A Financial Renaissance: A Return of the City?
Jake Canton Perry, Client Executive05/02/2024
Once the beating financial heart of Europe, the City of London is in need of renewed vigour. When previously the London Stock Exchange (LSE) and FTSE100 acted in near lockstep with the American markets, in the last decade the United States has raced ahead, with daily trading volumes soaring to new heights. In London, by comparison, the daily amount has fallen in value from £15bn a day in 2007 to £4.7bn a day at present.
When a company considers Initial Public Offering (IPO) destinations, they increasingly look east or west, bypassing London for Asia or North America. The number of listed companies in London has shrunk by 44% since 1996, largely thanks to mergers, takeovers and a dearth of new entries to the market.
Whilst in America, technology companies such as Apple, Alphabet and Microsoft have dominated the market landscape over the last decade, efforts to encourage new tech listings in the UK have largely failed. Semiconductor and software company Arm Holdings listed solely in America, Deliveroo saw its stock rapidly tumble, and WeSoda cancelled its offering altogether. Even commodity behemoths, often seen as the LSE’s speciality, such as Glencore’s coal mining spin-off, are spurning London for New York. By the close of 2023, 30 companies, collectively valued over £100mn, will have de-listed for a variety of reasons, with travel giant Tui the latest with plans to solo list in Frankfurt.
The volume of these delistings throughout 2023 triggered nervousness at the highest levels, with the Chartered Governance Institute sounding the alarm in early January by writing a letter to City Minister Bim Afolami. The Government's swift response materialised in a breakfast summit led by Chancellor Jeremy Hunt, gathering heavy hitters from Abrdn, Schroders, HSBC and Citi to discuss potential solutions ahead of the Spring Budget.
Despite the negative outlook, reforms are stirring some new optimism. Last summer, the Financial Services and Markets Act legislated for the Edinburgh and Mansion House Reforms. This package offered a long-term regulatory lifeline for the City, repealing and reforming EU law to reduce the regulatory burden on financial services. It aims to delegate the setting of standards back to expert, independent regulators rather than the centralised EU Parliament. In Autumn, Hunt also published plans for pension fund consolidation and the 'Venture Capital Investment Compact' which aims to make investing in companies less risky and unlock £50bn of investment by the decade's end. By winter, the Financial Conduct Authority had simplified the LSE listing process for new companies by reducing the number of listing categories and minimising the reasons for regulatory intervention.
The Government will hope that these reforms will raise the attractiveness of the City and help maintain its position as one of Europe’s busiest market.
Importantly, the Government is still keeping some cards up its sleeves to sweeten the deal in the future. Industry experts have flooded national newspapers with suggestions on how to further expand the appeal of the London Stock Exchange. Options include a trimming of the 0.5% Stamp Duty tax on dividends to incentivise pension funds towards stock investments over bonds. As well as, boosting incentives for UK start-ups and companies requiring late-stage growth, in line with the Long-Term Investment for Technology and Science initiative. Others suggest continuing reforms to reduce red tape and simplify the regulatory landscape for corporate businesses.
As a former Goldman Sachs banker, Rishi Sunak is very aware of the necessity of a thriving financial sector. Growing the economy was one of his ‘Five Priorities’ and the consistent introduction of financial legislation over the last year illustrates the importance his Government is placing on the financial sector in its efforts. However, does Sunak now believe he has achieved what is required and plan to turn his attention elsewhere? The controversial Rwanda Bill has headed to the Lords and the boats are still crossing the Channel from France; stimulating Conservative infighting and dominating Sunak’s time and eroding his political capital. Additionally, the looming prospect of a general election has put the Party on a war-footing, with Jeremy Hunt talking of using the available “£20bn fiscal headroom” for tax cuts in the Spring Budget.
With funds and time tied up on other Government priorities, will the current reforms be adequate to bring a renaissance to the City?
The Government is armed with additional measures it can introduce in the Spring Budget and if it decides to continue prioritising its reconstruction; the global status of the City – currently balancing on a knife’s edge – might just tip in London’s favour, pulling it back from the brink.