Meeting the challenge in our changing global markets

Speaker: Sarah Pritchard, Executive Director of Markets, and Executive Director of International
Event: UK Finance and EY: Capital Markets insights launch conference
Delivered: 16 May 2023
Note: This is a drafted speech and may differ from the delivered version

Highlights

• The UK must not be shy about highlighting its strengths as a full service, global wholesale market with a deep and broad base of expertise. For this to remain the case, we must continue to evolve.
• Following recent proposals to reform listing requirements, we will shortly be considering what if any reforms we should make to prospectus rules.
• We will be thinking about how forward-looking information should be covered in prospectuses, how to approach setting requirements for issuers seeking to admit securities to junior markets, and what rules we should set for firms that choose to operate a public offer platform to allow companies to raise capital from investors without being admitted to a public market.
• We will play our part to drive productivity by improving our own operational efficiency, making proportionate regulation, and increasing trust, effective competition and innovation in stable and international markets.

State of permanent evolution

We often present ourselves as being part of a generation plunged in a state of constant turbulence, the ones who stand to see the most change in our lifetimes thanks to transformations in everything from technology to climate to markets. 

Yet on this very day, in 1866[1], a dramatic change was foisted on American consumers. Congress passed legislation which paved the way for a new metal to be used for coins. This 5 cent coin was largely made of copper with 25% nickel but became known as nickel and today, May 16th, is officially Nickel Day. Before this, coins were usually gold or silver but the American Civil War had destroyed monetary supply as people were hoarding precious metals.

An attempt to replace coins with paper currency was derailed after the then head of the Currency Bureau had his own face printed on the notes. This – along with a bit of lobbying from an industrialist who owned nickel mines – paved the way for Congress to introduce nickel coins. The money markets – like the coins that underpinned our system of finance – evolved out of necessity and continue to do so today.

Many of the rules that underpin the UK capital markets are historic, formed in the 1980s, and we cannot afford to stand still. But be in no doubt. The UK financial services market remains strong, as the Economic Secretary to the Treasury has already outlined, and as today’s insights report by UK Finance and EY exemplifies.

Yet we all agree for this to remain the case, we must continue to evolve – and in some areas – evolve rapidly.

UK financial services and the City have a unique position as a ‘full-service’ global wholesale market, with an integrated deep and broad ecosystem of expertise across banking, insurance, investment, accounting, legal services, and related services. Our financial services ecosystem is located alongside a deepening tech ecosystem.

We should not be shy about reflecting on some of our strengths[2]: 

• We are first in the world for international debt issuance.  
• We are the largest centre for commercial insurance.  
• We are number one for foreign exchange trading.  
• We are the second biggest global financial hub, behind only the US.

In 2021, more than 3,000 fintechs were headquartered in the UK, four times more than Germany or France.

Our investment managers guard and grow over £11 trillion in assets[3]. Yes, there has been a significant drop in the number of listed companies since 2008, in the UK and many other developed markets, and our market share has receded against fast growing powerhouses such as China and India.

The insights report shows that regulation is one of the factors firms take into account when deciding where to list. However, access to capital and investor perceptions are often bigger priorities.  

Delivering to better our markets system

At the FCA, we are working with industry, government and other regulators to grow our global excellence as a market.

Listings is an important part but just one part of that eco-system.  

In saying that, we of course want to make the UK as attractive a place to list as possible, while maintaining high standards. That is why we have launched a blueprint for bold reform of the listings regime as set out in the consultation[4] we published recently. We are delighted with the engagement and response to date.

We want to make the listing regime more accessible, effective, easier to understand and more competitive. This will benefit both issuers and investors. We want to make sure that UK public markets remain an attractive and trusted place to list companies, to support growth and innovation. Our proposed reforms are bold but build on the changes we have made over recent years – they take into account what market participants have told us that they value in the current regime. While the reforms will make it easier for firms to list and for a wider range of companies to list, they will also lead to a shift in responsibility and increased risk for shareholders.

We have made this clear in our proposed set of reforms – and have said that we want and need a public debate, and ideally then as wide a consensus as feasible, on risk appetite. That increased risk as a result of reforms will lead to losses, as well as gains. Are we ready for it? Today’s report highlights how UK households hold 10.6% of their financial assets in equity. Meanwhile, in the US, the figure is over 36%.

We think there is a strong and pressing case for change to refocus UK listed markets, but we want and encourage further views and evidence on the blueprint we have set out. And we want others in the ecosystem to align and play their part, alongside us.

Our work on listings is a key part of our  commitment to strengthen the position of UK wholesale markets, which is a priority in our 3-year strategy[5] and which we are supercharging in this year’s business plan – recognising the importance of the wholesale markets to the UK’s economy. In doing so, we are building on the foundations set out in the government’s previous UK wholesale markets review, and taking into account feedback from industry, from our statutory panels, and from our newly established secondary markets advisory committee. We want to ensure that our regulatory attention is focused on the areas which can support market excellence – achieving the aim of markets that work well, with market integrity and consumer protection.

Innovating in the way we consult

As we set the plans for future regulatory reform, we will innovate in the way we engage with industry and other stakeholder groups, so that we can work to develop rules that drive the right outcomes.

Feedback through consultation papers can be effective, but it is not always the most creative or efficient way of balancing different alternatives, or coming up with outcomes-based solutions to a set of proposals and it can be slow.

The opportunity to discuss policy proposals, with different groups who may have different perspectives, is important – as we see regularly through the meaningful engagement we have with our statutory panels and other bodies.

