London’s financial markets need more reform to beat rivals, adviser says

Ministers need to continue reforming London’s capital markets or risk losing ground to rival cities in the EU and US, the author of the UK’s latest market deregulation proposals has warned.

Last week, the Treasury backed a series of reforms drawn up by Freshfields’ lawyer Mark Austin to make it quicker, easier and cheaper for companies to raise money in London.

His six-month review recommended ensuring that retail investors should be allowed to take part in all equity raisings, including those previously the preserve of institutional investors.

Austin also pushed for shares to be held in digital forms showing their ownership to “enhance the ability of individual shareholders to constructively engage with companies on governance and ESG issues”.

In an interview with the Financial Times, Austin described these changes as “once in a generation” reforms that alongside work recommended in a previous review carried out by Lord Jonathan Hill will make London as attractive as anywhere outside the US for companies to raise money.

But he added that the UK was at risk of complacency at a time when rival cities in the EU were fighting harder to become more attractive to companies and investors.

“There’s no point having a theoretically perfect market if no one uses it,” he said.

“By the middle of next year, London will have a regulatory regime that is modernised and fit for purpose. But is that the end of the story in making the market future-proof for the next 20 years? Absolutely not. We’ve got much wider issues.”

Austin argues that the UK needs to become more “streetwise”, and take on an “insurgent” mentality rather than simply relying on its history as a financial capital.

“When we were in the EU, we were the default place for western capital. We’re not necessarily any more. We should justify everything by reference to whether we still need it, and what use it serves. Because I think if you asked that question across a lot of our listing regime, you don’t actually need it.”

As a corporate lawyer, Austin creates “grids” of pros and cons for clients for different cities when assessing where to list. “Until now, we haven’t come out that well, the amount of friction we have.”

While ministers have been quick to claim the benefits of being able to reform outside the EU, Austin is clear that most of these changes could have happened regardless of Brexit. In some cases, reforms were needed simply to catch up with regimes in cities such as Amsterdam.

“The air is in danger of going out of London. It was never going to be a cliff edge after Brexit. If we’re not careful, we will go back to being a regional financial centre. I think we should be more ambitious than that.”

Last Tuesday, the Treasury published the results of a review of the fundraising market by the Freshfields’ lawyer, which recommends reforms to the pre-emption rights regime to allow more money to be raised quickly, and to reduce regulatory oversight of fundraisings.

It is hoped the reforms will make the UK’s capital markets more attractive for fast-growing and capital-hungry firms, and they have received support from fund managers such as Abrdn, BlackRock, Hargreaves Lansdown and Jupiter.

Austin says the London listing regime has been overburdened by additional requirements and regulations, and “gold plating” of basic rules. He argues that there are vested interests and a “groupthink” mentality that support the status quo of the UK capital markets. “Just because that’s the way we do it now doesn’t mean we should keep it going forward — you’ve got to keep London relevant.”

Cities such as Paris, Frankfurt and Amsterdam “don’t have any of this baggage”, he added. “London needs to wake up right now. And start to really motor in terms of meaningful, sensible, bold and brave reform.”

Companies are still deterred by high taxes and corporate governance that limits remuneration for top executives, he said. “You can’t reward people in the way you can in other jurisdictions. My worry is that we’re making it too unattractive for companies to be public here.”

Austin added that proposed changes to corporate governance rules in forthcoming legislation would add further burdens on companies looking to list in the UK, and predicted that more public companies would be taken private, where rules were looser.

He said that investor attitudes also needed to change around backing promising growth companies, rather than simply seeking income through dividend-paying stocks.