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New rules, new risks

From Folkestone and Dover to Fenchurch Street and Docklands, frustration is in the air. Thwarted holidaymakers are as impatient to get away as the government (even in hiatus mode) is to get its hands on the regulatory steering wheel. Ministers want to induce a second Big Bang, to unleash Britain’s post-Brexit potential and they are being urged on by City firms, who naturally would like compensation for being yanked out of the EU.

Private investors are equally discontented, although their problems are not Brexit-related. A constant theme in the emails I receive is unfair treatment by company management, whether that’s Duke Royalty’s decision to announce, open and close an offer and placing all within a single day, making “it impossible for any shareholder other than three directors and those in the know to take part”, or the brokers who aid and abet companies by “sabotaging shareholder democracy through their incompetent and careless approach”, as one reader proclaimed following his unsuccessful attempts to attend annual meetings.

The government has been sitting up and taking note, although that’s only because it would like to see private investor wealth dragooned into helping it on big infrastructure projects, and/or offered up to growth companies. It’s why it wants regulators to rip up EU based Solvency rules which require insurers to hold large amounts of capital of cash – money that could be released for investment into those crucial infrastructure projects. There’s also the small fact that financial services is a jewel of the economy. It makes a huge contribution, delivering a trade surplus of £63bn in 2020, the highest such trade surplus in the world, while the UK’s insurance sector is one of the largest in the world. Brexit however has the potential (already seen in rivalry with Amsterdam’s exchange and the EU’s desire to stop its firms using London’s clearing services) to be the City’s biggest ever threat to its preeminence, rather than a catalyst for growth.

The result is a heap of new legislation and rules designed to ensure London and the economy thrive. Among the new proposals to join earlier published plans (Lord Hill’s listing rules review, the UK Prospectus review, and a long term assets fund project) are the Financial Services and Markets Bill, and the UK Secondary Capital Raising Review by Mark Austin.

The aim of the financial services bill is to enhance the competitiveness of UK financial services by repealing hundreds of EU retained laws and to create a regime that works with financial services firms, not against them, where rules can be amended or ditched if they are hampering the latter. Ministers want firm-friendly outcomes, principles-based regulation, and to make growth and competitiveness additional key objectives for regulators.

Not surprisingly, regulators are resistant. They want rules-based regulation, and see protection as their core objective. They rightly worry that a relaxation in standards would create a riskier environment and damage the UK’s international standing.

Mark Austin’s report on fundraising, which deals with the exclusion of private investors, should deliver real change. Recommendations include allowing retail investors to participate in all more capital raising, and for the implementation of a digitisation drive so that ownership rights can flow to end investors quickly and easily. Share issuers should know who is on their register, even when those investors are in nominees. A new digitisation taskforce will be set up to produce initial findings by spring next year with an implementation plan following early in 2024. These changes are welcome.

Other proposed reforms might not work so well for small investors. These include allowing companies to raise up to 20 per cent of their existing share capital (as they were permitted to do in the pandemic without approaching all shareholders), and permitting high-growth companies to raise as much as 75 per cent, subject to shareholder agreement.

Big Bang 2 may happen exactly as ministers hope. There is a lot at stake if it doesn’t. Private investors may find it easier than ever to break through the barriers that keep them at arm’s length from the stock market. But it’s worth reminding ourselves that these reforms are not driven by a desire for fairness. They are designed to release funds (and that includes from company pension schemes). The backdrop is changing and investors need to be prepared.