Tag: Bim Afolami

The speech made by Bim Afolami, the Economic Secretary to the Treasury, on 20 May 2024.

Good morning, everyone.  Thank you to William/New Financial for the invitation.

Over the last 3 years, this government has embarked on the most comprehensive set of reforms to financial services in a generation.

These could not have been more timely. Because in that time, our world has changed almost beyond recognition. A global pandemic. War in Europe. And, as a result, a cost-of-living crisis.

We have risen to these challenges. That’s why inflation is now falling, wages are rising, and the IMF has forecast that we will grow faster than any G7 European economy over the next six years.

But through all the changes – and difficulties – of recent years, one thing has remained constant – the UK’s pre-eminence as a global financial centre – with London at the heart of its success.

In periods of rapid change, you risk becoming extinct unless you can adapt and evolve accordingly.

I’m a student of history.  So, believe me when I say that we have been here before.

Breton-Woods, the Big-Bang, and now Brexit. These were all responses to profound economic, political and historical shifts.

And rightly so. Because in those moments, unless you adapt and evolve accordingly, you will become extinct.

Today, we find ourselves at another of these moments. As the Prime Minister himself noted last week, more will change in the next five years, than in the last thirty.

That transformation carries potential for both risks and rewards.

And it is why for the UK’s financial services sector, everything has had to change for our success to be maintained. And the political, legal, and economic sovereignty that we have gained since 2016 allows us to do so.

It meant we could roll out a national Covid vaccination scheme faster than any other country in Europe. It allowed us to be amongst the first to help Ukraine defend herself. And – working hand in hand with industry – we are successfully delivering a new model for the UK’s FS sector.

Now as I mentioned in a speech I gave to the think tank Bright Blue last week, this model has three key elements. First, it is open to the world. Secondly it embraces the opportunities of tomorrow. And finally, it is firmly at the heart of a modern, dynamic UK economy.

Capital Markets

This philosophy has underpinned our reform of capital markets. The UK already has some of the oldest and deepest capital markets in the world – and today, we are Europe’s leading hub for investment.

The government is committed to building on those strong foundations. That’s why almost four years ago, our Prime Minister – at that point, our Chancellor – set out his vision of a technologically advanced, open, sustainable, and competitive financial services sector.

But promises alone are not enough. You have to deliver. And my promise to you I that I will continue to do so as long as I am in this post.

That’s why we are completely rewriting the UK’s Prospectus regime to make it easier for companies to list and raise capital on UK markets. This will increase the pool of investors with a stake in UK markets and allow firms to more easily raise larger sums of capital to invest in their growth.

Alongside this, the FCA are rewriting our listing rules for a new generation. This will bring our regulatory regime in line with international counterparts and provide greater flexibility to firms and founders when raising capital.

I’d like to thank Lord Hill and Mark Austin in particular for their support of this reform agenda.

But in particular, I am extremely excited that we are establishing a world-first new class of market, the Private Intermittent Securities and Capital Exchange System PISCES.

1. This will give private companies better access to UK capital markets and create regulatory coherence between public and private markets.
2. Here is what it means for the UK’s approach.

That we are on the front-foot.  That we have lent into the structural shift to private markets. That we evolve in response to circumstance and allow ourselves to take risks in doing so.

Because as I said in my “capital markets renaissance” speech at Bloomberg earlier this year – there’s no point having the safest graveyard.

Pensions Reforms

Achieving that capital markets renaissance requires rediscovering the productive potential of UK pension funds.

The numbers are sobering. UK pension fund holdings in UK listed equities have fallen – from 53% in 1997 to around just 6%. They invest even less in unlisted equity, especially in comparison to international peers like Australia. Friends, that’s not good enough.

But I know the rewards of changing those numbers are clear. Improved saver returns and improve economic growth. Billions of pounds of investment for high-growth companies. And thriving capital markets.

That why we are building on the Chancellor’s package from Mansion House 2023, which will unlock up to £75 billion of financing for growth by 2030.

