Hello everybody, another Friday, another edition of C&F Talks. And it's my pleasure to have with me today, Conor Lawlor, who's the Managing Director of Capital Markets and Wholesale at UK Finance. Conor's going to be joining us at the Future of UK Capital Markets Regulation Summit, which is being held on the 11th of November in London. Conor, welcome.

Hi Maurice, good morning, thank you for having me.

It's a pleasure.

We had an interesting interview recently, Conor, with a moderator of your panel, Michael Aherne from Herbert Smith Freehills. He was arguing that the significant fall in the amount of UK equities held by UK pension funds was inevitable with the demise of VB schemes and the stricter regulatory and accounting framework, which discourages short-termism.

He also thought that the returns on UK equities and the cost of trading discouraged them as well. How do you think pension funds and insurance companies can be encouraged to invest in the UK markets, and should they?

It's a very good question, Maurice, and I think Michael is quite right to draw attention to it.

The first thing I would say before jumping into an answer is, the fact that we are discussing pensions, markets, UK competitiveness with such ferocity over the last couple of years is fantastic, which in the previous administration start with sort of Lord Hill's listing review, and that momentum has maintained until now into a new government.

And we shouldn't take that for granted, because you could easily have a new administration that starts from scratch, ignores everything that's been done in the past. I think that connectivity and that tethering to this new administration is fantastic, because it means we can bank a lot of the good work and advocacy that's been done over the last four to five years. So that's fantastic.

And the way that we speak about markets and competitiveness is now evolving. It's the same topics, but in a slightly different narrative. So every two days, a year ago, the FT has an article on IPOs and capital raising and where somebody might choose to list or not.

Now it's very much pensions centric, which I think is fantastic, because it's a greater connectivity to society, because you can talk about pensions and markets, and you can talk about pensions and the ability for a group of people to be more financially resilient in later lives. And that's exactly the right topic we should be talking to.

I think Michael's point on defined benefit to defined contribution and the consequences is absolutely right. I mean, clearly, if you have a defined benefit contribution, you have to work very hard to make sure you hit a particular figure. And by definition, that is a legitimate pension.

And defined contributions are clearly different where you're putting money away on a regular basis, but you're not confined to any threshold or target. So you have no idea what you're going to be dealing with in retirement, and whether it's enough to sustain the sort of living standards that you would like. So the public discourse on that now, I think, is really important.

And we've got that with government. But equally, you need society and the people of this country to think about ‘what do I need and require to sustain a financially resilient life when I stop working’. So having this debate is fantastic.

I mean, the UK has a couple of challenges. One is retaining and growing and scaling superb companies. So you don't need to mandate pension funds to invest by law or regulation.

It should be an obvious choice because we have all these fantastic companies. And that's what needs to happen. And I think we've started that journey and people always ask, well, give me some specifics.

So we've changed rules on free flow requirements. So if you're a founder and you've worked really hard to build a fantastic company, but you don't want to give away all your equity because you want to maintain control and protect against a hostile takeover in X number of years time, well, then, you know, let's lower the requirement, free flow, that you have to give away into the market so you can retain a little bit more control, but also list your company, you know, adjusted share requirements, dual class shares, giving better voting rights to founders. These are tangible things that the regulatory authority and the government have done to try and enhance the favourability of choosing the UK as a listing generation.

And it will take time for that to bed in. And we've seen the most recent changes in the primary markets effectiveness review too from the FCA and the effect that that will have on our core exchanges here in the United Kingdom from joining the main and standard segment. That will take time to bed in.

So I think what has happened, Maurice, is we've had a level of market efficiency that reform and market efficiency changes that will take time to bed in. I think the next phase is now to speak and market and advocate for this country being a natural choice for company growth and capital flow. There's no point having a perfect market if the world doesn't know about it.

And I feel we still have a bit to go in that regard in speaking up the United Kingdom as a place to come and grow your company. And I think what we've seen is, as I said a couple of moments ago, we're fantastic at conceiving companies, but we have an unusual data point at five years’ time where we have the highest five-year failure rate of companies in Europe. And when we do have successful companies, they tend to be dominated at a board level by international or US capital.

And if you've got international and US capital, which is fantastic, but there'll be a large voice in deciding where you go next. So, it's no surprise that that flow from those fantastic companies is flowing to the US. Now, our advocacy isn't about displacing private capital, private international capital. We need that as a country. It's about sitting alongside it.

