The chief executive of the Financial Conduct Authority has admitted meeting officials from Saudi Aramco before publishing plans to water down rules in an attempt to attract the $2tn (£1.5tn) stock market listing of the oil giant to London.

Andrew Bailey told MPs that the meeting with officials from the Gulf kingdom’s state oil company, planning the world’s biggest flotation, took place in the early part of this year.

In July, the FCA launched its consultation on creating a new category for companies controlled by a sovereign country that are listing on the stock market. The regulator has faced criticism that weakening the rules will damage London’s reputation for protecting shareholders in companies with dominant owners.

But Bailey insisted the new category would not weaken protection for investors and those who invested in companies in the new group would know what they were buying.

He was replying to a letter from Nicky Morgan, the Conservative MP who chairs the Treasury select committee, and Rachel Reeves, the Labour MP who chairs the business, energy and industrial strategy committee, about the background to the proposed changes and whether there had been any political interference.

His response is likely to inflame the row at a time when London is vying with New York for the lucrative listing, in a battle that is regarded as a key challenge for the City in the run-up to Brexit.

The Financial Times reported on Friday night that the flotation could be abandoned in favour of a share sale to private investors.

In April, Theresa May and Xavier Rolet, the chief executive of the London Stock Exchange, visited Riyadh to meet Aramco’s chairman, Khalid al-Falih, who is also the kingdom’s energy minister.

Bailey said Treasury officials had been informed about the consultation in March. Stephen Barclay, the City minister, was told in July at an introductory meeting that took place 48 hours before the publication was due to be launched. Other than that, Bailey said he had had no conversations with ministers on the subject.

He said the FCA routinely had meetings with companies considering a flotation in London and would not usually disclose these. “However, given the public discussion of these events, 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,” Bailey said.

Morgan said: “Questions remain about the level of political involvement in the consultation. The UK’s world-class reputation for upholding strong corporate governance mustn’t be watered down.”

Reeves said: “What may well be good for City traders is not necessarily good for the rest of the country’s economy or investors.”

The FCA’s consultation ends on 13 October and investors and trade bodies have continued to raise concerns. Ashley Hamilton Claxton, the corporate governance manager at Royal London Asset Management, said: “While we fully support the case that the UK must stay competitive in a growing global marketplace, we do not think rewriting the rules is the correct way to go about it.”

Stephen Martin, the director general of the Institute of Directors, said: “We see no overwhelming reason to believe that states should be treated differently to other controlling shareholders. If anything, the risk for minority investors of having their interests ignored are greater, as the state will be subject to other domestic pressures.”

Bailey said in his letter that the proposals matched recommendations made by the Treasury to the FCA at the time of the budget in March. “The recommendations include the point that London retaining its position as the leading international financial centre supports the aim of sustainable economic growth,” he said.

The FCA proposals would enable state-owned companies to qualify for a premium listing, which has more onerous corporate governance rules and is valued by investors, but escape two key hurdles. One relates to how the company and the controlling shareholder conduct deals with each other, while the second gives investors a vote on independent directors.