FCA to consider market structure changes to boost 'patient capital'

The UK’s financial markets regulator is seeking feedback on market structure and regulation to assess whether they reinforce short-termism.

The Financial Conduct Authority (FCA) published a discussion paper on primary capital markets in the UK and how they can most effectively meet the needs of issuers and investors.

One focus of the paper is potential barriers to the provision of capital for growth, especially for early-stage science and technology companies. The FCA said it “would be useful” to explore the extent to which current market structures and regulation reinforce a short-term focus in issuers and investors, thereby hindering the provision of “patient capital”.

The FCA said that discussions with “pre-IPO” companies indicated a need for technical changes to be made to listing rules, but also “raised the question of whether a more fundamental reassessment might be valuable, focusing particularly on ways in which different forms of primary market structure and regulation might better support scale-up and patient capital, which are particularly crucial for early-stage science and technology companies”.

It cited concerns that the UK’s primary equity markets were proving less effective at providing a means for companies to raise capital for further growth and development.  

The regulator said there have been significant changes in secondary capital markets, such as a shift towards algorithmic trading strategies and the separation of primary from secondary markets. These changes were seen by some as having eroded the effectiveness of the primary markets and having led to a focus on short-term trading rather than long-term investment considerations, the FCA said.

Market regulation is seen by some as contributing to such a short-term focus, with “trends in market structure and market regulation […] seen by some to be mutually reinforcing”, it added.

However, it also said that these views were not shared by all, and that “some stakeholders point to the Financial Reporting Council’s Stewardship Code and the establishment of the Investor Forum as recent improvements to the effectiveness of primary markets in supporting a more patient approach”.

“Nonetheless, we are keen in this DP [Discussion Paper] to explore some of the themes that have emerged in this area,” it added.

The FCA also asked for feedback as to whether alternative market structures could support “a more patient, long-term approach”, such as a transitional market to sit between fully private and fully public markets.

The regulator asked long-term investors to indicate how they value different aspects of the current public equity market model, such as corporate transparency, investor stewardship, corporate governance requirements, or the ability to trade.

The FCA also asked for views on whether there is a role for a UK primary debt multilateral trading facility, to encourage more overseas companies to raise debt finance in the UK.

The FCA’s discussion paper can be found here.