LSE boss says London markets need to be ‘young and scrappy’ to be competitive

Julia Hoggett can remember exactly where she was when Apple’s market cap surpassed that of the FTSE 100.

She’d spent the night writing a list of everything that needed fixing in Britain’s capital markets – criticisms that seemed perfectly captured by the US tech giant’s dominance.

The next afternoon she received a call from a headhunter asking her why she had not applied for the vacant post of chief executive officer of the London Stock Exchange.

In her previous role as director of market oversight at the Financial Conduct Authority, Hoggett was frustrated at her failure to push through improvements – but taking the top post at the stock exchange in April 2021 gave her the chance to start working on that list.

Together with the UK government and regulators, she wants to help secure London’s position as the capital for raising capital after the fallout of the coronavirus pandemic, Britain’s exit from the EU, the war in Ukraine and the implosion of the tech sector.

The Apple milestone was followed by more depressing statistics. Last year was the smallest amount of money raised by IPOs in London in at least six years, falling to just £1bn from £14.3bn in 2021.

People at Paternoster Square in London
People in Paternoster Square, London © Carmen Reichman/FT

London then suffered the added outrage that Paris overtook it as Europe’s largest stock exchange by combined market capitalization.

“Basically, as Europe got bigger, London got bigger because it was the dominant center for financial markets in the EU,” Hoggett said in an interview with the Financial Times.

“We don’t have that now. We must be young, scrappy and hungry as we struggle to grow.”

Concerned that some in the city had grown complacent, Hoggett was reluctant to scrutinize closely whether London’s market rules were outdated as more investor capital flowed to the US and Asia.

“There seemed to be a debate about whether there was a need for change at all,” she said. “We need to have a market that attracts as many UK and overseas companies as possible.”

Hoggett is seen by many City leaders as a welcome force for change. She is one of the highest profile LGBT+ financial services executives and an advocate for women and minorities in the workplace, with some showing a similar commitment to that of her mother, former Supreme Court President Lady Brenda Hale.

By the time Hoggett took over the LSE, the government had already commissioned Lord Jonathan Hill to conduct a review of UK capital markets, resulting in relaxation of rules in areas such as dual class shares and free float limits.

However, she saw a need for the city itself to step in for the next stage of reform, based on the idea that Britain needs to be better at “supporting people, having good ideas and making them happen”.

“Sometimes founders say the cost of going public isn’t worth what I get,” she admitted.

Hoggett chairs a government-backed group trying to improve the functioning of Britain’s capital markets and is pushing for reforms in a range of areas to boost British businesses and give savers and pensioners better access to investment.

She hopes for significant changes this year, although it would be up to the FCA to implement many of the necessary regulatory changes.

Working with the task force, Hoggett identified four broad “ecosystem issues” in UK markets. The first was a lack of “venture capital” – active investors willing to bet on high-growth sectors and companies.

In part, she said, this reflected the growth of “passive” investing, but also the conservative nature of some UK institutional investors, who buy shares for regular dividend income rather than potential corporate growth.

In 1990, 32 per cent of UK pensions were invested in UK stocks. By 2018, this had dropped to 2 percent. She contrasted this with Australian and Canadian bond funds, which often invest in UK assets.

The task force is working on this area in parallel with the government’s plans to revise the Solvency II rules to make it easier for UK pension funds to invest in alternative assets.

The second problem for Hoggett has been the steady decline in corporate research in recent years, in part due to the unbundling of transactions and research under the Mifid 2 rules. Again, the LSE is working with regulators to change these rules this year to encourage corporate research.

“Are we adequately providing investors with the information they need to make judgments, particularly about the next generation of technologies?” she said.

The potential of the UK’s corporate governance code to stunt business growth is another concern. “Is it actually still fit for the needs of the next generation of companies? What is the role of proxy agencies?” said Hoggett.

She is also concerned about the UK’s ability to help start-ups become the national champions of the future, pointing to data showing that the majority of their funding comes from abroad.

“The consequence is that board membership comes with ownership [and] deciding where companies will be headquartered as they decide to embark on the next generation of this growth.”

As part of the solution, the LSE is in talks with the Government and FCA on how to create a regulated market that will allow private companies to trade shares more easily.

Hoggett said the UK should “remove the cliff effect between public and private markets” by having a marketplace where start-ups can trade shares, allowing employees to sell their stock options and “allowing institutional investors to being enabled to immediately follow these companies earlier stage”.

This is often when much of the value is created in a fast-growing company, she said, and would mean companies are not forced to go public before they are ready.

Hoggett wants further reforms to make the public market as attractive as possible for new companies. She said FCA’s forthcoming decision to have either one or two segments in the LSE “will be a pivotal moment”. She strongly urges collapsing the market into a single system rather than maintaining the distinction between standard and premium.

“Basically, one of the challenges is that the UK system has been set up very well for large established types of asset holding companies that are cash-yielding. And it wasn’t as well structured for fast-growing IP-based companies. And yet, if you look at where most of the growth and economic momentum is today, it’s the latter.”

She pointed to the need to reform the prospectus system to make it faster and cheaper, but conceded: “These are big changes. We’ve been doing it this way for a long time.” LSE boss says London markets need to be ‘young and scrappy’ to be competitive

Adam Bradshaw

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