It is no great secret that the UK’s capital markets have experienced a tumultuous few years. There have been a number of significant de-listings and many businesses are
remaining private for far longer than has historically been the norm. This has been reflected in the decreased number of IPOs. There are a number of causes, not all of which are unique to the UK and not all of which are immediately addressable, but one area where there is scope to take action is in addressing the regulatory burden.
Fortunately, this is also an area where action is being taken. The current government is determined to improve economic growth and have identified deregulation as a key lever that can be pulled to achieve that, with the recent Leeds Reforms the latest example of that ‘deregulatory’ agenda. Whilst not all of the policies put forward in mid-July were as revolutionary or even as new as they were presented as, there were a number of significant announcements that should give the UK’s capital markets an important shot in the arm.
An issue of prospectus?
In a bid to boost competitiveness, one of the most important announcements amidst the Leeds Reforms was the raising of the public prospectus requirements from 20 per cent to 75 per cent of existing share capital for secondary share issuances. Even as a standalone change, this represents a significant reduction of the compliance burden on businesses listed on the main market.
For IPOs, meanwhile, further reform is expected through the introduction of protected forward-looking statements with a distinct liability regime. This is still under consideration with further guidance to follow later this year but would be a positive move to encourage more useful disclosure of forecasts which give guidance to investors close to an IPO.
Moreover, when set alongside the changes announced over the last 12-18 months, a clearer picture emerges of a bold set of measures aimed at revitalising the UK’s capital markets. That includes the establishment of the PISCES market earlier this year, and last year’s move to cut some of the red tape that listed businesses were becoming emmeshed in and ensure that the UK was at least on an equal footing to international rivals. There has also been some discussion about the possibility of introducing 24-hour trading.
Not all of these reforms are necessarily a silver-bullet, with the rationale underpinning PISCES not entirely clear whilst 24-hour trading would likely to require a level of investment that would be hard to justify. But the steady drumbeat of reform intended to reduce the compliance burden and improve competitiveness demonstrates a welcome focus on the importance of capital markets.
The international picture
That said, there is still more that needs to be done and it is far too early to say at this stage that these reforms will radically change the picture for the UK on the international stage. Although there is some evidence to suggest that the prospectus requirements had discouraged companies from listing in the UK, there are a whole host of considerations for a business considering whether and where to list.
What could make a more positive difference would be a deal with the EU which allowed UK-approved prospectuses to be passported across the EU. However, whilst an agreement concluded earlier this year brought about closer relations between the EU and UK in a number of areas, it did not include passporting for financial services. It remains to be seen whether a further agreement down the line will include such a provision.
In the meantime, however, although the prospectus reforms are unquestionably a step in the right direction, this does not mean we can confidently predict a marked increase in the number of IPOs in London over the next 12 months or a string of defections from the US to London.
What we can expect as a result of these reforms is a clearer delineation between the main market and the AIM. This should help to ensure that the AIM fulfils its intended role as a growth market, which offers higher risks but also potentially higher rewards, with the larger and better-established companies listed on the main market.
Where next?
It’s important not to mistake these reforms, however welcome they may be, for a panacea. Although the Government and the regulators should be making a concerted effort to remove unnecessary obstacles to trading, it is important to recognise that this is a separate issue to spurring demand. As a result, these reforms are unlikely to spark an increase in trading in of themselves and, in the immediate future, activity may well remain centred around established companies with a proven track record of revenue generation rather than newer entrants.
Nonetheless, capital markets will have an important role to play in unlocking economic growth in the UK. Accordingly, reforms that can inject vitality into our capital markets should be welcomed on their own terms. Removing obstacles to trading may not be enough to spur an increase in activity alone, but it does create the possibility of a virtuous cycle as and when demand picks up. There is still work to be done to bolster the position of the UK’s capital market, but positive progress has been made and that should be recognised.