And so things about national wealth fund, sovereign wealth funds, utilising pension funds, your domestic capital to support your domestic companies, is a sensible policy challenge to tackle.

And if you get that right and you manage to retain companies, you start to move away from mandation and pushing pension funds into places where they may not want to be, because they don't have to. Because the choice of investment in UK companies will be up to you in 100 years' time, because we've generated. We should have this growth escalator.

And last, but not least, Maurice, I'll leave it at this point. The US has done something fantastic with the super seven companies that it has. Now, organically or inorganically, they've got a super sector.

And by design, choice, or randomness, that has happened. But it's a huge strategic advantage to the US. The UK taking a decision on the sectors it wants to champion in its public markets, I think, would be the next sensible public policy choice for it to attempt.

Rather than trying to have every company in every sector on our list of markets, let's prioritise what sort of country do we want to be in the next 5, 10, 15 years. We want chip makers, pharmaceuticals, biotech. Let's wrap around those sectors and make sure they have all the incentives and easy pathways to generate capital here, enjoy being here, and can scale and grow in a way that suits their company style.

And I think we're on that track, but we're not quite there yet.

I hear what you're saying, and I agree with all of that. I think the government's starting point on the industrial strategy in the sectors that they've identified will help in that matter.

I interviewed another member of the CMIT, and his main point was that we need the volume of high growth technology companies, which will then, as you just made the point, pension funds will want to invest in them. But there isn't the volume currently, and creating a system that fosters the development of those companies, like PISCES, helping them grow and understand governance and get familiar with institutional investors, will certainly help.

But if we may move to another point, the conference is also looking at the evolution of the public and private markets. And obviously, the number of take private deals versus IPOs is a ratio of something like 2:1. So do you think that the regulators' attempts to make public markets more attractive to companies will stem this trend? Are we going to see, despite all the great efforts and all the policy points you made, do you think that the take privates are going to just continue to act as a force of attrition on the public markets, and more and more companies will still go private?

It's another very good question, Maurice, and clearly a hot topic for not only the industry, but the regulatory authorities. We say private markets, but the global standards setters and regulatory authorities have been speaking about non-bank financial institutions, hedge funds, private equity, private markets at large for many, many years now.

So I don't think private markets are going anywhere. I think they're fundamental to a functioning market. You just need to understand them so we can regulate those markets and supervise them appropriately and make sure things like private markets and public markets are working in tandem to support economic growth.

The balance has clearly changed. Public markets have been working for decades. Private markets have grown particularly since 2016, 2017.

The explosion in finance used to support companies has largely swung towards the private market from a private market basis, and I don't think that's going to change, but there are large macro drivers that have enabled that to happen. The interest rate environment where you can fund companies incredibly cheaply for years, and therefore profit is always important, but it may not have been as important at a time where actually your cost of credit was effectively zero. That's changed now, so return is important, so recycling that capital isn't as easy as it was many years ago.

I think there is many public policy and regulatory decisions to think about if you want to transition companies from private markets into public, and if you've got an increasing regulatory environment and regulatory base and huge requirements on company boards, executives, and founders as they move from private to a public company, that's got to be a consideration. We've got to ask ourselves why would a company want to be public today? There's a prestige to that. You can access a wider range of capital.

You can become more internationalist. You can raise your finance in one country but be based in another. It can make you incredibly dynamic, but it also comes at a cost of your annual shareholder meetings, being a public figure, having to be incredibly transparent, and I think that's appropriate and right.

You just want to make sure the regulation is balanced enough to not to actually deter that transition from private to public, because it is an incredible privilege, but for founders on listed exchanges, it's an incredible challenge as well, so that balance needs to continually be assessed, and I think to be fair to the regulatory authorities in this country, they're largely alive to that.

And one of the big debates right now, Maurice, is risk culture in the UK. Have we got the risk penculum right, and have we been so focused on eliminating risk from the system that we also eliminate reward, and I think if you want to look at an example where I think the regulatory authorities have probably got that right, it's in the listing reform debate, where actually the ballots have been opened for a little bit more risk to come into the system, because you've created an environment where your investors and your company can come to an agreement on the sort of information that's disclosed, and therefore you've got a more tailored solution that should offer a better incentive for companies to eventually list in public markets.

Yeah, I think that's entirely right.

It seems like the balance of regulation has been modified in a way that hopefully tilts the balance in favour of going to, or at least there's no disincentive to be a listed company.

