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The speech made by Bim Afolami, the Economic Secretary to the Treasury, on 25 January 2024.

This building and indeed this city, but this building in particular, reflects the UK’s commitment to openness, competitiveness and innovation in financial services and the significant role that financial services can play in growing our broader economy, and there’s been a great deal of talk in recent months about this.

Since 2010, the British economy has seen the third fastest growth in the G7 faster than France, Germany, Italy, Japan. It is clear that our long-term underlying growth rate needs to rise in order for us to deliver prosperity, lower taxes and more effective public services.

And it’s right then, that our long-term plan for this country’s growth is our commitment to openness, competitiveness and innovation writ large.

That’s why we’re cutting taxes, to ensure hard work is rewarded, and to allow businesses to take long, firm decisions and investment in R&D.

That’s why we’ll continue to reduce our national debt, to fight inflation and deliver affordable mortgages for working people.

That’s why, through investment, we will ensure that our supply of homegrown, clean, affordable power is matched by home grown teachers, doctors and nurses.

Because since the beginning of 2023, we’ve seen real progress. Inflation and borrowing costs have fallen with inflation more than halving, our economy has bounced back, outperforming the forecasters, outperforming many of our European neighbours, and our national debt continues to fall.

I know that all of you, not just in Bloomberg, will continue to monitor our progress closely. But today I want to focus on the role that our capital markets can play in building our economy for the future. Rising to our economic challenges and achieving Britain’s economic potential.

Well, the first thing we should say is, well, what are we talking about? What are capital markets? Why do they matter? They play a key role in our economy because by allocating capital, facilitating investment, growth and job creation, they create investor returns. And those investors are not just international conglomerates. They’re British businesses. They are British people. And all of this drive’s activity across the economy.

London in particular, is an international powerhouse with a foreign exchange market three times the size of the American one. The derivatives market 50% bigger than the American one, all of which helps to make us a global hub for investment.

Now, I have, this Chancellor, this government, we’re not the first to recognise the potential of capital markets to grow the British economy in the 1980s, Nigel Lawson’s reforms, the Big Bang suspect, so to speak, unlocked the UK’s capital markets.

However, in recent years they have lost some of the dynamism for which they became well known in that generation. We in this country have not been immune to the global shift away from public equities to private equity.

According to a recent paper by McKinsey, total private market assets under management have grown at an annual rate of nearly 20% since 2017, which was the first year I was elected to parliament.

But between 2015 and 2020, London accounted for only 5% of global IPOs, and the number of listed companies in the UK has fallen by about 40% from as recently as 2008, the year of the financial crisis. Now those, I’m sure you agree, are sobering figures. And we take that on, and we know that we need to change them. But to change them, we must first understand what’s driving them.

A large part of this story is the success of New York across the pond. Over the past five years, the FTSE 100 increased by 12%, while the S&P 500 increased by 81%. Nasdaq has been very successful in attracting new listings, especially big tech firms. There, American home grown American tech firms like Apple, Meta and Alphabet.

And interestingly, if you remove the seven big tech companies from the S&P 500, the gap in performance is not anything like as wide as one thinks. Indeed, at one point in time, and this is quite an interesting fact, at one point in time, Apple alone out valued the entire FTSE 100. And we are also seeing greater competition from smaller EU exchanges such as Amsterdam.

It’s true however, there has been a broader trend over the past decade or so of a change in British investor behaviour, with domestic British investors shifting away from investing in UK equities and moving beyond our shores. Why has that happened?

My thinking after speaking with I don’t know how many people in the last few weeks a month since taking this job. Is that our approach to capital markets must carefully balance appropriate regulation with investors’ appetite for risk. And our post 2008 approach has focused too much on the former and not enough on the latter. In part that reflects the culture mindset of the government and our regulators.

Now, as many of you may know, I’ve spent some time in this office and beforehand making the case for the importance, the importance of risk in our society. And I pushed against the modern trend across the whole Western world. It’s not just Britain. Pushed against the modern trend to seek to eliminate all risk, which has only accelerated after the Covid pandemic.

Now, look, this is an understandable, but it’s a deeply damaging instinct. We have to move faster. Yes, with speed limits and controls. But accepting that innovation and growth cannot come and an entirely risk free environment.

As I argued in my remarks to the FT banking summit, which was, I think, the first public statement I made in this post. There is no point us in the UK having the safest graveyard.

Through a journey of root and branch reform. We need to move from a risk off to a risk on outlook, to move from a complacent incumbent mindset to an insurgent one, whilst recognising the challenges that we face because it’s only through measured and purposeful risk taking that we can deliver progress, economic growth and a capital markets renaissance.

Here’s what we’ve already achieved. Here’s what we’ve already done. First step on our reform journey was to properly diagnose the problem that started in earnest in 2020, the end of 2020 with my very good friend Lord Hill. The UK Listings Review, which built consensus across government and the industry on how to boost IPOs and capital raising on UK markets.

Then 2021 Mansion House, our then Chancellor, now Prime Minister mapped out our destination and he said he wanted a more open, competitive, technologically advanced financial services sector. And he launched the Wholesale Markets Review to consider how we could use our newfound regulatory freedoms to make UK markets more competitive. So having diagnosed the problem, next came our solutions.

