What are the most interesting aspects surrounding the UK Capital Markets reform agenda?
Charlie Walker, deputy chief executive officer at the London Stock Exchange
The UK capital markets reform agenda has been ongoing for several years now. Market participants, the regulators and authorities across the UK should be given a lot of credit for the ambition they have shown to evolve our capital markets to be more effective for the companies and investors of today and of the future. There is sometimes the temptation to look at the UK capital markets through a narrow lens, for example, of just a set of listing rules or just secondary market trading dynamics. However, the reform agenda is a more holistic assessment of all the components that make up the UK capital markets with the objective of being able to support the growth of UK companies and maintain London’s position as a global financial center – on which the UK economy also relies.
What has been encouraging to see is that the whole ecosystem – companies, investors, advisors – have really come together with a shared objective of having world leading capital markets. It does not mean that everyone agrees on everything, but I do think that the majority have fed into the consultations and discussions over an extensive period. It has been heartening to see that level of collaboration.
What are the key components of the reform process?
The first one is making sure that we have internationally competitive primary markets rules. Essentially, making sure that companies can join the UK markets and that there are no unnecessary barriers in place to stop them from doing so; making sure that the UK capital markets are attractive to founder-led businesses, and that companies listed in the UK can compete with those listed overseas on a level playing field. That is vital in helping companies start, scale and stay in the UK.
The second aspect is research coverage. The UK has seen a decline in the quantity and availability of research coverage post-Mifid II implementation, particularly in small- and mid-caps. The FCA has just announced a policy on providing greater optionality for the payment of research which we support and hope will lead to more coverage.
The third area is the availability of risk capital. The UK has not had active policies over the last 20 years which recognise the importance of domestic investment to the UK and therefore actively incentivise it. There has been a significant disinvestment from pension schemes in the UK partially as a result. In some instances, we’ve also seen policies, such as stamp duty where you are charged if you buy a UK share but not as an overseas share, work as a disincentive for domestic investment. To bring that to life, a UK investor pays stamp duty if they buy shares in Aston Martin but not if they buy Tesla. It is important that the UK population has a stake in their own economy and shares in the growth of the country –the capital markets should be an enabler of that.
It is worth noting this disinvestment from the UK is not a choice that most people have made. 97% of the public is in a default defined contribution scheme or a defined benefit pension scheme, and therefore are not actively choosing where their money is invested. However, progress has been made here, including plans for a British ISA, the Mansion House compact and the Pensions Review recently announced in the Kings Speech. We hope all of these initiatives result in the UK investing in itself again.
The fourth component focuses on corporate governance and stewardship. Markets have changed tremendously over the last 10 to 20 years, for example the continued rise of passive fund management or the focus on ESG among other things. We think now is the time to consider how those changes have impacted the relationship between company boards and investors. What does good corporate governance and stewardship look like in modern markets and how can the UK provide frameworks to support both companies and investors? Sometimes these have been setup to be oppositional, we believe the presumption should be that investors and companies are on the same side. The Financial Reporting Council have announced that they will be reviewing the Stewardship Code, which is a key document that many asset managers and proxy agencies in the UK are signatories of. That review is ongoing and we believe is an opportunity for the UK to take a leading role in this debate which is relevant in capital markets globally.
The fifth component is creating a scaling environment in the UK. We need to support companies across their journey from startup to global champions. The question is how do we create that funding continuum? In this regard, the UK government has announced the world’s first regulated crossover market, called PISCES, which will allow private companies to apply to a regulated exchange for the first time to have their shares traded periodically using all of the existing infrastructure.
And finally, we need to recognise the importance of culture. How do we as a country celebrate entrepreneurship, success and the benefits this brings to the country? At the London Stock Exchange, we do as much as we can in that regard, whether it’s a Market Opens to celebrate the UK’s private and public companies, our ‘Be Inspired’ interviews with private and public market CEOs, or events that we host at the Exchange and globally to convene market participants. But we can collectively do more.
How are these changes as well as the LSE’s wider strategy across the funding continuum expected to make it easier for companies to access capital and liquidity in the UK?
On PISCES, between the liquidity windows, the private companies who choose to join will remain fully private. This market will provide early-stage investors, employees, angels, VC’s, and other shareholders with the option to exit companies or realise investments earlier than they ordinarily would have had the opportunity to do so. It will also enable new investors to get exposure to private companies earlier than they ordinarily could do, to join the company’s register and to create that cycle of funding being recycled through companies. This crossover market is certainly very ambitious, and something that the London Stock Exchange is actively working on.
What trends are we seeing in the UK equities trading market and the type of trading that is taking place?
Retail inclusion is a big theme you can see across the reform agenda – whether it is asking how retail investors can access equity capital raising events more easily or ongoing discussions around whether retail investors should have access to mainstream listed bonds as well as equities.
We are also seeing an evolution in the way that retail investors are choosing to trade. There are an increasing number of neobrokers providing products and services. More broadly, retail investors now have access to a wide range of investments including through ETFs among other products. We believe this increase in retail participation will continue, which is a good thing for individuals and the market. We have long believed that the safest place for retail investors is investing alongside institutional investors on the same terms, and we would like to see a broadening of access to regulated asset classes in the UK.
In the longer-term, we continue to see a decline in the share of total trading that is taking place across lit exchanges, which is a growing cause for concern. Is this going to lead to challenges in price formation and is the current trend sustainable in the long run? That is a question we and participants across the market are increasingly focusing on.
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