I mean, the final point, because I guess we're certainly running out of time, the other source of capital, you know, leaving aside institutional investors, is obviously retail investment, and culturally the UK sort of lags behind some of the other markets, particularly I'm thinking of the US, where people maintain quite a large level of shareholding. How do you think that this can be tilted or nudged along so that there's a greater retail share ownership culture?

Another great question, Maurice.

Culture and financial education come to mind as the overarching answers to that question. Let's start with culture. If you look at what, if you look at other nation, states and countries, you look at Sweden, you're born, you're given some form of investment account.

I can't think of the exact name of that, but you almost grow up with investment in your DNA like you do in the US. Now, there's a completely different wealth dynamic in the US. You're more likely to have people with more disposable income.

And therefore, if you have more disposable income, you're likely going to want to do something with it in the UK. We put it into current accounts and hoard it in cash. In the US, I think they're more investment savvy, but they grow up with that in their DNA.

We don't in the UK. Our idea of wealth is purchasing a house in 2000 and X and selling it 10 years later for a profit, as opposed to investing in Tesco, Shell, AstraZeneca, other listed companies. That's starting to change.

But if you look at the pace of change in Germany, in France, Sweden, and the US, there's much more investment culture there. And we've got to figure out why and how you change that dynamic. Now, you don't want to create day traders in the UK.

That's not what this is about. But you want to educate people that your money can be working more for you than it currently is sitting in a cash deposit account at your bank or somewhere else. And financial education is central to achieving that understanding what your options are.

It's not just about a current account and a pension, you know, maybe little about there's got to be something in the middle where your money can do something for you. And technology is going to help as well. We've got new entrants into the market in the UK that allow you to buy US equity without any tax cost in a matter of seconds.

You can literally go from 0 to 30. I've done this many times to test it. 0 to 30 seconds, you can own the stock in, for example, NVIDIA.

So we've got barriers here in the UK. We've got this uniqueness where we've got you know, we've got a tax cost, amputated cost in purchasing, purchasing equity. We've got, you know, transaction costs.

So if you're trying to convince a cohort that might spend £50 to £100 a month saving and investing, but they've got to pay a stamp duty cost and a transaction cost, it sort of negates any sort of minimum return you might get over X couple of months. And I think it's not worthwhile. But in this country, I could buy US stocks for no transaction costs.

I can actually get up every morning and instead of buying a Starbucks coffee, I can buy Starbucks equity. It costs me zero, only the price of the share itself. So we don't have to follow what everybody else is doing.

But if we value an investment and saving culture, which I think this country does, and we're not quite getting it right, but other jurisdictions are, I think we need to make that public policy trade off where we're sensitive to tax changes, but maybe the overall greater good in a country that is much more financially resilient over 20, 30, 40 year timescale, because we're more personally responsible for our future financial resilience and wealth. I think it's a sensible thing to begin to look at and at least open up the public debate about it, irrespective of what you believe the solutions are. I think having a spotlight on this incredibly important topic is important, because if we don't get it right, and this is the problem with four or five-year parliamentary life cycles, this issue is 30 or 40 years away.

Because if we don't have the stockpiles of capital cash and healthy pension funds, savings and investments for ourselves as we age, the only thing that will happen is it's a cost the government and the exchequer will have to fund and step in to support a number of years from now. And that is a ticking time bomb, and I don't want to be overly dramatic, but it is an incredibly important public policy challenge of our age, which is why investing now to get it right is incredibly important. I know one of the most important well-known pension funds in the world, the Ontario Teachers' Pension Fund, made a decision 25 years ago over a 75-year timeline, of which they're 25 years into right now.

They're the timescales you need to think about pensions, investment, infrastructure. It's not three, four or five years. We're doing things now for two or three generations down the line.

Yeah, yeah, yeah. No, I think that's true, you know, that we have to move from short-termism to a much longer planning cycle. But you know, there's changes to public policy and the trade-offs between tax receipts and encouraging people to save and invest.

They're all part of this, aren't they? And it seems to me that it's a work in progress, that there's still lots to happen. And many of the fruits of the things, as you said, that have been decisions that have been made will be seen a little bit later.

But we're looking forward to discussing this in more depth at the conference, the Future of UK Capital Markets Regulation. Very much hope that our viewers will be able to join us there. It's in London on the 11th of November. Further information available at www.cityandfinancial.com. So do go there, have a look at the site and book yourselves on.

Conor, it was a pleasure to speak to you this morning. Thank you very much indeed.

Thank you, Maurice.