Just before Christmas, UK prime minister Rishi Sunak arranged a bilateral video conference with Masayoshi Son in another attempt to persuade the powerful SoftBank boss to bring the chip design firm, Arm, back to the UK stock market.
People involved in the call describe the conversation between the politician and Son, whose investment company acquired Arm for $32bn in 2016, as positive. Sunak, the third prime minister to try and persuade SoftBank to consider relisting Arm in London, talked of the importance of the firm and how the UK wanted to become a tech superpower. Son, in turn, recognised the significance of the Cambridge-based tech success story to the UK.
For many in the City, the imminent decision over whether to list one of the UK’s few world-class technology companies on the London stock exchange or an overseas bourse has taken on a greater symbolism in the wake of the UK’s exit from the EU and a longer-term struggle to reinvigorate the City of London.
They hope that a revamped regulatory regime tilted more towards risk taking will allow London to better compete with the US and Asia and reverse a gradual erosion of its pre-eminence as a financial centre in recent years.
For the government, there is the added need to demonstrate, both to an increasingly sceptical electorate and a City that was worried about the impact from the start, that leaving the EU has brought benefits.
The proposals ministers have brought together under the “Edinburgh reforms” — named after the city where Jeremy Hunt, chancellor, unveiled the plans in December — are the most significant shift for Britain’s financial services policy in more than two decades. Some have dubbed them Big Bang 2.0 in a nod to an earlier wave of financial deregulation.
They aim to rip up many EU-derived rules to make the City competitive against global rival financial capitals and range across banking, insurance, brokerages, exchanges and investors. The aim is to redraw the regulatory regime for asset classes ranging from cryptocurrency to infrastructure and equities.
“We need to look at our rules and practices with a fresh set of eyes and a blank sheet of paper and ask ourselves, ‘What is the right regime for us for the next decade and beyond?’” says Mark Austin, a London-based lawyer who was last year asked by the British government to rethink how companies can raise money.
“What do future-proofed, globally competitive UK capital markets that are fit for purpose for the next 15 or 20 years look like?”
The initiative comes at a critical time. London’s position as a financial capital — supported by advantages in language, timezone, legal system and skilled workers — had been boosted by its role as a gateway to the EU.
But the financial services sector was largely left out of the Trade and Cooperation Agreement between the UK and EU, signed in late 2020, meaning that firms lost the ability to serve EU markets under equivalent rules.
Guy Hands, head of private equity group Terra Firma, says Brexit sealed the City’s fate and describes its decline as “inevitable and completely predictable”.
Not everyone is so pessimistic — many bankers regard the UK’s exit from the bloc at worst as a “slow puncture” rather than a cliff-edge — but already there are signs that business, people and assets are shifting out of London.
Analysis by EY in March last year found that 24 firms have publicly said they will transfer £1.3tn of UK assets to the EU. Two-fifths of the largest UK financial services firms plan to move some UK operations or staff to the EU.
The European Banking Authority said the number of EU-based bankers earning more than a million euros annually rose to a record 1,957 in 2021 from 1,383 in 2020, a sign that senior staff are relocating to the continent.
The UK remained the world’s biggest exporter of financial services in the first year after leaving the EU and still performs better than other financial capitals on many competitiveness measures across financial and professional services, according to lobby group TheCityUK.
But it argues this should not mask the longer-term challenges. Its chief executive, Miles Celic, says that while London has grown over the past decade, “global competitors have grown faster” and that as a result its global share of markets such as cross-border bank lending, insurance premium-writing and pension and hedge fund assets under management has been in decline relative to rivals such as New York and Hong Kong.
Chris Hayward, policy chair at the City of London Corporation, has said that London is “at a crossroads. Faced with increasing global competition, we need a long-term sense of direction, a programme for government, regulators and industry to act and sustain our global powerhouse status”.
The return of risk-taking
Behind much of the 33 separate areas for reform is a single, central idea: that the UK needs to bring back risk-taking in a capital market that has been hamstrung by strict rules, in part devised with the EU in the wake of the global financial crisis.
