Finance

‘Capital markets reform is a no-brainer’ says listings review chief


Reforming capital markets is a “no-brainer”, according to the head of a review into the UK’s listing regime.

Freshfields partner Mark Austin published his report into secondary capital raisings on 19 July, in a move that coincided with the government’s key Mansion House address to City grandees, which talked up the prospects of unlocking UK markets in the wake of Brexit.

Austin, who was asked by the government last October to look at how further capital raising processes by companies that are already listed could be made more efficient, told Financial News the timing of his report was not a coincidence.

“It illustrates that this process of regulatory and capital markets reform is a no-brainer,” he said.

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The Secondary Capital Raising Review was an offshoot of Lord Hill’s listing review completed last year. Alongside the government’s flagship Financial Services and Markets Bill, they form part of a political effort to make UK financial services more competitive by breaking away from retained EU law.

Questions had been raised over whether recent turmoil in 10 Downing Street would delay financial services reforms, but Austin said that with the Mansion House speech going ahead, he did not see a change in the government’s commitment to opening up the City.

Retail power

Austin’s review argues retail investors should be more involved in the secondary capital raising market.

“Issuers should give due consideration to involving retail investors in all fundraisings in all places,” Austin said. “It’s an important principle that retailers should be involved in all fundraising.”

Mike Coombes, vice-president of corporate affairs at Primary Bid, a capital markets technology platform, said the changes outlined in the review are necessary to make capital raising fairer to retail investors.

“That’s a pretty important thing for this report to say,” Coombes told FN.

Retail investors’ shares are often diluted by secondary capital raisings. This was a feature of the market when companies needed to raise new funds during the pandemic.

“You have a real situation where retail investors, just by not being able to participate, will be materially disadvantaged,” Coombes said. “It’s a fairness and governance issue.”

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Retail investor involvement remains embryonic in secondary raisings, as they have only recently been allowed to participate. Coombes said retail investors involvement will also increase with better education.

“You read about IPOs all the time, but never about follow-on offerings. If they are of value, people will increasingly do it,” he said.

One of the major recommendations of Austin’s review is for existing shareholders to have “first rights” in purchasing new share listings.

Austin told FN that while some called for a US-style move away from so-called pre-emption rights, he was adamant to keep them in place.

“It’s a very valid part of our markets,” he said.

The review has called for firms to be able to raise up to 20% of their share capital in new issues. The change was first introduced in 2020 during the pandemic to make capital raising easier, and Austin believes it should be made permanent.

“That worked very well, when the rules were relaxed. Company’s issuers didn’t abuse it and they didn’t rush to 20%,” he said.

The review also calls for a change to the capital threshold at which a prospectus would be required for further share issuances. Currently, a prospectus is needed if firms raise 20% of existing share capital in a secondary listing. The review recommends raising this threshold to 75%.

Austin said the change would make it much easier for firms to issue additional shares by reducing the costs and time needed to create follow-on offerings. Many prospectuses are hundreds of pages long, he said, duplicating information for existing market disclosures.

“We need to move to a document that focuses on why you are doing this, what you are going to use the capital for, and what the specific risks around the offer are.”

The Financial Conduct Authority and the Pre-Emption Group, which is part of audit regulator the Financial Reporting Council, welcomed the recommendations.

To contact the author of this story with feedback or news, email Jeremy Chan

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