Post-Brexit reforms must go further under new PM, say Square Mile grandees
With a reputation for backroom politics rather than big speeches, John Glen was not one of Boris Johnson’s better-known ministers. But the Member of Parliament for Salisbury received a hero’s welcome at the City’s Mansion House dinner on a sweltering evening in July.
Glen was the longest ever serving City minister when he resigned over his boss’s leadership shortcomings a few weeks prior to the centrepiece event.
Despite his low profile, Glen is both well known and well liked in the Square Mile. When Vincent Keaveny, the Lord Mayor of London, singled out the former minister in his pre-dinner speech, the room – filled with the top brass of London’s financial services industry – gave him a rapturous applause.
Glen spent the last four years helping to steer the City of London through Brexit and the pandemic, while also sowing the seeds for a host of regulatory reforms.
Although the Square Mile successfully navigated Britain’s divorce from the European Union and Covid, winning Glen plaudits, it is now facing an even bigger challenge.
Across the City, there are growing concerns that London risks falling behind rivals because of its excessive rules and the sluggish pace of reform.
Last week, Michael Findlay, chairman of the London Stock Exchange (LSE), and Mark Austin, a senior City lawyer, issued a stark warning about the state of London’s capital markets.
The pair said officials must tear up decades-old orthodoxies and water down a host of stock market regulations if Britain is to reverse its current trend of decline in financial services and remain competitive with the likes of New York, Shanghai and even Amsterdam.
Known as a comfortable home for banks, miners and oil companies, the LSE severely lacks the high-growth technology businesses that have propelled other international exchanges to new heights.
The sense of urgency has been made more acute by Aveva, the FTSE 100 industrial software company, receiving a takeover bid last week from its biggest shareholder Schneider Electric. If the deal goes through, London’s blue-chip index will be left with just one pure technology company, the accounting software company Sage.
Austin, a partner at Freshfields who recently led a Treasury review into capital raisings, says Britain has a “once in a generation opportunity” to overhaul the rulebook that governs London’s listings regime and prevent ground being lost to rival hubs.
He is not despondent about the future, despite the difficulties ahead.
“The submission [to the FCA’s primary markets review] was not meant to be pessimistic but realistic," Austin says.
"It’s a problem that’s fixable.”
The pair called for rule makers to abandon the “restrictive philosophy” that governs the current listings regime and scrap the two-tier "premium" and "standard" segments of the market in favour of a “genuine single segment” with less stringent rules.
Under premium rules, public companies are expected to meet the UK’s highest standards of regulation and corporate governance – including appointing a third-party, or sponsor, to provide oversight and assurances to the FCA about listed companies in a bid to protect investors.
The LSE describes premium listings as those that meet “more stringent UK super-equivalent standards”, whereas the companies in the standard segment are only required to meet minimum EU standards.
At present, only companies with a premium listing are eligible to be included in the FTSE indexes, meaning companies with a standard listing are unable to draw on the vast pool of capital from tracker funds.
Austin, who also chairs an FCA advisory panel, believes the current system is outdated and onerous: “London has built up extra architecture around the public capital markets in recent decades in all sorts of areas. That was fine when we were the default listing venue in Europe, but we need to think astutely about how to remain relevant today.
“The current extra architecture around the premium segment does not have as much automatic benefit for issuers and investors as people assume – it’s always been a bit of a shibboleth. And there is no point in having a perfect market if investors and issuers choose to use other ones.”
And the problem at the moment is that very few companies are deciding to list in London. In the first six months of the year, only 13 listings took place in the capital, raising proceeds of just under $150m – huge declines of 71pc and 99pc respectively compared to the same period last year.
Austin adds: “Markets are about risk. The FCA quite rightly has a duty to protect consumers but sometimes I think that balance tilts too far in favour of protecting people from ever losing money. No one wants to see a regulatory race to the bottom but sensible reforms are necessary.”
Last year, a review of the listings regime ordered by Rishi Sunak, the then-chancellor, and carried out by Lord Hill of Oareford recommended a series of measures designed to attract high-growth companies to the UK. This led to the Financial Conduct Authority allowing dual class share structures and lower free float requirements in a bid to boost the market.
Lord Hill and his team did not go as far as they wanted to in terms of recommending wide-ranging reforms, The Telegraph understands.
Standing in the way of a wider overhaul is a group of institutional investors who are worried that watering down standards risks tarnishing London’s reputation. They tend to be value investors who are looking for stable companies that pay handsome and regular dividends – qualities they are less likely to find in high-growth tech and bioscience businesses.
Richard Buxton, a veteran fund manager and head of strategy at Jupiter, says he is concerned that lowering listing standards will attract "bad capital" and hurt investors.
He says: "It’s right for London to maintain its high standards to protect investors. That’s what it’s all about. What we don’t need is a race to the bottom that will attract dodgy foreign companies to list here. If that means they go and list on the Nasdaq or in Amsterdam then fine, so be it."
The UK also lacks the retail investment culture that exists in the US. However, that could soon change too. Austin’s recent capital raising review recommended that retail investors be allowed to take part in all equity raisings, including those previously the preserve of institutional investors.
Mike Coombes, head of regulatory affairs at PrimaryBid, a start-up backed by Japanese investor Softbank that allows UK retail investors to buy shares in listings and other fund raisings, says there has been a “fundamental shift in the presumption of retail inclusion in transactions” following the review.
One of London’s more quirky, yet seemingly sacrosanct, market rules is pre-emption: the idea that new shares must first be offered to existing shareholders when companies raise money.
Coombes says pre-emption is “not universal” – in fact, most well developed equity markets don’t have it – and adds that the UK could look to France, where digitisation at retail investment platforms has significantly widened retail participation in fast-moving deals.
Retail ownership of UK equities currently stands at around 15pc, compared to around 40pc in the US, and PrimaryBid is hoping that this could rise to around 25pc in the coming years.
Coombes says: “Reforming the rulebook is one thing, but there are also bigger cultural questions in terms of challenging assumptions about London’s super ‘gold-plated’ rules.”
Many in the City agree. Charles Howarth, a partner at City law firm CMS, says reforms should have been made long ago and that the premium and standard listing segments made for an “unsatisfactory mess” that had nothing to do with the EU.
He adds: “One major aspect of the attractiveness of London as a listing venue though cannot be improved through regulatory change: London investors need to learn to welcome growth companies and wean themselves off their addiction to dividends. The US shows the value of capital growth from backing tech companies.”
While John Glen will not be around to see through the next phase of City reforms – he is tipped for a promotion to work and pensions secretary – Liz Truss has promised to axe swathes of red tape in a bid to make the Square Mile more attractive.
In a sign that Truss will look to speed up reforms, John Redwood, an arch-Thatcherite and staunch proponent of deregulation, is set to succeed Glen at the Treasury.
Austin says No 10 and the Treasury “get it”, adding that he remains bullish about London’s prospects.
"Maybe we want to be a regional market, but I think we should be more ambitious than that,” he says.
“We have an opportunity to be the leading global go-to neutral, independent financial centre between the increasing polarity of the US and China."
Whoever replaces Glen can expect rapturous applause of their own for delivering that dream.
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