Addressing City executives under the extravagant Edwardian ceilings in Drapers Hall in London last week, City minister Andrew Griffith was frank about the new philosophy that underpinned its financial services plans.
“I know the critical importance of taking calculated risks. We need to develop what I would call a philosophy of risk in our country to be positive again and not beat ourselves up about the inevitable failures along the way.”
The government has promised to repeal and replace “hundreds of pages of burdensome EU retained laws” — although many of the reforms are for regulation enacted domestically or as a result of EU law that the UK helped shape when it was a member.
It has proposed reforms to the Solvency II regulatory regime for insurers as part of a long-running ambition to spur investment from UK insurance companies in riskier and longer-term asset classes.
Ministers want to also change the ringfencing regime brought in after the financial crisis that obliges banks to separate retail activities from their riskier investment banking arms. Regulators could be given secondary objectives around growth and competitiveness, alongside existing mandates around conduct and financial stability.
Building on a review of the equity listings market by former EU commissioner Lord Jonathan Hill in 2021, the government plans to revamp the rules around company prospectuses. It also wants to reconsider the regulation of short selling and review investment research, given concerns that the EU’s Mifid II regime has resulted in a drop in analyst coverage of British companies.
It has promised to consult on a UK retail central bank digital currency and help develop a marketplace that would allow private companies to sell shares. Ministers also want to abandon Brussels-inspired restrictions on banker bonuses, a move that would make the City more attractive for international firms who want to adjust the fixed and variable parts of executive remuneration.
“This is about being the best version of ourselves,” City minister Griffith says of the impact of the reforms.
Not just Brexit
Britain’s departure from the EU has also magnified longstanding issues, including a low level of UK pension money in domestic equities, a preponderance of “old economy” companies on its stock exchange and an inability to turn promising start-ups into sizeable listed companies.
Austin says that the UK government is not just fighting against the EU for financial services business but against a risk-averse and complacent culture in the City itself, and the worldwide drift of capital away from public markets and into private hands.
“If we are not bold we risk sleepwalking into losing our capital markets strength,” says Austin. “We need an insurgent mentality.”
This month, the FTSE 100 hit a record high but its performance against other world indices has been dismal. Despite a sell-off in technology stocks last year and UK market rally, the FTSE 100 trades at a much lower valuation relative to company profits than Germany’s DAX or the S&P 500 in the US.
Between 2015 and 2020, London accounted for only 5 per cent of IPOs globally and the number of listed companies in the UK has fallen by about 40 per cent since 2008, with many succumbing to foreign takeovers.
Michael Tory, co-founder of advisory firm Ondra Partners, says that the UK is the only major economy where local pension funds have in effect abandoned investment in domestic companies. Holdings of UK-listed companies fell from about half of their portfolios to around 4 per cent over the past 20 years.
“In other words, Arm’s decision, if it goes to Nasdaq, is merely a symptom of a much deeper problem.”
Tory pointed to British pension funds’ fragmentation and small size, which averages around $500mn, compared to global funds of $100bn-$200bn.
He says that UK boards, especially in the FTSE 250, often find themselves “demoralised by the total absence of a supportive home investor base to underpin long-term growth aspirations, which partly explains why so many promising young and smaller companies capitulate so readily to foreign takeovers, their businesses being better off owned overseas where the pool of equity risk capital is deeper and longer term”.
Founders also complain about the lack of scale-up capital — the larger pots of cash that can keep a promising business growing — in the UK which forces them to either sell or seek a listing at an early stage.
“We have some great start-ups coming out of our universities but then they disappear into the US VC world,” says Andy Griffiths, head of the Investor Forum, which represents some of the biggest institutional investors.
Nowhere is London’s risk aversion more keenly felt than in the technology sector. “I would never, ever list on the London stock exchange,” says Hussein Kanji, a partner at Hoxton Ventures, which has backed scores of British start-ups and remains a shareholder in once-feted 2021 listings such as Darktrace and Deliveroo.
Only a couple of the 33 tech companies floated that year — a cohort lauded by ministers as evidence of post-Brexit vitality — are now trading above their IPO pricing, with the rest reflecting a combined discount of more than 60 per cent.