To do so we are undertaking three workstreams. First, we will further consolidate the pensions market.

Secondly, we will ensure our regulatory framework rewards investment for long term returns rather than high costs.

And finally, we will ensure that pension funds have access to high-growth assets – including in the science and tech sectors – via the ‘LIFTS’ initiative. We announced the winners of this initiative at Spring Budget 2024.

Partnerships

Of course, just as our economic sovereignty has allowed us to chart a new domestic approach for UK capital markets, we have also used it to renew our international partnerships.

We are clear about what the UK can achieve on the global stage. That’s why the Foreign Commonwealth and Development Office’s 2023 refresh of our foreign policy approach – against a background of profound geopolitical shifts – highlighted financial services as a key competitive advantage of the UK economy, and a tool of statecraft that we can use to align the international order with our values.

You might think that’s somewhat academic. I know from my work with the City that you are practically minded people, who want to understand the impact of our decisions.

So allow me to set out what we have achieved with key international partners.

Gulf States

Take the Gulf, whose jurisdictions are fast emerging as key capital markets partners for innovative financial services.

We echo that positive approach to a changing industry. That’s why in 2023 we agreed with the Kingdom of Saudi Arabia to collaborate on financial services, including capital markets – which will harness that dynamism to maximise the full potential of UK sourced capital and finance in the Kingdom.

The EU

Of course, although we’ve been busy making new friends halfway across the world, the UK still needs to be a good neighbour.

The UK and EU’s financial markets remain deeply interconnected – in 2023 the EU was 35% of our financial services trade – our largest trading partner, and it’s right that in the current global climate, they remain so.

Although our regimes will of course evolve differently over time, I know that we are aligned on our principles: open markets, supported by high global standards. I am confident in saying that, under my watch, the EU will never have cause for concern about regulatory standards in the UK.

Our UK-EU regulatory forum is an important vehicle to facilitate access between our capital markets. At the inaugural event last year, we shared best practice on our work – including our innovative T+1 settlement.

China

Finally, it is crucial that we continue to engage with our strategic competitors – such as China. Although – as with any bilateral relationship – we won’t always agree on everything, you simply cannot give the cold shoulder to an economy that is home to a fifth of the world’s globally systemically important banks, four of the world’s largest banks, and almost a third of the world’s leading global financial centres.

It is in our interests to engage where we can – profoundly so – it makes good economic sense, and it also means we can continue to tackle shared global challenges such as climate change, biodiversity loss and ageing societies.

Where China is concerned, we must take the long view.

Of course, we should only engage where it is consistent with our interests. But be in no doubt – that is absolutely not the same as disengagement. If we hesitate too much – as Lord Cameron himself noted two weeks ago – our competitors will write our future for us.

I echo that view – and it underlines why we must continue to engage with China on financial services.

That’s why I took the opportunity to speak at the China – Britain Business Forum in March this year, where I set out how financial services sits at the heart of many of the shared challenges we face, and how working together we can resolve them with outcomes that benefit us all.

Conclusion

But I have spoken enough for today. And so I will leave you with this.

What you have seen from this government – both at home and abroad – has been nothing less than an ambitious parliament of delivery.

We have drawn on our long history of expertise in financial services to meet today’s challenges. We are rebuilding our framework from the bottom up – and nowhere better encapsulates that than our capital markets reforms.

But why is financial services so critical? Because it lies at the heart of the real economy, and the challenges our society faces.

It’s not just numbers on a spreadsheet, or bankers getting richer. Because products like mortgages, loans, investment – mean homeownership, small businesses and education.

People sometimes like to talk about the social contract between government and society. That if you are willing to work hard, and operate within the rules, then you will thrive.

Well, financial services underwrite that contract. A contract which requires industry, regulators and government to work together – to deliver a sector, and a future, that will benefit families and businesses up and down the country.

Now let’s get out there and deliver.

Thank you.

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.