Market deregulation - Austin Review

Aug. 5, 2022

Taken from an article published by Investment Week on the 5th August 2022, here: Market deregulation is key to reinforcing the UK’s position in the financial world (investmentweek.co.uk)

Democratisation of investment in London’s capital markets is crucial as Britain seeks to reinforce its position in the financial world. So, I welcome recommendations by Freshfields lawyer Mark Austin, who has drawn up a series of market deregulation proposals now backed by The Treasury.

People sometimes say that real estate investment, where I have specialised for 30 years, is becoming the preserve of Blackstone, Brookfield and Bill Gates as private equity giants and ultra-high net worth individuals play a bigger and bigger part in the landscape.

But there is no doubt that the UK's overall capital markets scene - including investment in listed property companies - has become a big boys' game.

In 1963, the man or woman in the street owned 54% of all the shares in issue on the London Stock Exchange. By 2012, this had fallen to a low point of 10.1%, and has only recovered to around 12%.

The decline in retail investors' influence is due to the rise in influence of institutional investors, who discovered the equity market in the early 1960s, to be followed into UK stock markets by global investors.

So, anything that helps re-balance the investment arena in favour of retail investors is to be welcomed, particularly as some companies now believe that having a broad investor base is crucial to fulfil the `Governance' feature of corporate ESG ambitions.

Mark Austin's submission to The Treasury, the `UK Secondary Capital Raising Review', certainly helps to do that.

One of the key proposals is for the immediate implementation of measures to involve retail investors in all capital raisings, rather than being frozen out as is often the case now. 

There are many frustrations for small shareholder that has invested their savings in a company. In particular, they tend to be excluded from the opportunity to participate in a capital raising at the beneficial rates which larger shareholders are always offered.

Protecting pre-emption rights for all shareholders in capital raising should be one of the cornerstones of good practise in the city.

Austin suggests a range of ways in which this can be done, including a `follow-on offer after the institutional offer has closed, limited to 20% of the size of the placing and a monetary cap of £30,000 per investor. These are practical measures that would be welcomed by retail investors yearning to take part.

There is also a powerful endorsement for digitisation of UK capital markets, to be led by a Digitisation Task Force with an independent chair and a clear set of principles to be followed. A move to a system where all shareholders - both institutional and retail - hold their shares in fully digitised form is long overdue.

Removing the practice of investors holding certificates is also correct and, as well as reducing costs to issuers, should also lead to increased transparency.

Likewise, a reduction in the duplication of due diligence reports and legal forms, and more clarity of responsibility for listing documents lying with directors rather than the lawyers and investment bankers, should also help to simplify and speed up the whole process of raising money on the stock market.

However, while Austin's market deregulation proposals are appropriate, it is also important to note the crucial role that small and mid-cap quoted companies make to employment tax revenues.

Retail investors often like to buy shares in smaller listed companies because they can see stronger returns from, for example, a FTSE-100 giant that is not on a similar growth curve.

According to research from brokers Hardman, small and medium-sized quoted companies represent 91% of companies listed on the London Stock Exchange, with a market capitalisation of £376bn.

These companies employ over 2.1m workers and in some regions of the UK account for 75% of the quoted company workforce. They contributed at least £25.1bn in taxes in 2020-21, and account for 5% of the total tax take for corporation tax, income tax, national insurance and VAT.

So while the measures proposed are important it is also vital the new Prime Minister's administration fully supports the whole listed company sector, including small and medium-sized quoted companies and the retail shareholders who want to invest in them. 

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