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Changing Stock Market Listing Rules and Retail Investors

03 March 2021

By Adam Lloyd

The Chancellor of the Exchequer, Rishi Sunak, has now delivered his budget and his plans may well set the economic agenda for a generation. As well as navigating a course between the rocky outcrops of tax and spend that have sunk many a political career he has to do it against the backdrop of the greatest level of national debt since the war. If that weren’t enough, he also has to create an environment in which Britain can prosper outside the comfort blanket of the EU. The stakes have never been higher and its not just political careers that are at risk if it gets it wrong.

The fiscal balancing act is probably foremost in his list of problems to solve and the politics of what he has proposed, such as higher corporation tax, will be argued and the details pored over for the life of this parliament and beyond. The future of the UK will be much more about how we encourage enterprise, do business and build an economy that can offer prosperity and opportunity for future generations. If Mr Sunak can get that right the fiscal dilemma will eventually recede.

Less likely to grab the headlines but potentially more significant for a post-Brexit Britain will be the non-fiscal policies for getting the economy moving again. In November last year Rishi Sunak commissioned Lord Hill to produce a report on how to take advantage of the departure from the EU to make the UK financial markets more attractive to global investors and issuers. The conclusions and recommendations of Lord Hills report were also published today in the UK Listing Review.

The post-Brexit narrative has it that by relaxing the financial services rule book Britain will be able to increase its share of the global listings pot and ensure London remains one the worlds key financial centres. Given the value of London’s financial markets to the UK economy it is an important thing to get right. The creation of the High-Growth segment on the London Stock Market to attract technology “unicorns” like the ones that have been listing in the US stock markets and achieving unbelievably high values has been getting recent headlines but since its inception in 2013 London has not made any real headway compared to Wall Street.

Lord Hill’s report lists 15 core recommendations to ensure the City prospers. Anything that can bring the world’s high growth companies and future industries to the UK should be encouraged because the successful ones will undoubtedly benefit the economy and society at large with more jobs, the creation of new wealth and ultimately more taxes for the Exchequer. At a political level the debate will likely be more about whether the government is doing enough rather than too much to encourage new enterprise. Relaxing the listing rules in London, as proposed by Lord Hill, could well be good for the economy if it persuades the business success stories of the future to come the UK.

The risk is that by deregulating a regulated market you actually frighten investors who invest in new issues by removing the protections they have relied on. It is no coincidence that the world’s biggest markets are also the most regulated. Those regulations are there to protect the investors without whose money the markets would be nothing. The decision to add more regulation or take it away is just as delicate a balancing act as deciding whether to increase or decrease taxes

Ironically, Lord Hill’s report is published just as the London IPO pipeline is filling up with its largest ever waiting list of new tech businesses such as Trustpilot. The Danish founder of Trustpilot referred to the “smart money” in London when explaining his decision to list here and also hinted that other tech businesses would be coming to London too. Maybe the listing rules are fine just the way they are.

Alongside the arguments to deregulate the market are the growing calls to make access to the market easier for individuals and the Hill review has also addressed this. The big three private client broking houses, AJ Bell, Hargreaves Lansdown and Interactive Investor have put aside their competitive differences to collectively demand greater access to new issues having been excluded from the biggest deals so far this year. They are demanding more rights for retail investors to access IPOs and asking that the rules be changed to make it a requirement for companies coming to market to consider a retail element to their IPO.

As it stands, the big institutional investors dominate the stock market because they have the most money to invest and when a new company wants to list its shares those big players always get first refusal. In may cases the smaller investors and individuals in particular have no direct access to these deals.  The big institutions have lots of money but it’s also important to remember the money belongs to other people who pay the institutions to manage their money for them. Most of those people are individuals who are saving through their pensions and ISAs. Just like retail investors, in fact. The notion that retail investors are exempt from the party is not completely true.

The protestations of AJ Bell, Hargreaves Lansdown and Interactive Investor are a little self-interested. The difference between them and the City institutions they complain about is one of semantics. They both manage money for their clients and when you drill down far enough the clients of the big funds and the private client brokers are pretty much the same: people investing and saving for the future.

The private client brokers and indeed Lord Hill all believe retail investors who wish to manage their own affairs should be able to stand alongside the institutions in the queue for new investment opportunities. New rules to make this a requirement now seem likely not least because there are now platforms out there like Primary Bid which make this easily possible. The FCA will consult on the recommendations of the UK Listing Review and we will see in due course what rules changes they bring about.

What regulators will need to be wary of is what protections exist for private investors. Greater access and rights for small investors is hard to argue against but the devil will be in the detail. The problem for politicians is that retail investors make a lot of vote limiting noise when it all goes wrong – and it does sometimes go wrong. Just as markets go up and everyone wants a slice so they come down again and the fall can be more dramatic than the rise. More people losing their life savings nearly always leads to more regulation.

If a retail element does become a requirement for new issues then it must also be absolutely clear what the risks are. It should also be easy for new trading platforms to come into the market to provide the services that private investors will rely on to manage their affairs effectively.

Competition improves service and reduces cost which can only benefit retail investors.