London’s financial hub struggles to find its footing in post-Brexit Britain

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London risks becoming a mere ‘regional stock exchange’ unless it dramatically ups its game – this is the warning of Mark Austin, the latest person to improve the UK’s listing rules and help the city maintain its position as one of the world’s leading financial centres.

“We have to be fast, ambitious and bold,” said Austin, a partner at law firm Freshfields Bruckhaus Deringer, which was commissioned to lead a government study into London’s capital markets. For companies wishing to list in Europe rather than the United States, “London was often the option of choice; this is no longer necessarily the case. They are increasingly looking at Amsterdam or other places, whether for easier assessment or regulation,” he said in an interview.

It’s a sentiment that echoes across the City of London: hope for the capital’s future as a financial center outside the European Union, mixed with concern that the Brexit vote will six years ago has so far only led to extremely slow changes and political wrangling.

Analysis: Britain’s proposed post-Brexit financial services law overwhelms industry

Outgoing Prime Minister Boris Johnson, who was elected on a promise to cut bureaucracy inherited from the bloc, saw part of his plan come to fruition on Wednesday, with a financial services bill that will override hundreds of European regulations. The bill was introduced by the chancellor he appointed two weeks earlier, Nadhim Zahawi, who may not be in office once Johnson’s successor is chosen in September.

Rishi Sunak, the former chancellor who oversaw the drafting of the bill, is one of the leadership contenders, although polls of Conservative Party members show him significantly behind Liz Truss.

List drop

Meanwhile, the London Stock Exchange is facing the quietest period for listings since the financial crisis. While the immediate cause of the crisis was the global pause in equity sales following Russia’s invasion of Ukraine, the reasons for the UK’s downfall go back years – Austin’s review being the latest in a long line of healing attempts.

The most recent blow came from SoftBank Group Corp., which is now considering whether to bring back British chip designer Arm Ltd. on the London market with a partial listing, in light of the political upheaval. Even continuing floaters are struggling: GSK Plc spun off Haleon, its £30bn consumer division, only to see it fall 6% on its July 18 debut.

Local tech companies, which Johnson was defending last month even as he struggled for political survival, he also suffered a series of disappointments in the London market. Food delivery platform Deliveroo Plc, e-commerce group THG Plc and furniture retailer Made.com Group Plc are all down more than 75% since their IPOs. Even those furthest from consumer spending and the cost of living crisis, such as money transfer company Wise Plc and semiconductor company Alphawave IP Group Plc, have lost 50% of their value. initial.

With volumes falling dramatically, more than half of the proceeds from this year’s IPO in London came from the listing of a Chinese wind turbine maker called Ming Yang Smart Energy Group Ltd. on a little-used stock connection program designed to encourage more international signups. So far, no UK company has used the venture, launched in 2019, to issue shares in China.

Overall, London share prices have lagged international rivals, despite economic conditions over the past year favoring the miners and oil majors who make up a large part of the market. Since the Brexit referendum in 2016, Britain’s FTSE 100 index has risen around 45% with dividends reinvested, while the S&P 500 has generated returns of 112%.

However, not everyone is downcast. London Stock Exchange Group Plc executive Julia Hoggett told Bloomberg Television on Thursday that she was still determined to get Arm to register in his home country.

Hoggett will chair a new capital markets task force aimed at “making sure the UK is where great businesses can start, grow, scale and stay”. Other members include Austin, Schroders Plc CEO Peter Harrison and GSK Chairman Jonathan Symonds.

“I want to win every bid I can make, and I’m also very confident that there is a very compelling case for Arm to have a double bounty slate in the UK,” Hoggett said. She added that Arm’s previous listing here gave it a higher valuation than its peers around the world, before SoftBank agreed to take it private in 2016.

SoftBank founder Masayoshi Son plans to resume talks on a UK secondary listing once a new cabinet is in place and the company has confidence in government assurances of favorable tax policies and credits of R&D, people familiar with the matter told Bloomberg.

“I am very confident about the future of the Square Mile. London is not going to stop being a global financial powerhouse,” said Steven Fine, managing director of brokerage Peel Hunt, citing the UK’s education system, time zone and financial infrastructure.

“The changes to the listing rules are clearly a step in the right direction. This is the place from which large fund companies can access international markets, and it is unlikely to disappear overnight. .

Rule Changes

The UK has spent years discussing ideas to revitalize its stock market. Much like their European counterparts, who have been working for six years and rely on a capital markets union, policymakers are finding that tweaking the financial system takes time.

Austin’s proposals, revealed on July 19, build on a 2020 report on the industry by Jonathan Hill, former EU financial services commissioner. This exam was put in place to attract more fast-growing companies to London, especially tech founders with a preference for the much deeper US market.

Hill’s recommendations included reductions in free float requirements – the amount of a company’s shares that are in public hands – from 25% to 15%, allowing for two-class share structures in the listing segment. premium from the London Stock Exchange, and reforms to attract American-style specials. acquisition companies for acquisition purposes. This last idea, proposed during the SPAC craze in New York that has since run out of steam, only led to a handful of signups.

Austin also suggests making permanent a COVID-era exemption that allowed companies to raise up to 20% of their existing capital in the spot market, involving retail investors in all fundraising, digitizing shareholder records and reducing prospectus requirements.

Many of these proposals, and the shake-up contained in the Financial Services Bill, are in political limbo for at least the next few months until a new prime minister is chosen.

Another change that could come to the City – depending on who is in charge – is a government power to challenge regulators’ decisions. The bill presented last Wednesday did not provide for the right to “appeal” decisions and impose changes, but would give ministers the right to order a review.

Zahawi admitted in a speech that he could be little more than an interim chancellor. Sunak, if he wins the race to become prime minister, may decide that reforms need to be deepened to give elected politicians more leverage. Truss has hinted that she may change the Bank of England’s mandate more broadly.

“The Chancellor clearly understands that the government is in an interim phase and has dodged the idea of ​​calling powers – for now,” said Iain Anderson, founder of Cicero/AMO, a communications firm covering Westminster and the UK. town. “It will be in the trash of the new government from September.”

Regulators will also be watching closely. Andrew Bailey, the Governor of the BOE, has repeatedly stressed the importance of the Bank’s independence, telling politicians on the Treasury Select Committee that “the independence of regulators is important because a large part of our international reputation depends on it”.

Meanwhile, Sam Woods, chief executive of the Prudential Regulation Authority, is facing calls from the insurance industry to back the relaxation of Solvency II capital rules, which were drafted when they were part of the EU . Last month, while still Chancellor, Sunak met industry leaders to discuss ways to “implement these ambitious reforms at pace”.

These are just some of the choices available to regulators – and politicians – now that they no longer need to stick to the letter of EU law. Tensions over the scope of this newfound freedom sum up the wider relationship between Westminster and the City: united on the need to reform Britain’s most lucrative industry after Brexit, but still uncertain about how this will play out. will do.

–With help from Dinesh Nair.

Photograph: Skyscrapers and buildings including 30 St. Marys Axe, also known as the Gherkin, over the City of London skyline in London, UK, Thursday 21 October 2021. Photo credit: Chris Ratcliffe/Bloomberg

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