Reforms progressed across all areas in our legislation and regulatory regimes, but also in the culture and mindset of government and regulators. On the legal and regulatory front, we have passed a huge act, the new Financial Markets and Services Act 2023. This delivered the Wholesale Market Review’s most urgent changes, and as a result, firms can now trade in the most liquid market and get the best price for investors.

We’ve also set statutory growth and competitiveness objectives for our regulators, established the new Regulatory Complaints Commissioner, Rachel Kent, who is here in the front row. So, she is, to ensure that regulators are fully accountable to market participants as well as accountable to consumers. And we’ve worked hand in hand with industry to carefully review every single aspect of our rulebook.

Now, this issue is very close to my heart. As the former chair of the Regulatory Reform Group in Parliament, which I set up. I’ve long been a critic of the accountability gaps in our regulatory system and the disproportionately anti-growth mindset of many regulators.

However. As my thinking has evolved over time, I’ve come to understand the responsibility that politicians have, not just regulators. Politicians from all parties. We as politicians must take a lot more responsibility for this. We created the system and incentives that the regulators operate in, whilst often blaming them for not acting fast enough on an issue of consumer harm, and then staying silent when industry complains about an ever more complex and costly rulebook.

This culture of risk aversion has been very present in politics as much as it has been present in the regulatory state, and this must change. So be in no doubt. While I’m closely monitoring how the new system breaks down and closely monitoring how our regulators take on this growth and competitiveness objective that we have given them.

I will act and we will act further if we don’t see a sensible shift in our regulators toward more pro-growth mindset. At the same time, I want to lead a cultural shift within our politics and within our politicians. More immediately, we are taking forward a host of new initiatives like the Digital Security Sandbox, which will test the use of distributed ledger technology in trading and settlement. That’s just one of the huge range of reforms coming up stream. The results of these reforms is that after three and a half years, we are now within sight of making the UK’s public markets match fit again.

But you and I know we must go further to fully deliver on the promise of our capital markets. The regulatory and legal reforms are a necessary but not sufficient condition. So let me tell you about the steps that we are taking now to go further, because we’re supporting companies through every stage of their investment life cycle.

First, we will ensure that companies can scale up effectively so that they are primed and ready for listing. To do this, we are establishing a world first, a new class of exchange, which will allow private companies to raise capital on an intermittent basis.

Now, the private intermittent securities and capital exchange system. And this came across my desk and I said, guys, this isn’t going to work. I don’t even understand what that is. So, what I did was I played around with the acronyms with the words, and we’re going to call it Pisces. Pisces for short will be established before the end of this year.

The Pisces platform will give private companies better access to UK capital markets, break down the artificial regulatory cliff edge that exists between the public and private markets. This development will allow us to take advantage of the structural shift that I was discussing earlier to private markets, rather than suffer from.

Secondly, we want to ensure that when companies choose to list, when they do that, the process of doing so is as frictionless as possible. And as I’ve now taken the UK’s new prospectus legislation through Parliament in recent days, the FCA can now complete their entire rewrite of the prospectus regimes rulebook to deliver on the recommendations from the Lord Hill reforms and indeed the Mark Austin reviews. This will boost the operating environment for our capital markets in two principal ways.

First, by increasing the pool of investors in participating capital raises and enabling firms to raise larger sums of capital more quickly and more easily.

Finally, we want to ensure that once listed companies are matched with the best investors for their offering, we will achieve this by taking forward Rachel Kent’s Investment Research Review recommendations.

We aim to revive the research market, which has been damaged in recent years, by delivering more efficient and accurate pricing, in particular for small and medium sized businesses, whilst attracting a more diverse range of investors, including retail investors.

And I’m not going to have any more time to list some of our wider initiatives, like Charlie Gatlin’s Accelerator Settlement Taskforce, which will upgrade our back office operations for the 21st century by moving from a T2 to a T1 settlement, or our form of Solvency II which were released 100 billion pounds of investment into our economy.

But given present company that, of course, seeking a balance of risk and reward, I’m prepared to make a bet with you about our future delivery of these reforms and then make a bet with you. This is dangerous. The Mansion House 2024 will mark substantial progress in all three of the investment lifecycle stages that I’ve set out today.

First, the FCA’s new listing rules will consolidate our dual segment structure into a simpler single listing segment. And that would have narrowed the gap with our international competitors. I am confident that as part of this transition, the FCA will engage with firms who want their IP to benefit from our new regime, ensuring that the UK IPO pipeline is ready for action.

Secondly, we will be well on our way by Mansion House midway through this year to delivering the regulatory framework for Pisces by the end of 2024.

And finally by taking forward Rachel Kent’s IRR recommendations, the Investment Research Review recommendations, we will allow much more investment research to be produced in this country on smaller, mid-cap British businesses giving more information to investors, particularly retail investors.

Now, why am I so confident in this agenda? Well, partly that’s just because that’s an occupational hazard of being politicians. But in all seriousness, I’m confident in this agenda. I’m saying it to all of you today because it’s underpinned by our commitment to where I started to openness, competitiveness, growth, dynamism, innovation in financial services. That is not for financial services. It is for the British economy as a whole.

Now, I know, or at least I hope very strongly that the people in this room share those values. When they are properly applied, they will have an impact far beyond financial markets. After all, the Big Bang improved the lives of millions across this country. And I’m confident that when we have delivered our capital markets renaissance, those will too. Thank you.