London’s Financial Center Struggles to Find Its Way in Post-Brexit Britain

Article

London is in danger of becoming a mere “regional stock market” down the line unless it significantly raises its game — that is the warning from Mark Austin, the latest person charged with sprucing up the UK’s listing rules and helping the city maintain its position as one of the world’s leading financial centers.

“We need to be fleet of foot, ambitious and bold,” said Austin, a partner at law firm Freshfields Bruckhaus Deringer, who was commissioned to lead a government review into London’s capital markets. For companies wanting to list in Europe rather than the US, “London was often the go-to option; that is not necessarily the case anymore. They are increasingly also eyeing Amsterdam or other venues, be it for valuation, or easier regulation,” he said in an interview.

It’s a sentiment that’s repeated across the City of London: hope for the capital’s future as a financial hub outside the European Union, mixed with anxiety that the Brexit vote six years ago has so far only led to stiflingly slow change and political rows.

Analysis: Britain’s Proposed Post-Brexit Financial Services Law Underwhelms Industry

Outgoing Prime Minister Boris Johnson, who was elected on a promise to slash bureaucracy inherited from the bloc, saw one element of his plan come to fruition on Wednesday, with a financial services bill that will undo hundreds of EU regulations. Presenting the bill was the chancellor he’d appointed two weeks earlier, Nadhim Zahawi, who may not be in post once Johnson’s successor is picked in September.

Rishi Sunak, the former chancellor who oversaw the drafting of the bill, is one of the leadership candidates, though polls of Conservative Party members show him trailing considerably behind Liz Truss.

Listing Slump

Meanwhile, London’s stock market is faced with the quietest period for listings since the financial crisis. While the immediate cause of the slump was the global pause in share sales after Russia’s invasion of Ukraine, the reasons behind the UK’s slide date back years — with Austin’s review the latest in a long line of attempted cures.

The most recent blow came from SoftBank Group Corp., which is now rethinking whether to bring back UK chip designer Arm Ltd. to the London market with a partial listing, in light of the political upheaval. Even floats that proceed are having a tough time: GSK Plc spun off Haleon, its £30 billion consumer division, only to see it drop 6% on its debut on July 18.

Home-grown tech companies, whom Johnson was championing last month even as he struggled for political survival, have also suffered a string of disappointments on 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 initial public offerings. Even those more removed from consumer spending and the cost of living crisis, such as money-transfer company Wise Plc and semiconductor firm Alphawave IP Group Plc, have lost 50% of their initial value.

With volumes down dramatically, over half of this year’s IPO proceeds in London stem from the listing of a Chinese wind turbine maker called Ming Yang Smart Energy Group Ltd. on a little-used stock connect program designed to encourage more international listings. No British companies so far have used the venture, launched in 2019, to issue shares in China.

London stock prices overall have lagged international rivals, despite economic conditions over the last year favoring miners and oil majors that represent a large chunk of the market. Since the Brexit referendum in 2016, the UK’s FTSE 100 index has grown by about 45% with dividends reinvested, while the S&P 500 has delivered returns of 112%.

Still, not everybody is downbeat. London Stock Exchange Group Plc executive Julia Hoggett told Bloomberg Television on Thursday that she is still determined to attract Arm to list in its home country.

Hoggett will chair a new capital markets taskforce aimed at “ensuring the UK is the place where great companies can start, grow, scale and stay.” Other members include Austin, Schroders Plc CEO Peter Harrison, and GSK Chair Jonathan Symonds.

“I want to win every single offering that I can do, and I also feel very strongly there is a very compelling case for Arm to have a dual premium listing 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 about a secondary listing in the UK once a new cabinet is in place and the company has confidence the government’s assurances around favorable tax policies and R&D credits will be delivered, people familiar with the situation told Bloomberg.

“I’m very confident about the future of the Square Mile; London’s not going to stop being a global financial power,” said Steven Fine, chief executive of broker Peel Hunt, citing the UK’s education system, time zone, and financial infrastructure.

“The listing rule changes are clearly a step in the right direction. This is the place from which big fund houses can access international markets, and it’s unlikely to go away overnight.”

Rule Changes

The UK has spent years discussing ideas to revitalize its stock market. Much like peers in Europe, who’ve worked for six years and counting on a capital markets union, policy makers are finding that tweaking the financial system takes time.

Austin’s proposals, revealed on July 19, build on a 2020 report into the industry by Jonathan Hill, a former financial services commissioner for the EU. That review was set up to attract more fast-growing companies to London, especially tech founders with a preference for the much deeper American market.

Hill’s recommendations included cuts to free float requirements — the amount of a company’s shares that are in public hands — from 25% to 15%, allowing dual class share structures in the London Stock Exchange’s premium listing segment, and reforms to attract U.S.-style special purpose acquisition companies. That last idea, proposed during New York’s SPAC craze that’s since run out of steam, has led to just a handful of listings.

Austin also suggests making permanent a COVID-era exemption that allowed for companies to raise as much as 20% of their existing capital on the spot market, involving retail investors in all fundraising, digitizing shareholder registers and slashing requirements for prospectuses.

Many of these proposals, and the shake-up contained within 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 stopped short of a right to “call in” decisions and force change, but would give ministers the right to order a review.

Zahawi admitted during a speech that he might be little more than a caretaker chancellor. Sunak, if he wins the race to become prime minister, could decide the reforms should be taken further to give elected politicians more say. Truss has hinted she may change the Bank of England’s mandate more broadly.

“The chancellor clearly understands the government is in a caretaker phase and has ducked the idea of call in powers — for now,” said Iain Anderson, founder of Cicero/AMO, a communications firm spanning Westminster and the City. “This will be in the in-tray of the new government from September.”

The regulators will also be watching closely. Andrew Bailey, the BOE governor, has stressed the importance of the Bank’s independence on several occasions, telling politicians on the Treasury select committee that “independence of regulators is important because much of our international standing depends on it.”

Meanwhile, Sam Woods, chief executive of the Prudential Regulation Authority, faces calls from the insurance industry to support the relaxation of the Solvency II capital rules, which were written while part of the EU. Last month while he was still chancellor, Sunak met with industry leaders to discuss ways to “deliver these ambitious reforms at pace.”

These are just some of the choices available to regulators — and politicians — now they no longer need to stick to the letter of EU law. Tensions about how far to take this new freedom encapsulate the broader relationship between Westminster and the City: united on the need to reform the UK’s most lucrative industry post-Brexit, yet still uncertain about how it will be done.

–With assistance from Dinesh Nair.

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

Related: