The author of a government-commissioned review of fintech is pushing ministers for major reform of the UK’s capital markets to ensure they can compete on the world stage, City A.M. has learned.
In a letter to the Treasury in February, Ron Kalifa, who led a landmark review of fintech last year, outlined several key areas in the capital markets ecosystem that were hampering growth, including analyst research, the depth and mindset of investment managers, and tax policy that does not incentivise firms to float in the capital, City A.M. understands.
Sources told City A.M. the letter urged ministers to conduct in-depth reviews of the environment for corporate research, with the aim of boosting the depth and quality of investment analysis into UK firms, and tax rules, to stop firms from reaping early-stage tax breaks before heading overseas to go public.
Calls for reform to the analyst research landscape come after EU-era MiFID II rules forced financial institutions to unbundle their analyst and execution fees in 2018, causing brokers to slash analysts spending and sparking a rout in senior analysts and overall analyst numbers.
European brokers have shrunk their analyst teams by at least three times more than US firms since the rules came into effect, equating to a 12 per cent loss of analysts in Europe against a four per cent loss in the US, according to a report by analytics firm Substantive Research last year.
The conservative mindset of investment managers focusing on public markets has also been outlined as an area in need of reform in the letter, after top institutional investors have shunned investment in IPOs in recent years in order to focus on short term yields.
Sources said the final pillar outlined for review is designed to boost executive pay and ensure remuneration keeps pace with the level of risk and liability that bosses are expected to shoulder, with the intention of stemming an exodus of talent away from public firms.
There are concerns that current restrictions on non-executive directors’ remuneration in the form of stock are restricting the potential pool of candidates willing to take on the roles.
City minister John Glen has now provided an initial response to the letter, City A.M understands, but sources have been calling 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 demonstrated commitment coming out of 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 looked to woo a host of big name tech firms and promote the City as a destination to go public.
London has been struck a number of recent blows in its bid to become an international IPO destination, however, with homegrown chipmaker Arm and British buyout giant CVC among the big name firms said to be eyeing floating overseas.
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 firms to go public, sources said.
City A.M. revealed in February that changes to analyst research rules were also among the measures discussed at the meeting in February to boost the appeal of London as a listing capital.
While changes have been made to exempt firms under £200m market capitalisation from unbundling requirements, regulators are being pressed to go further in providing exemptions for firms at IPO stage. Concerns have also been raised that the new limit will continue to shut out researchers due to the fluctuation in market capitalisation and firms’ unwillingness to commit resource to researching firms when they may be later forced to unbundle the fees.
UK investment managers and institutional investors meanwhile have come under scrutiny in the letter over fears that a fixation on yield and payouts, rather than longer term investment and equities, are preventing growth-focused firms from raising capital in the UK.
Pension funds are one of the key areas being examined by industry and ministers as a source of funding, but equity investment from pensions managers has plunged in the past two decades. Equities represented 73 per cent of UK pension funds’ assets in 1999, but had plunged to 12 per cent by 2018, according to research by Pension Europe.
Ministers have been looking to remedy the dearth of investment in recent months by overhauling pension regulation and freeing up capital to flow into UK firms.
A further consultation on changes to pension rules was announced last week in a bid to unlock cash from pension funds to flow into public and pre-IPO growth investment, while Solvency II rules, which have forced insurance giants to hold huge amounts of cash on their books, are also set for the scrap.
Digital minister Chris Philp similarly called for institutional investors to step up and back homegrown tech last week, arguing that the benefits of the growth firms in the UK were flowing to institutional investors overseas.
A review into tax rules is now being pushed by those who fed into the letter, City A.M. understands, urging changes to tax rules which would more significantly benefit investors, taxpayers and firms who list in the UK.
At the meeting between ministers and tech leaders in February, ministers were reportedly mulling a tax model for public markets that mirrored the Enterprise Investment Scheme, which has spurred a boom in investment into UK startups by allowing investors to claim back on investments.
A Treasury spokesperson told City A.M.: “The Treasury is working closely with regulators to strengthen the UK’s Capital Market eco system.
“So far, we have amended FCA rules to boost the availability of research to institutional and individual investors, and we are working with the PRA on reforms that are set to grow and innovative and vibrant insurance sector.”
The letter emerges today as the fintech sector gather to review the progress of the Kalifa Review one year on at UK Fintech Week this week, with city minister John Glen and Business secretary Kwasi Kwarteng due to address industry bosses today.