UK government may block LSE listings on grounds of national security

By Bob Huxford, Capital Markets

The Chancellor of the Exchequer, Rishi Sunak, is said to be considering the creation of powers that will enable the UK government to block companies from listing on the London Stock Exchange (LSE) on national security grounds. 

A consultation on the details of the proposal should launch in the coming weeks, but it is expected the powers could be employed if there were suspicions a listing was being used to help a hostile foreign state deliberately undermine the reputation of the LSE, or more easily access state or commercial secrets.

The proposal is not designed to block any specific companies, although it was the listing of Russian aluminium and hydro-power producer EN+ in 2017, that initially raised concerns, as its founder, Oleg Deripaska, is said to have close ties to Vladimir Putin. EN+ listed at a valuation of $8bn, since which time the US placed sanctions on Mr Deripaska and the market cap is now down to $5.7bn. 

Would the proposal be welcome? The London Stock Markets have for some time been mostly self-regulating and this has proven in general a great success. Not being in the straitjacket of over-regulation has made London’s markets highly attractive to companies seeking a listing, particularly smaller companies that cannot shoulder the cost and burden of the inflexible regulations found, for example, in the US. This is precisely why the UK’s Alternative Investment Market (AIM) can justifiably claim to be the world’s most successful stock market for smaller, growth companies.

Markets have been generally able to police themselves because they are built on trust and anything that undermines that trust damages investor sentiment toward the market and ultimately the share prices of its constituents. Companies that don’t play fair are typically, therefore, given short shrift by investors and either don’t make it to the market in the first place or don’t stay listed for long.

However, whether a company, or those involved with it, might pose a threat to national security may not be obvious to investors, unless they happen to work for an intelligence agency. Nor should it be for them, or the Financial Conduct Authority, to ascertain whether this is the case.  

Anything that can improve the perception of the UK’s financial markets as dependable would be welcome. London, or Londongrad as some now refer to it, is already suffering from a perception of being the money-laundering capital of the world. We don’t also want to be viewed as the country that enables nefarious businesses to hide behind the legitimacy of a stock market listing.  

Tory MP and Chair of the Foreign Affairs committee, Tom Tugendhat, said: “Britain’s markets underpin our economy and our global reach. That’s why we need to be careful who uses them. Dirty money and asset stripping have become a new form of attack on our country.” And he’s right, we do need to be careful. The finance industry accounts for 7% of the UK’s GDP and 11.5% of tax receipts. It doesn’t just exist to feed fat cat bankers but helps all of us, and anything that erodes trust in the UK’s finance industry could prove costly to us all.

Of course, this will only work if the government is careful not to abuse its newfound powers to block respectable businesses for political reasons. The key will be transparency. One of the cornerstones of trust in our markets is that everyone has access to same information. If companies are to be barred from the LSE on national security grounds what transparency will there be about the grounds for that decision? When you say it out loud, keeping bad actors out of the stock market seems like a very sensible idea. If it is to be a good idea that actually works, the devil, as ever, will be in the detail.