As solicitors, our work often relates, directly or indirectly, to the City of London and the investment brought in by the financial services sector. In addition to the bread-and-butter work around supporting corporate governance, there is the advice for funds looking to invest in or take over listed businesses, for businesses looking to rent new headquarters or to patent a key piece of intellectual property, and for start-ups looking to raise capital. Overall, the entire professional services sector which supports the City of London brings in 12% of the UK’s annual tax.
This explains the alarm at the worsening trend of British businesses listing overseas, especially in the US. The core causes are structural: fragmented pension capital; weak retail investor engagement; a taxation regime that strangely penalises domestic investment; and weaknesses in the regulatory regime. Many of these issues can be at least partly addressed by revisiting the legal framework within which the City operates and by looking at the behaviour that framework incentivises.
Unlocking pension capital
While the UK pensions sector has many strengths, there is general recognition that pension capital is relatively poorly consolidated and could be better deployed. We can see that large institutional funds overseas have lower overhead costs, stronger bargaining power and, crucially, a greater capacity to invest in riskier domestic start-ups (since larger funds are better placed to mitigate risk).
The government has announced plans to consolidate certain public sector pension funds. However, there is a case for a more radical approach given the level of untapped capital. The Netherlands – known for having among the best pensions systems in the world in terms of both pensioner benefits and domestic investment – focuses on sectoral multi-employer schemes. Following years of debate in the UK, the government has recently published plans to introduce similar multi-employer schemes and should consider pushing this strongly. Another helpful overseas precedent is Australia, which recognised the importance of pension capital to domestic investment decades ago and uses its tax system to incentivise pension funds to invest domestically.
Reform taxation
The UK’s 0.5% stamp duty on share transactions is the highest among comparable major economies. Commentators across the political spectrum, from the Guardian to the Centre for Policy Studies, have criticised this aspect of our tax framework. It is simply illogical to charge UK investors for buying UK-listed shares, while there is no equivalent tax on investments in non-UK equities. The result is a direction of investment away from UK equities towards overseas stocks.
As Dan Neidle’s Tax Policy Associates has argued, there is a strong case for the outright abolition of stamp duty on shares, if feasible given other constraints on the public finances. A sensible compromise might be to introduce exemptions for UK retail investors buying UK-listed shares, or a tiered system rewarding investment in growth shares.
Engage retail investors
A well-supported stock market also depends on a broad retail investor base: less than 25% of the British public invest in equities, while in the US the equivalent figure is closer to two-thirds. This is a long-term cultural issue and not one which can easily be resolved – companies leaving the London Stock Exchange often cite greater retail investor engagement elsewhere as among the reasons for their decision.
As a starting point, there is a case for legislating for a national financial education programme, helping to build a culture of financial literacy. Financial institutions could be incentivised through the tax framework to participate in the programme. The UK should also look at further encouraging pension pot consolidation and coupling this with maximising the level of control employees have over how those funds are invested.
Regulatory changes
Compared with other regulatory regimes, especially in the US, the UK regime places significant restrictions on founder control, executive remuneration and ownership structure. Yet global peers are more relaxed about multi-class share structures (permitting founders to retain influence for longer), executive pay and incentive alignment. These issues are of keen interest to start-up founders, particularly in the tech space, placing further pressure on the UK.
Working with the sector, the regulator may wish to consider loosening the time limits on founder shares. There is also an argument for softening the UK’s binding ‘say on pay’ rules, especially in growing strategically important sectors (although retaining shareholder protections is, of course, vital).
It is welcome that a more relaxed regime has now been introduced for non-UK companies listed elsewhere that are looking to establish a secondary listing in London. This regime should also be extended to companies founded in the UK, as the FT recently commented. As always, it is important that regulators are given political support, since there is always an element of risk involved when changes are made to the financial regulation regime.
Conclusion
While the trend regarding company listings in London is not encouraging, certain changes to the legal and regulatory framework could make a real difference. The government should work with regulators, pension trustees and the financial services sector to deliver for British businesses and the related professional services sector.
Shanuk Mediwaka is a solicitor at Slaughter and May. He writes in a personal capacity
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