To say that it has been a busy year so far in terms of consultations would be an understatement. With the Government and regulator taking advantage of their new-found freedoms post-Brexit to enhance our public markets, we have seized the opportunity to be a voice for small and mid-sized quoted companies in order to ensure genuine positive change is realised.
For many reasons, small and mid-caps are an important part of our public markets and the UK economy as a whole; as well as the sheer number of them, they also embody a unique innovative make-up and an incomparable potential for growth. They also represent over 90% of quoted companies in the UK and so it makes little sense to solely focus on creating markets that are fit for the FTSE 100 or FTSE 350.
Their contribution to the UK economy is vast, not only in terms of generating wealth, but also in relation to creating jobs and encouraging innovation. According to recent data, these companies employ over 3 million people - an estimated 11% of total UK private sector employment and contribute over £26bn in taxes - about 5% of total UK tax take.
Since the closure of Lord Hill’s Listing Review period in January, we have responded to a number of consultations from a variety of Government departments and regulators, including HM Treasury, the Department of Business, Energy and Industrial Strategy (BEIS) and the Financial Conduct Authority (FCA).
These consultations have been a mixed bag. Many of them included positive proposals aimed at making UK public markets more attractive and accessible for smaller growth companies.
Lord Hill’s initial consultation, for example, the aforementioned Listing Review, was an holistic look at public markets and asked stakeholders several questions on how to make UK markets more attractive. Our response outlined that greater choice is needed for companies and investors and that reforms should be focused on a new market format to replace the Standard Listing segment, which is currently a home for many good companies as well as those that struggle to find their place elsewhere on our public markets.
Following this initial consultation, the Primary Markets Effectiveness Review from the FCA was introduced. We wholeheartedly agreed with their objective of improving the UK’s primary markets, but also believe that real change requires concerted action to ensure a culture and inspirational environment that is conducive to extolling the virtues of UK public equity markets.
There have been another two significant consultations from the Treasury: The Wholesale Markets Review and The Prospectus Regime Review. In response to the former, we stressed the need for liquidity in small and mid-caps. We highlighted that recent policy, regulatory and market developments have increased the barriers for retail access to investment in these companies. Although HM Treasury’s consideration of the creation of a new listing venue for micro-cap companies might perhaps be useful, it is also important to assess some of the issues affecting the broader population of smaller companies and ensure that listing remains attractive to companies throughout their growth journeys. The essential element of attractiveness of the markets, for current and future public companies, is the presence of liquid capital and a rich ecosystem of varied investors. Focusing on retail access to small and mid-cap equities therefore, is a vital step in creating this virtuous ecosystem.
In response to the Prospectuses Regime Review, we critiqued the current approach due to its impact on smaller quoted companies who struggle with the disproportionally complex and costly “one-size-fits-all” approach taken by the EU in relation to prospectuses. We stressed the importance of a consideration of the core purpose of the prospectus and the kind of fund raisings for which it should be required. Overall, we were largely encouraged by the direction of travel taken by HM Treasury, with the consultation being seen as an opportunity to create markets that are fit for the future, particularly following Brexit. We, along with the small small and mid-cap community, wish to see the UK deliver a regime which is balanced and proportionate, and recognises the importance of growth companies in the market as well as to the overall health of the domestic economy.
So overall, the Listing Review and the follow up consultations can be seen as broadly positive yet they have been overshadowed by the consultation from BEIS which was published in March 2021.
The consultation follows three audit-related reviews (Sir John Kingman’s review of the FRC, Sir Donald Brydon’s review of the quality and effectiveness of audit, and the CMA’s market study on statutory audit) and combines the 155 recommendations put forward within these reviews.
The key areas of concern for us are the expansion of the definition of Public Interest Entities (PIEs) to include a large number of AIM-quoted companies, increasing the accountability of directors through new requirements in relation to internal controls, dividends and capital maintenance as well as other policies aimed at over-tightening governance requirements for directors.
We are firm in our rejection of some of these proposals. For some policies, applying them to larger private businesses makes sense, but the market cap thresholds for a Public Interest Entity on AIM has been set at far too low a level at €200m. We believe a more appropriate figure would be £1bn, and this should only be considered after the requirements have been initially implemented for the FTSE 350 and the impact of that has been reviewed. Essentially, it is clear that market participants, particularly those with less resources, need more measured and patient programmes for reform as rushing to establish a long-term, untested governance structure, like that proposed in the consultation, would be counterproductive.
Following a tumultuous year, the QCA and its members believe that the small and mid-cap community has an ever more important role to play in rebuilding and strengthening the UK economy. They can only do so, however, if they collectively have the room to grow within markets that are fit for purpose. As highlighted earlier, most of the consultations we have responded to in the last year represent good early steps. However, the Government and FCA need to continue to build on them with bold, concerted action to create inspirational markets which provide attractive choices for investors and companies - markets that are fit for the future.
Meanwhile, the temptation to over-regulate, in order to protect what we currently have, leads to protecting current market structures that patently are not designed with today’s companies in mind. The government has a great opportunity to ensure that any further requirements placed on company leaders are proportionate and do not hinder the very progress we are all working so hard to achieve. Our markets already have a global reputation for high regulatory standards, it is clear, without being complacent, where our near and mid-term priorities should lie. We need to create a series of markets that are welcoming homes to vibrant, innovative and disruptive businesses of all ages and sizes as a matter of urgency. Over the last few months, and through our responses to the above consultations, we have ensured that this message continues to be delivered on behalf of small and mid-sized quoted companies. And we will continue to do so going forward.