to list on the London Stock Exchange, would dilute investors’ voting rights and leave them exposed to riskier stocks.

The plans are aimed at boosting the competitiveness of London in a bid to avert an exodus of businesses from the LSE, where the number of listed companies has fallen 40 per cent since 2008. This year alone has seen Cambridge-based chipmaker Arm and building materials group CRH shun the UK to list in New York.

The FCA’s proposals would remove the need for companies to have three years of audited accounts and merge London’s standard and premium markets into a single category, making it more attractive for early-stage companies to list.

The changes would also be “more permissive” on dual class shares, which give company founders greater voting rights over ordinary shareholders.

“The whole thing is a degradation of hard-fought protections for shareholders, who are providing their capital to support companies,” said Richard Buxton, UK equities manager at Jupiter, who described the proposals as a “massive lowering of governance standards”.

He added: “Allowing for changes such as dual class shares is a massively backwards step . . . If it does attract companies without three years of audited accounts, for example, then there will be scandals and disasters.

“What we need to address this is not the eroding of shareholder rights but reform to develop savings for UK equities. Defined contribution schemes, for example, should be heavily invested in UK stocks.”

Caroline Escott, senior investment manager at Railpen, which oversees £37bn of pension assets, said dual class shares “strike at the heart” of “fair and democratic financial markets” by removing voting rights.

David Cumming, head of UK equities at Newton Investment Management, warned that individual investors in particular would lose some safeguards. “There is a consequence that if you do this, then you run into higher risks as an investor. The issue is for [retail] investors who are not so well-equipped, they might be vulnerable.”

Meanwhile, Chris Cummings, chief executive of the Investment Association, which represents UK asset managers, said there needed to be “appropriate safeguards in place to deliver real benefit to the pensioners and savers invested in listed companies.”

But other fund managers applauded the proposed changes. Stephen Yiu, manager of the Blue Whale Growth fund, said the move could encourage more technology companies. “We’ve been investing in the US for tech stocks largely over the past few years. There’s a massive ecosystem there. It’s great there are now changes in the UK, but the argument is, are we too late?”

Danny Tricot, a lawyer at Skadden, defended the move by the regulator. “The FCA should certainly ensure disclosures are appropriate. However, it should not be the FCA’s job to say that transactions . . . don’t meet the rules and therefore can’t be undertaken. This only hurts the listed companies and in turn their shareholders and investors.” 

Simon Thomas, UK head of capital markets at Clifford Chance, also backed the regulator, saying that the “benefits of the reform outweigh [the greater] risk [of failure]”.

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