'Plus ça Change'? Britain's equity market regulation in the post-Brexit era

Once the UK is free of "the shackles" of the EU's legal framework it will be free to make substantive changes.

A stock ticker reflects falling stock prices inside the London Stock ExchangeReuters

Much has been said in the UK media and elsewhere about how the British economy is likely to fare in the post-Brexit world. However, not much attention has been paid to the fate of the UK's current role as Europe's pre-eminent venue for hosting equity initial public offerings (IPOs).

For investors, advisers, entrepreneurs and growth companies, as well as for the UK economy as a whole, maintaining a vibrant and successful public equities regime, particularly for small and micro caps, will be crucial after Brexit in 2019.

The London Stock Exchange's Main Market and NEX's Main Board are heavily regulated by EU legislation, but AIM and NEX's Growth Market are only subject to the EU's market abuse regime.

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So what will happen to this framework on the UK's departure? The answer is, on the face of it, not a lot – at least in the short term.

The UK government's proposed European Union (Withdrawal) Bill will convert into UK law all of EU law, including the body of law relating to the financial markets, as it stands on the day of exit.

However, in recognition of the fact that there will need to be some tweaks to those laws to make them work in practice, the Bill grants powers to ministers to enact secondary legislation to amend existing EU laws so that they still work in the post-EU environment.

In the financial markets area, this will involve dealing with the extensive role that the European Securities and Markets Authority (ESMA) plays in promulgating and supervising the single rule book for European financial markets.

For instance, in the Market Abuse Regulation alone there are over 100 references to ESMA. It seems obvious that it will be the Financial Conduct Authority (FCA) that will assume much, if not all, of ESMA's role in the post-Brexit regime in the UK.

In addition to transposing the existing EU-law based regime almost in toto into English law, the UK will also, hopefully, gain equivalence status for FCA-approved prospectuses, allowing them to continue to be passported into EU countries (and vice versa), both for cross-border fundraisings and for dual listings on EU regulated markets. All of this will minimise disruption and help ensure the continued flow of public companies to London.

Exchange-regulated markets such as AIM and NEX's Growth Market are less affected by EU legislation. Unlike the LSE's Main Market for Equity Securities, they do not require an EU-law-compliant prospectus for admission and neither are they affected by the Listing or Transparency Directives (since 2016, however, they have been subject to the EU's Market Abuse Regulation). Therefore the impact of Brexit on them will be even less from a regulatory point of view.

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So, the immediate impact of departure should be limited, at least from a legal point of view. The response from the markets seems to have been suitably sanguine which is manifested by the figures for admissions to all of the UK's significant equity markets having remained remarkably resilient.

But once the UK is free of "the shackles" of the EU regime it will be free to make substantive changes beyond those simply needed to enable the existing framework to continue to operate. How should the government and the FCA use that freedom?

It is crucial that the FCA and the Government ensure that the UK regime remains as attractive as possible whilst retaining its reputation for robustness and probity. They should embrace the opportunity they will have to enhance the attractiveness of the UK markets to international companies and investors.

To achieve that is not just about rule changes, but is about giving out the right messages to those investors and companies – that the UK is, more than ever before, the place to come to the market and welcomes them with open arms. To achieve that the following are required:

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1. There needs to be a smooth transition in the legislative framework on Brexit with a period of stability thereafter

2. Equivalence treatment must be obtained for UK and EU prospectuses

3. If there are to be changes to the rules in the longer term, they need to enhance the attractiveness of the UK rather than diminish it – no gold plating

4. The UK needs to continue to follow the EU's recent direction of travel with regards to reducing the cost and administrative burden on smaller companies coming to and remaining on public markets

5. Those determining admission to the markets need to recognise the need to encourage international and overseas businesses to choose London as their preferred IPO venue

6. Those at the coal-face of dealing with listings (whether at the LSE or the UKLA) need to be more positive in their dealings with overseas companies and portray less suspicion about their motives for wanting to come to the market in London

7. The stipulation that only EEA-based shareholders count for determining compliance with the requirement for companies on the Official List to have 25% of their shares in public hands should be dropped

8. AIM and the UKLA need to combat their perceived antipathy to investors from China and to take a more nuanced attitude to SE Asian-based businesses generally

The FCA is under a statutory duty to have regard to the international character of capital markets and the desirability of maintaining the competitive position of the UK. Their recent consultations on enhancing the effectiveness of UK Primary Markets which include tentative proposals for the creation of a new international listing segment is a good sign that they are taking that duty seriously and just the sort of development that will help in the post-Brexit era.

Saudi Aramco, which is estimated to be worth about $2.5trn, will sell only 5% of its equity with London among the front-runnersReuters

Similarly, the FCA's proposal to create a new premium listing category to accommodate sovereign-controlled international companies, such as Saudi Aramco, has to be lauded. The latter proposal has proved somewhat controversial, but should be welcomed as a recognition that, now more than ever, the UK is "open for business" and is willing to be flexible to attract that business.

AIM is under no equivalent obligation to consider the bigger picture, however, and has spent the last few years trying to make itself less attractive to smaller companies and especially smaller cash shells, which have now almost been banished to the Standard Segment of the Official List.

The LSE has taken an increasingly hands-on (and some would say heavy-handed) approach towards which companies are admitted to AIM, often substituting their own opinion for that of the Nomad whose job it is meant to be to determine suitability.

In fact, changes to formalise that approach are being mooted. That would be a mistake. AIM needs to foster more certainty in the admission process, not less, and it needs to remember its role as a fundraising venue for smaller growth companies.

With the potential decrease in access to venture capital in the UK, thanks to the withdrawal of funding for UK VCs from the European Investment Fund, the UK's primary capital markets have to make up some of the shortfall. So AIM and the UKLA need to encourage smaller, high growth companies to come to the markets and they need to encourage international investors to come to London to invest in them.


Richard Beresford is the Chairman and one of the founders of law firm McCarthy Denning. His practice is diverse, covering mergers and acquisitions, equity capital markets, and early stage ventures and private equity. He is also chairman of Rockpool Acquisitions, which recently floated on the London Stock Exchange.


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