Rathi: ‘UK has to compete for investment'

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Rathi: ‘UK has to compete for investment'
Nikhil Rathi, chief executive of the FCA (Chris Ratcliffe/Bloomberg)

The Financial Conduct Authority boss has said the country has to compete for investment, including from UK pension funds, arguing that this competition is about far more than regulation.

Speaking at the Global Investment Management Summit today (March 29), Nikhil Rathi, chief executive of the FCA said there has been a focus recently on the sharp decline in UK pension and insurance funds investment in UK equities.  

He said: “Reasons for a fall in defined benefit allocations from over 50 per cent in UK equities in 1992 to less than 2 per cent today range from changes in the treatment of dividend tax to accounting rules to global economic shifts.  

“Overseas investors now own a majority of the UK equity market – this can be both a cause of celebration and, in some quarters, concern.”

With many more fully funded DB schemes bought out and ending up on insurers’ books, this will change the availability of capital over the next decade, Rathi explained. 

At the other end of the spectrum, over 90 per cent of those employed outside the public sector save into defined contribution schemes.

He said by 2029, the British Business Bank estimates workplace DC schemes assets under management will reach £1trn, double what it was in 2019.

“The case for pension fund consolidation seems clear cut to enable greater economies of scale, deeper expertise and capacity in investing in a wide range of assets on behalf of UK savers,” he said.

“Ultimately, investors and those acting on their behalf will go where they can get the best returns to meet their objectives, including investing sustainably with appropriate risk diversification and taking account of business environment and currency volatility.  

“The UK has to compete for this investment, including from UK pension funds, and cannot just assume it will flow in our direction.   That competition is about far more than regulation.” 

Regulation is only part of it

While recognising that regulation is only one element to encouraging firms to list in the UK, he said the FCA will always play a full part and was open-minded about reform. 

He said regulation – at least alone – cannot create companies of scale in sectors of the future. 

“Nor can it help investors better understand how these companies work and their value,” he said. “Nor can it conjure a culture in which success is lauded just as readily as failure is criticised.    

“A company’s decision on both whether to list and, if so, where, is driven by a range of factors, including whether staying private or non-listed markets can provide more efficient access to capital.”

Ahead of a forthcoming blueprint for changes to the listings regime, Rathi said the FCA saw value in allowing experienced investors the flexibility to form their own judgement in making investment decisions based on issuers’ disclosures.

He said the FCA wants the full spectrum of capital raising possibilities to be functioning well from private to public markets.  

If a company does decide to go public, its choice of listing location may be driven by valuations, depth and liquidity of capital markets and breadth of investor base, comparable peers and more.

“Real change requires both financial and an ongoing sustained commitment from all parts of the ecosystem, infrastructure that controls exchanges, trading, clearing, settlement, corporate advice, buyside and research,” he said.

“Firms that control the ecosystem are now part of global groups that have so many competing priorities. So getting this aligned commitment is challenging, but achievable.”

Asset managers   

In his speech, Rathi set out possible reforms to the UK framework for asset management and argued that the proposed ESG labelling regime for investment products will build trust in the growing sustainable investment category.

He said asset managers need to keep investing in capacity to undertake investment analysis. 

“Sell-side firms have to be convinced to recommend the UK market when advisory fees for transactions elsewhere can be significantly higher,” he said.

Other factors are more sensitive, including political and investor debates about executive remuneration. 

“We at the FCA and the regulatory regime we oversee are one part of a much wider debate, one part of a much wider ecosystem, all of which needs to be aligned and pulling in the same direction,” he said.

“We pride ourselves in openness and on an approach that supports competition, domestic and global. We are a global financial centre after all. 

“But in the area of equity markets taking such a stance does result in a number of asymmetries.”

He added: “We need to be clear-eyed about these and their cumulative impact and constantly work to ensure a level playing field through regulatory cooperation and market access discussions.”   

Rathi explained that some jurisdictions require a listing presence in their home jurisdiction or restrict direct overseas listings.

 

“In some markets delisting can be complicated; our approach has been to prioritise issuer and investor choice,” he said. 

“Understandably many emerging markets, such as in the Middle East, which are undertaking large scale privatisations use those programmes to bolster their domestic capital markets too.   

“India does not permit overseas direct listings of Indian companies, although there has been a lively debate on this topic.” 

Meanwhile, the EU has a share trading obligation which means euro-denominated shares of EU issuers cannot be traded on UK trading venues, which are currently not deemed equivalent.  

In the UK, Rathi explained it has tended to prioritise free movement of capital cross-border so have not put in place similar requirements. 

“Retail investor access is often subject to more specific regulation,” he said.

“UK savers are able to invest in a large number of stock markets around the world, including through tax advantaged savings vehicles such as Isas and Sipps, whilst other jurisdictions sometimes place more restrictions in their analogous vehicles."

sonia.rach@ft.com

What do you think about the issues raised by this story? Email us on ftadviser.newsdesk@ft.com to let us know