- The good news – there is clear recognition that change is required to revitalise UK equity markets, and there is growing momentum to address some of the issues with a host of reviews and proposals.
- The bad news – although we see the changes as fundamentally positive and necessary, they are not enough on their own to halt and reverse the de-equitisation of the UK market, as discussed in our recent note.
- In this note – we examine the proposed reforms and suggest a number of additional solutions.
More action required – the UK’s economic malaise is reflected in the UK equity market, and fundamental change is required to stimulate this vital part of the economy. We will shortly be sending out a survey to gauge the views of a broad spread of participants in the wider market.
Reform agenda – there is considerable activity, which aims to fundamentally change the building blocks of UK capital markets. In our view, this is very welcome and would start to address the prevailing market issues.
Scale of the issue – although the problem is now being recognised, the level of malaise is deep set, particularly in the small & midcap and growth sectors. Over the past five years, the number of UK-listed companies has reduced by 100 or c.20%. Another 17 companies are currently subject to offer and there has only been one IPO of note this year (CAB Payments).
Why this matters – there is currently a circle of negativity whereby the number of listed companies is shrinking, the market capitalisation is shrinking, the valuations of UK-listed companies are depressed and companies are attractive acquisition targets.
This has long-term implications for a number of reasons:
- Smaller companies drive economic growth and employment.
- The UK loses its attraction as a listing venue.
- Certain sectors (e.g. technology) are being hollowed out, and acquired companies see leadership and growth move to other geographies.
- The UK’s strengths as a financial services provider are reduced.
- The level of corporation tax is reduced.
- The benefits of listing (broad ownership, high levels of governance and oversight, permanent capital) are being lost.
- The cost of capital is higher given the low market valuations.
- Liquidity across smaller companies reduces, further exacerbating the cycle of negativity.
Looking for answers
We welcome the recognition that there is a clear issue to address and fundamental changes being proposed. The key areas of reform intended to strengthen the UK’s position as a leading global financial centre include:
Mansion House Reforms – to enhance the financial services sector, unlock capital for promising industries and increase returns for savers, all of which strengthen the UK as a listing destination.
Investment Research Review – to support research on smaller companies and enhance access for retail investors.
Listing Reforms – to simplify the listing rules, enhance flexibility and improve issuers’ ability to make acquisitions or disposals.
Prospectus Reforms – to improve the efficiency of raising capital.
Secondary Capital Raising Review – to enhance the ability of listed companies to raise capital.
In addition, we see a number of important areas of focus away from the fundamentals of changing the legislative and regulatory framework underpinning the markets. In particular, we see a need to provide incentives for companies to list, given there is a prevailing view that being listed just provides additional burdens in terms of governance, oversight and restriction on executive rewards. Listed companies are held to higher standards than private businesses (which drives numerous societal benefits), and incentives should be considered to offset the greater cost and burden.
We see a number of potential areas to address, including:
Tax incentives
We see these as enabling faster economic growth for the overall economy and benefiting smaller companies in particular. The changes could be directed at listed businesses to recognise their importance to the overall economy and to reflect the additional costs and requirements of being listed.
Corporation tax – introduce graded tax for companies based on certain profit levels, to reduce the negative impact on smaller companies from the recent increase from 19% to 25%.
Tax shield on interest – debt financing currently receives 100% relief, which effectively makes debt more attractive than equity. The level of relief could be reduced alongside a more general reduction in corporation tax. This would increase the attraction of equity capital and enhance long-term, permanent investment.
Capital allowances – extend capital allowances beyond 2026 to provide greater certainty, particularly given the time required for planning & implementation.
Investment in people – reduce the level of NI for smaller companies to encourage employment levels and investment in skills.
Incentivisation to invest in the UK
ISAs & SIPPs – mandate a proportion to be invested in UK-listed assets in return for the associated tax benefits.
IHT – broaden the inheritance tax exemption from AIM to fully-listed smaller companies.
Pensions – expand the Mansion House Review to incorporate smaller listed companies.
Sovereign Wealth Fund – maybe not a priority currently given the state of government finances, but it is never too late to start, as demonstrated by several other countries.
Liquidity in UK smaller companies
This is vital as a liquid market is essential for larger investors to invest in smaller companies. This is particularly important for international investors. There have been many reports telling investors how attractive the valuation UK market is, but this is not relevant if the constituents are too illiquid for international investors to want to build a holding.
Stamp duty – cut/remove stamp duty for smaller companies.
Improve retail access – as discussed in the Kent review.
Reform agenda – key dates
- July 2022 – UK Secondary Capital Raising Review Report published.
- May 2023 – FCA publishes consultation paper on proposed equity listing rule reforms.
- May/June/July 2023 – FCA publishes engagement papers on prospectus regime reforms.
- June 2023 – Financial Services and Markets Bill granted Royal Assent.
- 3Q/4Q23 – FCA expected to publish feedback following engagement process on listing regime reforms.
- October 2023 – Chancellor to update proposal in autumn statement.
- 1H24 – FCA expected to publish consultation papers on prospectus regime reforms; early 2023 also the earliest period for publication of the final listing rules by the FCA.
- 2025 – FCA expected to publish final prospectus rules.
For more details on the proposed reforms please click here.
