Speech by Nikhil Rathi, FCA Chief Executive, delivered at the Association of Corporate Treasurers Annual Conference 2024.
Speaker: Nikhil Rathi, Chief Executive
Event: Association of Corporate Treasurers Annual Conference 2024
Delivered: 21 May 2024
Note: This is a drafted speech and may differ from the delivered version
Highlights
- Regulators want and need engagement from corporate treasurers – who are a bellwether for what is really going on in the economy and the direct impact of regulation.
- The FCA’s wide ranging package of reforms is aimed at reducing burdens and barriers to raising finance as well as supporting the risk appetite in the economy that enables firms to secure the capital they need for investment.
- Innovations such as T+1 and a Digital Securities Sandbox are designed to make our markets and transactions more efficient and transparent, reducing the cost of capital for corporates.
War. Cyber-attacks. Climate change. Not just the ingredients for the next dystopian Netflix series, but bread and butter issues that corporate treasurers wade through on a routine basis.
The outside world may see you as holding the keys to cash flow, liquidity, and funding. But those on the inside recognise that you are the bellwether for the businesses that power our economy.
You are often first to spot a looming storm and to devise a plan for how to hoist the mast or batten down the hatches so that your firms survive and thrive.
This year promises more of the same – in other words, more unpredictability, particularly with half the planet heading to polling booths and the greatest level of geopolitical tension for generations.
This will have an impact on markets, investor confidence and the availability – or otherwise – of finance.
It will affect supply chains and test resilience. Business as usual for you then. And I am sure you, like others around the world, are watching closely each month as central banks consider their interest rate decisions.
What you probably do not need is more known unknowns to add to the list of uncertain weather patterns. The best way to do that is to step up our mutual engagement, so that any upcoming regulation does not catch you off guard and so that we can capture any concerns and – dare I say it – support for our direction of travel.
Most treasurers don’t work in firms we regulate. Yet our work will often impact your business but perhaps you only hear about it through intermediaries such as banks and we too only hear about the impact on you at one remove.
Engagement is key
Here today are businesses from the FTSE 350 to smaller innovators to UK subsidiaries of global companies.
We oversee all the UK’s financial markets including equity, fixed income, commodities, futures and options derivatives and elements of FX markets. Crypto and digital asset markets are making their way into our regulatory ambit. And we collaborate closely with regulatory partners on how the UK payments system will evolve.
You have varying resources and appetite for dealing with regulators so let me give you the edited highlights of where our work might overlap with your interests.
One area where engagement has paid off is in the ending of LIBOR, in many ways a bigger financial transition for the markets, if not the economy, than Brexit.
We were told it could not be done in a tight timeframe. However, thanks to collaboration with industry – including with many of you – and with our international peers, we have led a successful global approach.
Only synthetic US dollar LIBOR remains, and this will end shortly. We have secured a more stable system which will give confidence to investors and consumers.
You have also engaged with our consultation on money market funds[1] – which aims to reduce their vulnerability and separately on proposals to restrict short selling rules. These are all aimed at maintaining market integrity while sustaining our international competitiveness.
Going for growth
Many of you will know that we recently formally adopted a secondary objective to facilitate growth and international competitiveness of the UK economy over the medium to long-term.
We want your businesses to be able to access a range of sources of finance – from debt to equity, public and private, at the scale you need when you need it.
The UK has long struggled[2] with weak business investment which dampened productivity and economic growth. Investment fell to below 17% of GDP from 2000 onwards, down from 23% in the 1980s.
Meanwhile investment in a typical G7 country remains at 20-25%. We have gone from being above average investors – from both private and public sources – to below our competitors including Germany, France, and Japan.
That decline in investment has been dominated by reduced spending on machinery and equipment – including on ICT – which fell from around 8% of GDP in 1987-1997 to less than 4% from 2009 onwards. This is the lowest share in the G7.
While much of this is beyond our control as regulators, supporting efforts to turn this round is at the core of the competitiveness objective.
We have established the Long Term Asset Fund (LTAF) regime, designed to aid investment flowing efficiently in long-term illiquid assets. It is early days with 4 funds approved. With take up by Defined Contribution pension funds, we have now broadened access to retail investors.
We are also working with the Treasury and market participants on rules for PISCES, a Private Intermittent Securities and Capital Exchange System, that aims to enhance secondary liquidity for private firms which should overall reduce their cost of capital.
And we have welcomed engagement with the ACT on our overhaul of UK capital markets – a move to a single equity listing category removing the more prescriptive rules, relying more on disclosure such as on significant transactions, and better aligning with international norms. Final rules will come very soon.
We are also working on a replacement prospectus regime to make capital raising more agile and less costly.
Whilst we are moving away from a 'one size fits all' rule book with less prescription around how firms engage with their shareholders, we still expect corporates to engage actively with their shareholders and consider their interests carefully in their decision making.
Key for you is pricing and liquidity. And we are working to optimise transparency in bond and derivatives markets. A well-functioning secondary market with robust market infrastructure is key to the treasury function and we have an opportunity to adjust some inherited EU rules to better suit the UK’s global wholesale markets, whilst maintaining internationally consistent standards.
