The club of City executives plotting a revival for the UK’s capital markets

For the 10 top executives who meet each month at the London Stock Exchange’s Square Mile headquarters, fear is a powerful motivator.

The three-century-old bourse is confronting a prolonged drought in listings, a domestic pension industry shunning UK equities and a morale-sapping anxiety that any homegrown company aiming for global success will choose to float in New York.

The monthly gatherings were born of a decision in the summer of 2022 by Dame Julia Hoggett, chief executive of the exchange, to take matters into her own hands.

She convened a group of City grandees, advisers and investors to drive a radical overhaul of the UK’s capital markets, win political backing for the changes and try to counter what the group saw as a corrosive negativity engulfing the London market.

Two years on, the efforts of the group, which calls itself the Capital Markets Industry Taskforce, and the fortunes of the market, are at a critical juncture.

Polls have put the apparently City-friendly Labour party on track for victory in the general election on July 4, the flotation of microcomputer maker Raspberry Pi this month has dispelled some of the gloom, and there are tentative signs of a global recovery in initial public offerings.

“We’re at a very delicate tipping point right now where issuers and investors are starting to listen to us,” said Mark Austin, a CMIT member and corporate lawyer at Latham & Watkins. While not expecting a recovery in flotations until at least late this year, Austin insists that sentiment towards London is improving: “The tide is turning”.

Convincing more companies to list is one measure of success, but it is not the only one. The group’s agenda includes reforming a risk-averse pension system and finding ways for start-ups to secure domestic funding to scale up and stay in Britain, even if they opt to remain private.

One of the first people Hoggett recruited to the CMIT was Peter Harrison, chief executive of UK asset manager Schroders.

The ambition, said Harrison, was to create a “Noah’s Ark” drawing representatives from all corners of the capital markets who would join forces to try to end the malaise. “This was trying to create a neutral place where we all said: actually, how do we solve the problem rather than solve our self-interest?”

Other members include Sir Jonathan Symonds, chair of FTSE 100 drugmaker GSK, and Sir Nicholas Lyons, former lord mayor of the City of London and now chair of pensions group Phoenix, each armed with their own motivation for rebooting the market.

CMIT has forged close ties with the Conservative government, with Chancellor Jeremy Hunt publicly backing its agenda. Harrison, Symonds and Lyons spent hours at the Treasury helping officials to hone their ideas before the Autumn Statement in November, according to people familiar with the matter.

It has made the case for reform of a pension system that eschews high-growth private companies, robbing start-ups of a source of funding as they try to grow and potentially eroding returns for future generations of retirees.

The group has also sought to put a spotlight on corporate governance and remuneration rules and norms, which it argues leave London-listed companies at a disadvantage versus those in the US.

CMIT’s members say privately that they believe their agenda has the backing of Labour, but this confidence will be tested if party leader Sir Keir Starmer makes it to 10 Downing Street and has to rapidly rank his priorities.

Launching a new industrial strategy and bolstering workers’ rights are among the party’s most pressing concerns. One business lobbyist who speaks regularly to Labour said he believed financial services would not be a top priority.

Yet with little room for higher public spending, a Labour government’s plan for economic growth would largely hinge on encouraging private investment.

While Labour might give more weight to different aspects of the reforms, it could be bolder than the Conservatives in areas such as pensions, said two City advisers who have met the party’s business team. It has promised a full “review of the pensions landscape” to identify ways to boost returns and increase investment in the UK.

Two CMIT members expressed frustration in recent months at the refusal of Prime Minister Rishi Sunak’s free marketeer advisers to support more radical measures to push investors to back UK companies.

Regardless of political affiliations, there is a consensus in the City that a period of political stability would help after the turmoil since Brexit.

Part of CMIT’s sales pitch to politicians is that the benefits of a flourishing equity market — and a healthy pipeline of private companies that could list on it — extend far beyond the City’s lawyers, bankers and accountants.

