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

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

Last week the Treasury backed a series of reforms crafted by Freshfields lawyer Mark Austin to make it faster, easier and cheaper for businesses to raise money in London.

Its six-month review recommended ensuring that retail investors are allowed to participate in all fundraising rounds, including those previously restricted to institutional investors.

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

In an interview with the Financial Times, Austin described the changes as “once in a generation” reforms which, alongside the work recommended in an earlier review by Lord Jonathan Hill, will make London as attractive as anywhere outside the United States for companies to raise funds.

But he added the UK risked complacency at a time when rival EU cities were fighting harder to become more attractive to businesses and investors.

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

“By the middle of next year, London will have a modernized regulatory regime fit for purpose. But is that the end of the story to make the market sustainable for the next 20 years? Absolutely not. We have much larger problems.

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

Mark Austin: ‘London needs to wake up now. And start to really drive in terms of meaningful, sensible, bold and courageous reform’ © Freshfields

“When we were in the EU, we were the default location for western capital. We aren’t necessarily that anymore. We should justify everything by referring to whether we still need it and what it’s for. Because I think that if you ask this question in much of our registration scheme, you don’t actually need it.

As a corporate attorney, Austin creates “grids” of pros and cons for clients in different cities when evaluating the list. “So far we haven’t done well, the amount of friction we have.”

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

“The air is likely to get out of London. It was never going to be a cliff edge after Brexit. If we are not careful, we will become a regional financial center again. I think we should be more ambitious than that.

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

It is hoped the reforms will make UK capital markets more attractive to fast-growing, capital-hungry companies, and they have received backing from fund managers including Abrdn, BlackRock, Hargreaves Lansdown and Jupiter.

Austin claims that the registration regime in London has been overloaded with additional requirements and regulations, and “over-regulation” of basic rules. He argues that there are vested interests and a ‘groupthink’ mentality that underpin the status quo in UK capital markets. “Just because this is how we’re doing it now doesn’t mean we have to keep moving forward – you have to keep London relevant.”

Cities like Paris, Frankfurt and Amsterdam “have none of that baggage”, he added. “London needs to wake up now. And start to really drive in terms of meaningful, sensible, bold and courageous reform.

Businesses are still discouraged by high taxes and corporate governance that limits top executive pay, he said. “You can’t reward people like you do in other jurisdictions. What worries me is that we are making it too unattractive for companies to be public here.

Austin added that proposed changes to corporate governance rules in the forthcoming legislation would add additional burdens to companies seeking to register in the UK, and predicted that more public companies would be privatised, where rules were more flexible.

He said investor attitudes also needed to change about backing promising growth companies, rather than just chasing income through dividend-paying stocks.