Reforming capital markets is a “no-brainer”, according to the head of a review of the UK’s rating system.
Mark Austin, Freshfields Partner released its secondary capital raising report on July 19, in a move that coincided with the government’s key speech at Mansion House to the city’s greats, which touched on the prospects of unblocking UK markets following Brexit.
Austin, who was asked by the government last October to examine how processes for raising capital from companies that are already listed could be made more efficient, said Financial news the timing of his report was no coincidence.
“It shows that this process of regulatory and capital market reform is a no-brainer,” he said.
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The Secondary Capital Raising Review was an offshoot of the Lord Hill List Review completed last year. Alongside the Government’s flagship Financial Services and Markets Bill, they are part of a political effort to make UK financial services more competitive by breaking with retained EU law.
Questions had been raised about whether the recent unrest at 10 Downing Street would delay financial services reforms, but Austin said with the Mansion House speech he saw no change in the government’s commitment to open the city.
The Austin review argues that retail investors should be more involved in the secondary market of raising capital.
“Issuers should give due consideration to involving retail investors in all fundraisings everywhere,” Austin said. “It’s an important principle that retailers be involved in all fundraising.”
Mike Coombes, vice president of corporate affairs at Primary Bid, a capital markets technology platform, said the changes outlined in the review are needed to make raising capital fairer for retail investors.
“That’s a pretty important thing to say for this report,” Coombes said. FN.
The actions of retail investors are often diluted by secondary capital raisings. It was a feature of the market when companies needed to raise new funds during the pandemic.
“You have a real situation where retail investors, just by not being able to participate, will be materially disadvantaged,” Coombes said. “It’s a matter of fairness and governance.
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The involvement of retail investors remains embryonic in secondary rounds, as they have only recently been allowed to participate. Coombes said retail investor involvement will also increase with better education.
“You read about IPOs all the time, but never follow-up offerings. If they have value, more and more people will,” he said.
One of the main recommendations of the Austin review is that existing shareholders have “first rights” in buying new stock listings.
Austin said FN that while some called for an American-style abandonment of so-called preemptive rights, he was adamant in keeping them in place.
“It’s a very valuable part of our markets,” he said.
The review asked companies to be able to raise up to 20% of their share capital in new issues. The change was first introduced in 2020 during the pandemic to make raising capital easier, and Austin believes it should be made permanent.
“It worked very well, when the rules were relaxed. The company’s issuers didn’t abuse it and they didn’t rush 20%,” he said.
The review also provides for a change to the capital threshold at which a prospectus would be required for new share issues. Currently, a prospectus is required if companies raise 20% of existing share capital in a secondary listing. The review recommends raising this threshold to 75%.
Austin said the change would make it much easier for companies to issue additional shares by reducing the cost and time needed to create follow-on offers. Many prospectuses are hundreds of pages long, he said, duplicating existing market information.
“We need to move on to a document that focuses on why you are doing this, what you are going to use the capital for and what the specific risks of the offering are.”
The Financial Conduct Authority and the Pre-Emption Group, part of audit regulator the Financial Reporting Council, welcomed the recommendations.
To contact the author of this story with comments or news, email Jeremy Chan