It was a big night at Mansion House on Monday. Reports launched, speeches given, bold statements made. What does all that mean for the UK, in terms of investment, technology and ensuring this is a country where companies ‘can start, scale and stay’?
The Chancellor set the tone of his speech in terms of “long-term reforms to our competitiveness” before explaining ambitious plans “to enable our financial services sector to increase returns for pensioners, improve outcomes for investors and unlock capital for our growth businesses”.
It’s probably also worth reminding ourselves of some of the positive backdrop to our current situation. As the Chancellor said: “In the last decade we have become Europe’s largest life science sector, Europe’s largest technology sector, its biggest film and TV sector and its second largest clean energy sector.”
It is positive that the Government are now talking so clearly about the opportunity and the combination of our successful financial services sector and the vast potential of digital technologies.
“We want to be the world’s next Silicon Valley and a science superpower, embracing new technologies like AI in a way that brings together the skills of our financiers, entrepreneurs and scientists to make our country a force for good in the world.”
An important pillar of the Chancellor’s speech was the potential investment power of our pension funds:
“The UK has the largest pension market in Europe, worth over £2.5 trillion. It plays a critical role in providing safe retirement income as part of the social contract between generations.
“However, currently we have a perverse situation in which UK institutional investors are not investing as much in UK high-growth companies as their international counterparts.
“At the same time on their current trajectory, some defined contribution schemes may not provide the returns their pension fund holders expect or need.
“Whilst many defined benefit funds are in surplus, their returns are lower than some international peers and some are still underfunded.”
Or to put it plainly, why have we allowed a cost obsessed model to develop? It is clear we must return to returns.
It is welcome that the Chancellor agrees. In setting out these ‘Mansion House reforms’ he first explained how current figures show investing is skewed away from the UK.
“I start with Defined Contribution pension schemes, which in the UK now invest under 1% in unlisted equity, compared to between 5 and 6% in Australia.”
To address this and encourage greater domestic investment the Chancellor announced the “Mansion House Compact”.
The Compact – signed by the CEOs of many of the largest DC pension schemes –Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G & Mercer – commits DC funds, which represent around two-thirds of the UK’s entire DC workplace market, “to the objective of allocating at least 5% of their default funds to unlisted equities by 2030.”
“If the rest of the UK’s DC market follows suit, this could unlock up to £50 billion of investment into high growth companies by that time.”
The Chancellor summed up the purpose perfectly, clarifying that “investment decisions should be made on the basis of long-term returns and not simply cost.”
We have all been so conscious of the scale up challenge in the UK. The Mansion House speech similarly spoke to the opportunity,
“At the same time this package has the potential to unlock an additional £75 billion of financing for growth by 2030, finally addressing the shortage of scale up capital holding back so many of our most promising companies.”
Turning to listings in London the Chancellor shared David Schwimmer and Julia Hoggett’s aspiration that the London should be the ‘global capital for capital’, saying:“I want the world’s fastest growing companies to grow and list right here, making LSE not just Europe’s NASDAQ but much more.
“So today we are publishing draft legislation on prospectus reforms, delivering another milestone of Lord Hill’s UK Listing Review. This will create a more effective regime than its EU predecessor, giving companies the flexibility to raise larger sums from investors more quickly.”
There were also very positive words surrounding Rachel Kent’s investment research review:
“The government welcomes Rachel Kent’s excellent Investment Research Review published today and has accepted all recommendations made to it. We therefore welcome the FCA’s commitment to start immediate engagement with the market to inform any rule changes on removing the requirement to unbundle research costs by the first half of next year. This will ensure we are better able to fund quality research into the new Silicon Valley sectors.”
The Chancellor was also clear as to two changes which the city has been calling for since the opportunity arose…
“Last week, we abolished protectionist rules inherited from our time in the EU such as the Share Trading Obligation and Double Volume Cap so UK businesses can now access the best and most liquid markets anywhere in the world.”
The Chancellor left, perhaps the most innovative announcement, until the end of his remarks…
“In a highly innovative step which represents a global first, we will establish a pioneering new “intermittent trading venue” that will improve private companies access to capital markets before they publicly list. This will be up and running before the end of 2024 and put the UK at the forefront of capital market innovation.”
So, some real innovation, significant potential, and many reasons for optimism. Building on the Edinburgh Reforms, we now have the Mansion House reforms. Here’s to a continuation of these practical and pragmatic steps which, if got right, can re-focus finance and related regulation for the benefit of us all.