Fintech Review author urges ministers to overhaul capital markets

Monday 04 April 2022 05:00

Author of government-commissioned fintech review urges ministers to fundamentally reform UK capital markets to ensure they can compete on the global stage, AM City has learned.

In a letter to the Treasury in February, Ron Kalifa, who led a landmark fintech review last year, outlined several key areas of the capital markets ecosystem that were hampering growth, including analyst research, depth and mindset of investment managers and taxation. policy that does not encourage companies to enter the capital, understands City AM.

Sources told City AM the letter urged ministers to carry out thorough reviews of the business research environment, with the aim of improving the depth and quality of investment analysis in UK companies. , and tax rules, to prevent companies from collecting taxes at an early stage. breaks before going abroad to go public.

Calls to reform the analyst research landscape come after EU-era MiFID II rules forced financial institutions to decouple their analyst and execution fees in 2018, forcing brokers to cut spending analysts and causing a rout among senior analysts and the overall number of analysts.

European brokers have cut their analyst teams by at least three times more than US firms since the rules came into effect, equating to a 12% loss of analysts in Europe compared to a 4% loss in the United States, according to a Substantive Research firm analysis report last year.

The conservative mindset of public market-focused investment managers was also described as an area in need of reform in the letter, after major institutional investors shunned investments in IPOs in recent years in order to focus on short-term returns.

Sources said the latest pillar outlined for review is designed to increase executive pay and ensure pay keeps pace with the level of risk and responsibility bosses are expected to bear, in a bid to stem a drain of talent away public companies.

There are concerns that current restrictions on non-executive director compensation in the form of shares will restrict the potential pool of candidates willing to take on the role.

City Minister John Glen has now provided an initial response to the letter, according to City AM, but sources have called for faster action.

A senior city source said: ‘Industry has been pushing and pushing for these changes and we need to see the same level of commitment demonstrated from the Treasury.

The letter follows an informal consultation with industry leaders and a meeting between tech bosses and Downing Street in early February, which Kalifa attended, where ministers sought to woo a host of big technology companies and to promote the city as a destination to go public.

However, London has recently suffered a number of setbacks in its bid to become an international destination for IPOs, with local chipmaker Arm and British buyout giant CVC among the big companies considering floating in the market. ‘foreigner.

The four areas outlined in the letter have been identified as essential for reform if the UK is to challenge internationally as a destination for companies to go public, sources said.

City AM revealed in February that changes to analyst research rules were also among the measures discussed at the February meeting to boost London’s attractiveness as a listing capital.

While changes have been made to exempt companies with a market cap of less than £200m from unbundling requirements, regulators are in a rush to go further by granting exemptions to companies at the IPO stage in stock Exchange. Concerns have also been raised that the new limit will continue to exclude researchers due to fluctuating market capitalization and companies’ reluctance to commit resources to researching companies when they may be in the future. forced to unbundle costs.

UK investment managers and institutional investors meanwhile came under scrutiny in the letter, fearing a fixation on yield and payouts, rather than longer-term investments and shares. , is preventing growth-oriented companies from raising capital in the UK.

Pension funds are one of the key areas scrutinized by industry and ministers as a source of funding, but equity investment by pension managers has fallen over the past two decades. Shares made up 73% of UK pension fund assets in 1999 but had fallen to 12% by 2018, according to research by Pension Europe.

Ministers have sought to address the investment crunch in recent months by overhauling pensions rules and freeing up capital to invest in UK businesses.

A new consultation on pension rule changes was announced last week with the aim of freeing up cash from pension funds for investment in public and pre-IPO growth investments, while Solvency II rules, which forced the insurance giants to hold huge amounts of cash on their books, are also being scrapped.

Digital Minister Chris Philp also called on institutional investors to step up and support homegrown technology last week, arguing that the benefits of growth companies in the UK benefit institutional investors overseas.

According to City AM, a review of tax rules is now being pushed by those who fueled the letter, calling for changes to tax rules that would further benefit investors, taxpayers and UK-listed businesses.

At the meeting between ministers and tech leaders in February, ministers reportedly brainstormed a fiscal model for public procurement that mirrored the Business Investment Scheme, which has spurred an investment boom in UK startups allowing investors to recover their investments.

A Treasury spokesperson told City AM: “The Treasury is working closely with regulators to strengthen the UK capital market ecosystem.

“So far, we have amended the FCA rules to increase the availability of research for institutional and individual investors, and we are working with the PRA on reforms that should develop and an innovative and dynamic insurance sector. “

The letter is out today as the fintech industry gathers to review the progress of the Kalifa Review a year later during UK Fintech Week this week, with City Minister John Glen and Business Secretary Kwasi Kwarteng due to address industry bosses today.