“We need the capital markets to work better because it makes us all better off,” said CMIT member Katharine Braddick, group head of strategic policy at Barclays and a former Treasury official.

There is a “mutually reinforcing relationship” between the capital markets and the country’s prosperity, she added. “We’ve got to do a better job of explaining to people why this market exists. It’s about funding the UK economy, helping people save more and driving the transition to net zero.”

British companies that list in New York or take money from a San Francisco venture capital fund are also more likely to gravitate away from the UK, taking potential jobs with them, said Charlie Walker, Hoggett’s deputy at the LSE. The British Business Bank is among those concerned that the UK is in danger of becoming an “incubator economy”, seeding businesses that then move overseas.

Work on remaking the UK’s capital markets has been under way since at least 2020 and has leaned on government-commissioned reviews of the listing regime and fintech sector. The biggest overhaul of listing rules in decades is set to be confirmed as soon as next month.

CMIT scored its own win last year when the Financial Reporting Council, the accounting watchdog, scrapped all but one of its planned additions to the corporate governance code for large listed companies.

Robust corporate governance has been a hallmark of the UK market but Austin says the regime has become “unduly burdensome” and deters companies from listing in London.

It is a view that has faced resistance from investors who put great weight on governance standards.

“CMIT claims to be bringing together the full ecosystem but . . . it does not feel like investors are being listened to,” said an investment manager at one of the largest UK pension funds. “They’re creating an unbalanced debate where good corporate governance is pitted against a thriving UK plc.”

A group of pension funds last week urged the Financial Conduct Authority to delay approving the listing rule reforms until after the election, warning that the changes would deter governance-focused investors.

The tension is at the heart of the controversy over whether attracting Shein, the online fast-fashion retailer with Chinese roots, would be a coup for the London market or betray its reputation for governance. Shein has faced allegations of forced labour in its supply chain, which the company denies.

Asked about the prospect of Shein going public in London, Schroders’ Harrison said: “There is a high bar for companies seeking to be listed in London — if a company can meet that bar, it’s up to investors to decide if they want to invest.”

While the debate over Shein intensifies, there are signs that major London-listed companies are shifting their approach to executive remuneration. CMIT has argued that a reluctance to pay more weakens the hand of FTSE companies in recruiting top executives who could earn more at US-listed rivals.

FTSE 100 companies such as the London Stock Exchange Group, AstraZeneca and Smith & Nephew have in recent months handed bigger pay packages to their leaders, defying opposition from some shareholders and the proxy agencies that advise them.

Asked whether he was comfortable with bumper pay deals for executives, Hunt told the Financial Times: “I have no problem with high levels of executive pay if it is merited by the performance.”

Members of CMIT say they recognise London cannot outgun New York, the world’s deepest capital market. “We’re not trying to turn ourselves into New York,” said Austin. “New York is 10 times bigger, it’s a much deeper market and it always will be. And it will be the right answer for a lot of companies.”

Austin and others argue that US markets are not always a good home for companies valued at less than $5bn-$10bn, with little name recognition among investors and limited coverage from analysts. Their aim is to create a “level playing field” and make the UK “the obvious viable alternative” for companies that do not opt for New York, he said.

CMIT’s lofty ambition to bring together different — and sometimes duelling — interests is far from complete. Even within the group, there is acknowledgment that members have helped identify potential solutions but their incentives are not always aligned.

“I’m frustrated that we still don’t know what we’re all aiming at and what we think the problem is that we’re trying to solve,” said one member.

One example is the “British Isa”, a move by Hunt to give bigger tax breaks to retail investors who back UK companies. Although the group supports the idea, the change would result in only a small amount of investment and some members see it as a “distraction” from bigger reforms.

After two years, there is hope among some in the City that CMIT has at least offered a map for how to achieve a renaissance for London’s moribund market. But even if much of the blueprint comes to pass, patience will be required.

The aim of the reforms, particularly those designed to boost investment in UK companies, is to lay a “foundation stone”, said Symonds. “This is a multiyear, if not multi-decade transformation.”