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UK capital markets reform gathers pace

Author: ICAEW Insights

Published: 11 Oct 2023

Proposed changes to the regulation of the UK’s capital markets aim to increase London’s attractiveness as a place to list.

A host of regulatory projects designed to make the UK a more attractive place for companies to list are nearing fruition, with imminent changes to listing rules signalling that the UK means business when it comes to the attractiveness of its capital markets.

David Petrie, ICAEW’s Head of Corporate Finance, who last week participated on a panel at The Future of Capital Markets Regulation Summit 2023, says there has been a very marked shift in the regulator’s approach to the rules around listing in the City of London.

An alignment between the commercial objectives of those seeking to encourage more companies to list in the City of London, including the professional community of bankers and lawyers, regulators, and the London Stock Exchange, has served to push for reforms that together will make it more attractive for companies to list in the UK, Petrie said.

“There is certainly a consensus that something needs to be done to support what is a very desirable policy objective and following a number of consultations and subsequent reports a clear set of recommendations has emerged. While many in the City do appreciate that there may be some negative and presumably unintended consequences of making these changes, there is now a determination for measures that relax certain requirements to pass forward into law or regulation,” Petrie says. 

Many of the proposed changes have been championed by Andrew Griffith MP, Economic Secretary to the Treasury and City Minister, who is a former banker and an ICAEW member. Griffith will be speaking at the Annual Reception of the Corporate Finance Faculty on 9 November and ICAEW members with an interest in capital markets, or in senior roles in listed companies, are encouraged to attend.

If headline IPO figures are anything to go by, reform is certainly needed. Between 2015 and 2020, London accounted for only 5% of IPOs globally and the number of listed companies in the UK has fallen by about 40% from a peak in 2008, prompting the series of policy reforms that have been touted to restore London’s position as a leading financial centre.

The move away from a listing on the London Stock Exchange does not mean that companies are struggling to find funding, Petrie says, just that the routes for investing in British industry have changed. Although the number of public listed companies has reduced, the private equity sector has grown quite significantly, and the size and scale of companies in which private equity houses are able to invest institutional capital or pension fund monies into has also grown, Petrie explains. 

Meanwhile, a process of de-equitisation over the past decade or so that has seen pension funds shift away from holding investments in equities, either publicly or privately held, and into fixed income investment looks set to continue. “This is something that regulators and market participants across the City of London are very keen to fix. Whether it’s done through a public listing or through private management, equity investment in industry is essential for economic growth, because only a certain proportion of growth can be financed from debt.”

A string of government reviews and consultations has sought to thrash out reforms of the listing rules, with ICAEW actively engaged in the debate. The UK Listings Review, chaired by Lord Hill and launched by the Chancellor on 19 November 2020, proposed a number of remedies including the introduction of dual class share structures (DCSS). 

It is suggested that allowing companies with dual classes of share to have a premium listing could encourage innovative, often founder-led, companies onto public markets sooner, and so broaden the listed investment landscape for investors in the UK.

Although research is sometimes quoted that suggests that companies with B class shares tend to outperform those using other share structures, there are some concerns over the corporate governance implications of B class shares – a structure famously employed by newspaper group Hollinger International, previously headed up by Conrad Black, which collapsed in 2007 following fraud. 

In its representation to the UK Secondary Capital Raising Review, ICAEW expressed some reservations about dual class share structures, not least because of a potential reduction in investor protection. “It does increase the possibility – albeit remote – that when individuals control public companies, things can go wrong,” Petrie says. “That’s not necessarily a function of the share structure, but because B class shares are more common in tech companies that have witnessed a valuation boom in recent years. Nonetheless, we do not oppose DCSS but we do think that investors ought to be free to make the choice in full knowledge of the increased risk.”

Meanwhile, the secondary capital raising review led by Mark Austin of law firm Freshfields tackled the rules around the prospectus for secondary capital raising. Similarly, a review of the financial reporting and corporate governance obligations of UK listed companies is also under way. 

The Edinburgh Reforms announced in December last year outlined a strategy to drive growth and competitiveness in the financial services sector. Further details of listing reform were outlined in the Chancellor’s Mansion House speech in July this year, which set a clear pathway to reforming the regulation. 

At the same time, some frustrations have been voiced by members of the VC community about the suitability of the London market for high-growth tech companies in particular. The recent decision by British chip designer Arm to list in New York fuelled concerns that London will miss out on more blockbuster tech IPOs. However, the practical considerations of listing overseas and particularly in the US should not be downplayed, Petrie warns. 

“Companies that do best in the US also tend to have very significant operating activities in North America. Simply going to the US to try and attract a higher valuation is not something that corporate financiers or investment bankers would typically recommend. The fundamental principle remains that companies should list on the exchange where the investor group best understands the operations and the potential of the business.”

Petrie remains confident that the regulatory changes afoot will allow the UK capital market to compete effectively with the US for international investment. “No stone has been left unturned by government and the regulators in terms of looking at the effectiveness of the UK’s capital markets and understanding whether they’re functioning properly,” he says. 

But the fundamentals underpinning investment in UK equities extend beyond the regulations, Petrie warns. “In themselves, changes to the rules and regulations will not necessarily increase the attractiveness of equities. The economic fundamentals are the most important thing for investors, and that is to an extent dependent on the performance of the UK economy and the value of sterling.”

ICAEW Know-How from the Corporate Finance Faculty

This guidance is created by the Corporate Finance Faculty – recognised internationally as a centre of professional excellence in corporate finance. The Faculty is the largest network of professionals involved in corporate finance and represents the interests of its members with policymakers and facilitates a highly effective business development network.

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