ALEX BRUMMER: Pressure on the FCA to help boost London floats

There is no bigger setback to Rishi Sunak’s effort to turn Britain into the next Silicon Valley than the decision of the nation’s biggest tech enterprise, Arm Holdings, to relist in New York.

Owner SoftBank is turning its back on Cambridge intellectual property, R&D and the UK’s digital infrastructure.

This comes at a moment when events at Silicon Valley Bank and San Francisco-based First Republic show that the financial stability surrounding US hi-tech is less than secure. 

City regulator the Financial Conduct Authority (FCA) took flak for the failure to bring Arm back to the London Stock Exchange (LSE), although one suspects it was never really on the radar for SoftBank’s manipulative boss Masayoshi Son.

It is encouraging that FCA chief executive Nikhil Rathi has taken the Arm fiasco to heart and wants to erase barriers to primary and secondary listings in London, making the Square Mile more competitive.

Floated away: City regulator the Financial Conduct Authority took flak for the failure to bring Arm back to the London Stock Exchange

He wants to abolish the distinction between standard and premium listings on the LSE and create a new, less rule-based single listing. 

The proposals will produce howls of anger from governance mavens but may be just what is needed to reinvigorate the UK’s moribund market for initial public offerings, and could discourage potential leavers from fleeing to Wall Street.

There would be strict requirements for transparency to replace existing rules.

Requirements to show a three-year financial record, among the barriers to start-ups, would be swept away. 

Compulsory shareholder approvals for large transactions would be abolished, although full disclosure of transactions would be required.

Rathi argues that Britain’s robust board structure, with separation and independence between chief executives and chairmen, should protect all stakeholders.

He draws attention to the retreat of defined benefit pension funds from the UK stock market, with just 2 per cent of portfolios in the FTSE, against 50 per cent in 1992. The rot began when Gordon Brown removed the dividend tax incentive.

This started outflows overseas and, more recently, fully funded schemes have moved out of equities. 

Nevertheless, there is plenty to play for as 90 per cent of Brits outside the public sector are in defined contribution plans, with projections that the sums invested should reach £1trillion by 2029.

The opportunity to revive pension fund interest in UK stocks and shares is there. The UK will need to compete for this money and simpler, new listing requirements could make British business much more investable again.

Flight risk

In the past, the Bank of England buried discussion of the risk involved in liability-driven investments (LDIs) – derivatives built on gilt-edged stock – in the back of its financial stability report.

After last autumn’s swoon, which imperilled the nation’s pension funds, there is a change of heart.

It has picked up on the advice of former deputy governor Paul Tucker, who suggested that managers of pension funds, using devices such as LDIs, need to have sufficient liquidity to manage their way through a 2.5 per cent swing in the price of UK government bonds. Previous stress tests looked at a 1 per cent move.

Having slammed this stable door the Bank is confident that UK banks, which hold capital against interest rate risks, are in a better position than some overseas counterparts. It appears confident that British banks have the capacity to support the economy in an era of high interest rates.

Maybe, but Governor Andrew Bailey can no more than King Canute turn the tide.

We have seen how quickly cash moved in the US where £260billion of deposits fled banks to money market/mutual funds at the stroke of a keyboard. 

Anyone looking across the Atlantic and at events in Zurich, where former UBS boss Sergio Ermotti has been parachuted in to take charge of the Credit Suisse rescue, could not but be nervous.

There is no space for complacency.

Price points

Shares in Next suffered in latest trading from chief executive Simon Wolfson’s recognition that higher costs will hurt earnings this year. It’s worth bearing in mind that Wolfson likes to undercook expectations.

More significant is his recognition that inflation is shrinking by 7 per cent in the run-up to summer and will fall to 3 per cent by the autumn.

That is a boost not just for investors but Chancellor Jeremy Hunt too. Phew!