Kanji says he would “much rather see my companies listed in New York where valuations are higher and where investors and analysts ‘get’ growth”.
The UK’s poor record of sustaining successful large quoted technology companies comes despite the country producing more technology unicorns — young companies valued at more than $1bn — and claiming more venture capital investment than any country in Europe.
Pension funds, Tory says, are simply not equipped to take riskier bets on new technologies or higher growth domestic companies. “Long-term domestic equity risk capital basically no longer exists in this country,” he says. He supports the creation of a handful of large consolidated pension funds, decoupled from corporate sponsors, to deliver a more secure, higher return and more diversified retirement savings system.
Julia Hoggett, chief executive officer of the London Stock Exchange, says the UK needs to be “young, scrappy and hungry” if it is to compete as a global financial centre, especially now it can no longer rely on its position as the “dominant centre for financial markets in the EU”.
All about action
The government’s plans have received a cautious welcome. City grandee Sir Win Bischoff, former chair of the Financial Reporting Council, says they are “useful in arresting the relative and measurable decline of the City over the past five years” and should make the UK “a more equal competitor to New York, Hong Kong and Singapore”.
Amanda Blanc, chief executive of FTSE 100 insurer Aviva, says the blueprint contains “sensible measures . . . that keep London at the forefront of global financial centres” and do not constitute “deregulation for deregulation’s sake”.
But not everyone is happy about the prospect of unpicking some of the rules put in place after the global financial crisis and various mis-selling scandals.
Sir John Vickers, whose 2013 report set out the ringfencing regime for UK banks, told MPs on the Treasury select committee this month that he would “certainly have concern if an erosion or a rowing back on the reforms that were put in place were to be in prospect”.
“Anything that led to a cutting of corners or relaxation of financial regulation that put [the regulator’s] primary objective at risk would in my view be a very unfortunate step to take.”
Bank of England governor Andrew Bailey has also warned Sunak against going too far with post-crisis deregulation, while some City executives argue that many global financial firms favour London precisely because of its high standards of governance.
Clare Woodman, head of Morgan Stanley in Europe, says the reforms should increase UK market efficiency and competitiveness but “a continued focus on maintaining high standards of regulation will be important, as it remains an important pillar of London’s success as a financial centre”.
Daniel Godfrey, who has run two of the main trade bodies for UK asset managers, describes the proposals to water down rules on company research as “chilling” and says it is a result of “powerful voices that would like to revert to an indefensible past” while others warn that unwinding complex post-crisis legislation will be costly and time-consuming.
Ministers play down any weakening of the high standards of regulation and market oversight, with Griffith describing the plans as smoothing over the “rough” edges of ring fencing and senior managers rules.
Regulation is also just one element of the UK’s post-Brexit financial landscape. Andy Briggs, chief executive of insurance group Phoenix, supports making it easier for pension funds to invest in illiquid assets such as infrastructure, but cautions that there needs to be “the flow of investable projects”, not just rule changes.
While wanting to increase investment in the UK, he adds there is no guarantee that British pension funds will always back British assets given their duty to savers to find attractive returns regardless of location.
Like many others in the City, Briggs worries about how quickly the reforms will actually come into effect given the need to set up task forces, conduct reviews and consultations and pass legislation.
Daniel Pinto, chief executive of Stanhope Capital Group, says that “for the Big Bang 2.0 not to end up a Big Whimper, the task forces which are consulting must focus on facilitating a cultural reboot of the City, rather than protecting the status quo”.
Anand Sambasivan, co-founder of PrimaryBid, which helps retail investors take part in IPOs, says that after more than two years of work on reforms in the City “what matters now is implementation speed from the government”.
Griffith says there should be “no doubt the government’s mission is now to make over the next months meaningful progress, not to talk about things, but to deliver, deliver, deliver”.
An early test of the strategy will be the decision on whether Arm does indeed list its shares in London alongside New York. Those close to the process say that the technical work has been done and shows a dual listing would work in theory.
“It’s decision time,” says one person involved in the process, words that could just as easily apply to the government’s ambitious reform agenda. “No more excuses.”