The head of Britain's financial watchdog has admitted that he held talks with oil giant Saudi Aramco over a potential $2 trillion (£1.5 trillion) stock market flotation in London, as MPs warned over lax governance standards and political interference in the deal.

Andrew Bailey, chief executive of the Financial Conduct Authority (FCA), said that discussions were held earlier this year amid a barrage of criticism over his proposals to change listing rules that would allow the Arab firm to plump for London over rival financial centres.

"We can confirm that we held conversations with Saudi Aramco and their advisers in light of their interest in a possible UK listing in the early part of this year.

"We emphasised during those conversations that we were reviewing the Listing Regime," Mr Bailey said in response to a letter from Nicky Morgan, chair of the influential Treasury Select Committee.

Ms Morgan wrote to the FCA demanding it explain a raft of proposals which would exempt companies controlled by governments from stringent listing rules.

The move would create a new category of listing that could pave the way for Aramco to float in London in what is set to be the biggest initial public offering (IPO) in history.

Saudi's state-owned Aramco is preparing to list only around 5 per cent of its shares and the FCA plans would allow the group to side-step rules that companies must sell at least 25 per cent of their shares to gain a "premium" status.

But the rule change has drawn sharp criticism from big-hitting City institutions such as Royal London Asset Management, the Institute of Directors and the International Corporate Governance Network.

In defence of the FCA's proposals, Mr Bailey added: "We do not think protections for investors will be weakened.

"We have previously made clear publicly that we will permit lower percentages than 25 per cent, where the value and distribution is such that there can be a liquid market."

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However, Ms Morgan said that "questions remain about the level of political involvement in the consultation" and her comments come as the Government scrambles to secure overseas investment amid Brexit uncertainty.

Prime Minister Theresa May and London Stock Exchange boss Xavier Rolet met with the company's boss Khalid Al-Falih in April when they pressed home the advantages of bringing the listing to London.

Mr Bailey added: "Our proposals are consistent with the Treasury's recommendations to the FCA, published at the time of the Spring Budget in early March.

"The recommendations include the point that London retaining its position as the leading international financial centre supports the aim of sustainable economic growth. Those recommendations had been discussed with Treasury."