Rishi Sunak’s speech announcing the Budget yesterday contained only a brief mention of the Chancellor’s plan to make the City of London a more competitive financial centre. The “high-growth firms” that Sunak hopes will drive Britain’s economic recovery “need access to capital”, he said, and this will be achieved by “unlock[ing] billions of pounds from pension funds into innovative new ventures” and “changing rules to encourage more companies to invest here”.
More detailed proposals for a shake-up of the stock market’s rules were published by the Treasury yesterday morning in the form of the UK Listings Review, which recommends allowing new share structures, reducing the amount of shares a company needs to sell to be listed, and relaxing rules around special purpose acquisition companies, or SPACs.
This is a political as well as an economic project. London’s prominence as a global financial centre has been reduced by Brexit, even before the terms of the final agreement with the EU on financial services are known. Thousands of jobs have moved abroad and foreign investment has fallen. For the hedge funds that backed Brexit, however, the tantalising whiff of deregulation is now in the air. Will loosening a few regulations turn on the taps to revitalise the economy, or does it risk doing more harm than good?
Roger Barker is the director of policy and corporate governance at the Institute of Directors. He has repeatedly warned against a “race to the bottom” in stock market regulation, which he says could have far-reaching implications.
Barker is most concerned by the appetite for encouraging SPACs into the UK stock market. A SPAC is a financial vehicle, a “blank cheque company” that sells shares and then uses the capital raised to buy a business within a certain time frame. Investors buying shares when the SPAC launches don’t know what it’s going to spend the money on. They are a fast way for a company to go public without the scrutiny that comes with an IPO, and to raise exciting amounts of money – in the US, $109bn of SPAC deals were made last month. Some are even backed by celebrities and sports stars.
But when SPACs sell shares, they “haven’t had to issue a prospectus and go through an IPO process”, says Barker. Investors buying into them are, he says, “investing in a very speculative way, just because they think someone’s a big shot, and they want to sort of ride on their coat-tails”.
The SPAC boom in the US has been led by hedge funds, for whom they are, thanks to their structure, a lucrative and low-risk proposition. But retail investors are more likely to lose money from SPACs than to see any returns.
“You could argue, I suppose, if people understand what they’re getting into, that’s their choice”, says Barker. “But the problem is that, if you have this type of situation occurring, companies will collapse, and that ultimately reflects very badly on UK corporate governance.”
Dual-class listings, which allow companies to offer shares with minimal voting rights, are less controversial. They are the means by which the founders of tech companies in the US, such as Apple and Google, have raised large amount of capital while keeping control of their companies. Deliveroo announced plans this morning to list in London using a dual-class structure.
“A lot of people in the investor community see [a dual-class structure] as being representing bad governance, because they feel it reduces the accountability to shareholders of boards and companies,” says Barker, but he feels that for fast-growing tech companies, such a structure is encourages “patient capital”.
“It seals the company from short-term pressures”, he explains, allowing companies that are developing new technologies or pursuing scale to concentrate on their goals rather than submitting to the demands of many shareholders.
But it is also important that such a structure is limited to the companies that actually need it. “If you’re talking about mature companies, which are actually making plenty of profit in a mature area … maybe a tobacco company or an oil and gas company – you want the management of those companies to be under shareholder pressure. What you don’t want is management using all that money that’s coming in to go off and pursue empire-building, or pay themselves too much money.”
The failure to keep these new permissions in check could do extensive damage to the City. “Ultimately, people want to list in London because if they do, so, they will be trusted more by investors”, says Barker, “because they know that London demands high standards.”
And while the City may often seem detached from the wider economy, most of the UK’s largest employers depend upon its capital markets to raise money and manage risk. A recent report claims that these companies employ around 5 million people between them.
Deregulation is a financier’s solution to a politician’s problem. It is a convenient agreement with the rather dodgy claim that there is no British Google because Google wouldn’t have been able to issue a certain kind of share on the LSE in 2004. This is obviously not true – Google was already a household name when it floated, for one thing – but it allows the Treasury to say it is working to support the British tech sector.
Does the British tech sector actually need the Chancellor to intervene, when London alone accounted for more than a quarter of all European venture capital funding last year? If not, we should think about who would really benefit from a more “agile”, less regulated London.