Some bond and derivatives markets cannot sustain the same levels of real-time or close to real-time transparency as others and we will allow for more flexibility to ensure markets remain liquid and accessible.
A pragmatic approach to divergence and convergence
Since leaving the EU, we have had new powers over regulation through FSMA[3] – or the Smarter Regulatory Framework.
But we will never deviate for the sake of being different and always take a pragmatic approach.
We have to undertake a cost benefit analysis on any proposals and this would include cross-border business impacts, where firms can find themselves subject to 2 different sets of rules for the same activity. We would take this carefully into account when considering changes along with industry feedback on their preferences.
Recently, we tweaked the EMIR technical standards for the UK. The changes will come into effect on 30 September 2024.
Many of the changes are in line with those made to the EU EMIR requirements which came into force in April.
There are times when we are better off taking a divergent approach, to tailor the rules to our markets.
There are changes to margin requirements, and we have proposed a 12-month transition period for firms coming into scope for the first time.
In the capital raising space, we also have broad support for facilitating the issuance of low denomination bonds – which would be a new approach to the inherited regime – and will work with treasurers to realise the significant benefits wider participation could bring.
Wealth managers and those who manage smaller portfolios have also indicated that they would welcome lower denomination bonds and for you these could represent an attractive additional source of demand for UK corporate bonds.
Broader individual participation in our capital markets, be that your employees or retail investors, should build stronger understanding of the importance of sensible risk-taking to grow our economy.
Surge in private finance
We also know that there has been surge in private finance activity. Global assets under management for private funds trebled over the 10 years to 2022. And the size of the private credit market has grown three to four-fold since 2015, while the leveraged lending, high-yield bond, and private credit markets account[4] for around a quarter of all market-based debt globally.
Beyond private markets, in the UK we have seen an increase in net lending from non-banks of around £425bn[5] over the last 15 years.
Much of the growth has taken place while interest rates have been low. Consequently, vulnerabilities could be exposed by the adjustment to higher interest rates and the changing macro-financial environment.
For example, private finance valuations have been under pressure, and financing and exit routes have become more difficult. I have made clear that the answer isn’t to reach automatically for the regulatory cudgel. And I would like to see more evidence before we declare we have a systemic issue in the private finance sector.
What we need is better information so we can properly appraise the risks. We should not unjustifiably restrict an important source of financing to businesses of all types.
That is why we’ve been supporting the Bank of England with its stress test on banks’ exposure to private equity risk. And we are doing our own work on valuation practices in the fund industry with a multi-firm review examining valuation practices for private assets. We expect this work to run until the end of the year and will include a probe into the personal accountabilities for valuation practices in firms, governance of valuation committees, what information is reported to boards and oversight of boards.
And I’ve cautioned the private equity industry that they need to proactively help us get the information we need.
We are taking a global lead on this issue, with our executive director of markets, Sarah Pritchard, co-leading a workstream on leverage in the non-banking sector for the global Financial Stability Board.
Investing in innovation
Looking to the future, we all know the benefits of technology investment, even if the initial outlay can seem painful.
Shortening the settlement cycle to T+1 from T+2 would align us with the US. Other major markets, such as India, have already made a move.
The Accelerated Settlement Taskforce recently recommended[6] that the UK should move to T+1 by 2027, with operational changes beginning from 2025 – a recommendation accepted by the government. We at the FCA are observers in the group which will consider what changes are needed.
We are establishing a Digital Securities Sandbox[7], alongside the Bank of England.
This will test distributed ledger technology – DLT (Distributed Ledger Technology) – for trading and settlement of tokenised or digital versions of securities such as bonds and equities.
Its aim is to make markets more efficient, transparent, and resilient and to safely explore DLT before any changes become permanent.
Market users will make material savings if existing processes can be made faster and cheaper through these technologies.
Our consultation on the Digital Securities Sandbox runs for another 8 days – until 29 May 2024 – and your input is welcome.
We are also part of several working groups and a digital sandbox on tokenisation.
Overall, a move to tokenisation – if implemented and regulated correctly – can mitigate risks because it will enable instantaneous settlements.
In the months ahead, you will also see us stepping up our work on smart data and Open Finance. We will examine the blocks to interoperability in open finance and the lessons that can be learned from other jurisdictions.
We recently responded[8] to the government’s white paper on AI regulation. We want to leverage AI in a way that drives benefits to UK markets and consumers and stimulates competition. For now, we are of the view that existing regulations can be applied to this area without writing new rules. But we will keep an open mind if new threats or issues emerge. We take a particular interest in data asymmetry between Big Tech and other players and how that impacts competition.
Conclusion
By now, I hope, you have spotted a theme here and an opportunity for you: At the FCA, we are working hard to make this the best place in the world to do business.
We need your help. We don’t just make the rules, we help shape the ecosystem and long-term risk appetite that firms operate with.
We are just one part of that ecosystem though and we invite ACT members to further engage with us, to make our rules work for you, our markets, investors, and our economy.
Jointly, we can rewrite the script and make this a blockbuster.