Written input will always be key – as it is important that we are able to account for our actions, particularly under the new transparency and accountability mechanisms within the Financial Services and Markets Bill. But with our focus on becoming a data driven and outcomes focused regulator we are exploring new ways to engage on policy proposals alongside our more traditional consultation and discussion paper routes.

Last year, you saw us take our ‘sprint’ approach, which had previously focused on tech issues, to the policy arena – running our first ever ‘policy sprint’ on crypto.

That was highly successful – it helped identify areas where there was alignment, and those where difficult decisions may be needed – and the outputs from this sprint have enabled us to move at speed in support of the current UK government consultation on regulating cryptoassets.

We are now taking this approach, of providing forums to discuss and collaborate on policy proposals, into the capital markets in support of our work on UK market excellence. We are starting with taking this approach on prospectus reform.

Just last week we kicked off an introductory event setting out how we intend to engage with industry and other stakeholder groups in a thematic way, via different engagement papers, so that we can work through at pace how the UK’s future prospectus regime could operate.

This is important, as the reform to the prospectus regime is another, potentially, significant moment in how UK markets operate.

We will have the opportunity to consider whether or how to set prospectus requirements for companies seeking admission of securities to trading on regulated markets and for issuers raising further capital. We will be thinking about how forward-looking information should be covered in prospectuses, how to approach setting requirements for issuers seeking to admit securities to junior markets, and what rules we should set for firms that choose to operate a public offer platform to allow companies to raise capital from investors without being admitted to a public market.

In previous years, we would have probably navigated through these complex reforms by issuing discussion papers and consultation papers made up of enough pages to plunder a small rainforest.

We will still retain written evidence and papers, and will still be consulting via written consultation papers, as this is important as an accountable regulator – but we are keen to try and run the ‘discussion’ element of our regulatory reform agenda differently.

To help work this through we will be running thematic blueprints and workshops, sprints and other live events so that we can collaborate on future reform and take each issue theme by theme, focusing on outcomes and options.

As an outcomes-focused regulator, we clearly want to make sure that any future reform works. As we shape our future thinking, we want collaboration – we want input from active and engaged buy and sell-sides, input from those involved in capital raising as well as input from advisory functions, capital markets infrastructure and exchanges.

A good track record - LIBOR wind down

We have a good track record of being able to work at pace and closely with international partners to ensure that UK and global capital markets work well.

We have already started delivering against the commitments set out in the Wholesale Markets Review. We consulted on Improving Equity Secondary Markets and on the trading venue perimeter last year. And this month we published our policy statement and final rules on equity markets and will soon publish final guidance on the perimeter. Looking ahead, we intend to consult in the summer on the framework for establishing a consolidated tape and on commodity derivatives.

We also have to stand ready to act when things go wrong or in the event of crisis situation, for example in implementing sanctions or tackling rate fixing.

On such issues, which threaten the integrity of our markets, we are always stronger when we are working together to tackle and prevent harm whether it is domestically or internationally, with the private sector or the public sector.

The successful wind-down of LIBOR in an orderly fashion so far has been a great example of constructive collaboration between the private and official sectors.

The US dollar LIBOR panel and the overnight and 12 month US dollar LIBOR settings will cease in just a few weeks now.

The market needs to be prepared for this final wind down of synthetic settings before the end of next year, with the end of the 3 month sterling LIBOR in March 2024 and the end of the synthetic US dollar LIBOR six months later. The work done so far to move away from LIBOR has been a success – let's ensure that the final steps[6] are made in support of these final changes.

Accountability by metrics and looking forward

As we look to the future, I want us to focus our regulatory efforts not only on fixing current issues with the way in which markets operate, but also to set the foundations for the future so that we can help firms and markets innovate, digitise and thrive.

We are committed to upholding market integrity – making sure that regulation plays its part in enabling the UK economy to grow and thrive internationally and working to deliver against the UK’s wholesale market reforms and Edinburgh package.

Our new secondary international competitiveness and growth objective will come into force later this year once the Financial Services and Markets Bill receives royal assent, and we will engage with the input into the Treasury’s call for proposals for metrics that will help us and others demonstrate how we are advancing the objective.

We know that ultimately this objective will only be achieved by working in close partnership with others.

We will play our part to drive productivity by improving our own operational efficiency, making proportionate regulation, and increasing trust, effective competition and innovation in stable and international markets.

One example of improved operational efficiency that can be demonstrated by metrics is the reduction in our pending caseload in Authorisations. From their peak in December 2021[7] of 12,500, this has been cut by 60% to 5,000 amid a background of increased scrutiny and even more applications. And we are investing in making the process smarter to make it more efficient in future.

We have included metrics in our three-year strategy[8] and are committed to regularly report against those targets.

And given the many different actors who have to work together to propel the UK economy, the metrics on growth and competitiveness need to be focused on where we contribute, without introducing perverse incentives.

Conclusion

We don’t believe in change for change’s sake. But history shows us – just like with nickel coins – that markets do not stand still.

As regulators, we need to help with that evolution. We know there is work to do in ensuring the UK remains attractive for financial services and their customers, particularly in the face of competition from ever growing emerging powers. We regulators are one part of that eco-system and stand ready to do what we can.

It is true that we can all learn from our mistakes, but we must not lose sight of our successes.

The FCA is firmly committed to supporting UK market excellence, super-charging our commitment to doing so in this year’s business plan and beyond.