On 1 July, precisely six months after the UK left the European Union, the UK Government’s Chancellor of the Exchequer announced planned reforms designed to re-focus and modernise the UK’s financial services industry.
Background
It would be fair to say that since Brexit the pro-business Conservative government led by Boris Johnson has been under pressure to inject renewed impetus and hope into the UK’s financial service industry, which generates £76 billion in tax revenue and employs 2.3 million people.
In the run up to, and since, ‘Brexit Day’ on 1 January the European Union (EU) failed to agree that UK financial services regulation is equivalent to EU regulation. Being recognised as equivalent would have permitted UK-based financial services companies easy access to the EU markets. The EU’s determination, or at best lack of determination so far, was perhaps a surprise given the UK adopted all EU regulation when a Member State. Conversely the UK has recognised equivalence for EEA countries and Switzerland in relation to share trading.
Consequently, in the immediate aftermath of Brexit Day approximately EUR8 billion of EU equities trading moved to Amsterdam and Paris, as EU rules proscribed it from staying in London. Hundreds of financial services firms opened offices in, or outright relocated to, EU locations to ensure continued access to European markets on a passporting basis. Similarly, the derivative trading sector has been forced away from the UK.
More recently, London drifted even further behind as a venue for initial public offerings (IPO) as New York and Frankfurt benefitted from the SPAC boom. The unattractive regime for IPOs in the UK prompted the UK Government to commission Lord Hill to conduct a review and make recommendations for potential reforms to the UK listings rules. Lord Hill’s review made 16 recommendations, ranging from overhauling the Prospectus Rules through to permitting dual class shareholding structures on the premium listing segment (considered to be the most prestigious of the London segments). Not all of the proposals met with universal approval, almost immediately evidenced by institutional money shunning Deliveroo’s IPO in part due to the dual class share structure.
Proposed Reforms
We highlight two of the flagged reforms. We will report further on the reforms in separate posts.
UK Listings
The chancellor has announced the intention to review and potentially replace the prospectus regime. The intention behind the reform is to:
- to facilitate wider participation in the ownership of public companies;
- to improve the efficiency of public capital raising by simplifying regulation and removing the duplications that currently exist in the UK prospectus regime;
- to improve the quality of information that investors receive;
- to improve the agility of regulation in this area.
The Prospectus Regime consultation was announced on 1 July and runs until 24 September. It is consulting on matters such as new powers for the UK Financial Conduct Authority (FCA), the content of prospectuses, the scope of the UK’s public offering rules and public offerings by private and overseas companies.
The FCA has committed to implementing the necessary rule changes by the end of the year.
Wholesale Markets
Perhaps the poster-child for over-prescriptive EU regulation, the second Market in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation have been widely derided by financial services firms as being expensive to observe with little benefit.
The Wholesale Markets consultation comments “it is not surprising given the extent and complexity of the new regulation introduced by MIFID II, that some rules have not delivered their intended benefits, have led to duplication and excessive administrative burdens for firms, or have stifled innovation. The government intends to rectify this.”
The changes being consulted include removing EU caps on the amount of trading in “dark pools” and the rules around where derivatives must be traded.
The consultation was also announced on 1 July and runs until 24 September.
Conclusions
The announced reforms were not a surprise, although they mark another step forward in re-vamping UK securities regulation post-Brexit. At its heart is modernising the UK regime to attract greater business – whether that is through streamlining regulation or focussing on the government’s hot buttons such as technology and sustainable finance. We expect that on balance these proposals will find favour with the UK’s financial services sector, particularly the reform to Mifid II.
The chancellor insisted that any reforms would not jeopardise the chances of the UK regulatory regime being recognised as at least equivalent to the regimes in major trading partners. Although the chancellor specifically mentioned the EU, it seems unlikely that the reforms will improve the chances of the UK being granted equivalence by the EU; it would take a tectonic shift in opinion on what amounts to ‘good’ regulation. It is more likely that the changes are designed to appeal further afield, particularly the US, China and Singapore.