To unpick this, we commissioned EY to produce a piece of research, drawing on numerical data and the perceptions of a broad range of market participants, to help us better understand the current shape of the UK equity market, and the views and perceptions that may drive its future.

Our goal was to cut through the noise and better understand the sentiments driving decisions around capital deployment, listing destination and other investments, and propose solutions on how best to move forward.

It has now been a week since the launch of our report on 16 May and we have been delighted with the feedback we have received.

Here is an insight into some of our key findings and the solutions we have put forward for the industry as a whole to consider together.

What did we find?

We found that while the UK remains a leading global centre for capital markets, this position is being challenged and there can be no room for complacency:

• The UK has the highest number of businesses per capita in Europe, with a well-capitalised start-up ecosystem. However, there is a cliff edge of funding available as companies scale up and the survival rate of new businesses after five years is only 38 per cent, below comparable markets.
• The London Stock Exchange (LSE) remains the largest stock market in Europe. However, its market capitalisation declined by six per cent between 2017 and 2021. The number of companies traded on the LSE decreased by 7.4 per cent during this period and new international company IPOs were down from 35 per cent to 29 per cent.  
• The LSE has lagged the NYSE and NASDAQ in yearly total returns but has outperformed in post-IPO price performance. The experience of UK technology companies admitted to trading in the US shows that there is no guarantee that price performance post-IPO will be better in the US.
• While UK asset managers have allocated a higher percentage of their mandate to equity recently (40 per cent in 2017 to 42 per cent in 2021), the proportion invested in UK equities dropped significantly, from 30 per cent in 2017 to 23 per cent in 2021.   

What do we propose?

We have set out a range of measures to help address the challenges and trends identified by our report:

• Help companies to grow in the UK and join UK markets, for example through considering amendments to tax policies like the EIS and SEIS schemes or introducing a requirement to repay public money paid via tax schemes if a company chooses to list outside of the UK.
• Promote a culture of financial empowerment and entrepreneurship through supporting education in financial literacy and the importance of investing for the future, encouraging investors to focus on risk-adjusted, long-term returns, and removing the 0.5% stamp duty on share purchases.
• Remove frictions in the system by positively engaging with the digitisation of the UK capital markets and the UK’s regulatory reform programme – building on the strong progress already made by recent HM Treasury and Financial Conduct Authority (FCA) reviews.
• Reinforce the UK as a destination of choice for companies and investors by considering deference mechanisms to reduce unnecessary duplication of legal and regulatory requirements and developing “why choose UK capital markets” content.

Taking on the challenge of rebooting our capital markets is no small task. Still, the reward is material – a greater source of domestic capital that supports our SMEs and other UK companies, an empowered population with more choices on savings and investments and an international investor base that deploys capital to all corners of the economy. With these fundamentals in place, the UK’s capital markets ecosystem and global financial reach can power the UK’s economic future.

We look forward to working with government, regulators, and stakeholders across the industry – such as the Capital Markets Industry Taskforce – on driving forward these changes.

This blog is a taster of what we cover in our report. Do let us know if you want to discuss this in more detail.

avanthi.weerasinghe@ukfinance.org.uk
julie.shacklady@ukfinance.org.uk