If you wanted to show that London is open for business after Brexit, there are better ways to do it than to give the government vague powers over who is allowed to list on its markets. Unfortunately, that seems to be exactly what has happened without much of the City even realising it.
You may recall that in May, Rishi Sunak said he planned to combat the scourge of dirty money in London’s financial markets by issuing a consultation to give the government powers to block IPOs where the companies involved posed a threat to national security.
Not that many people noticed, but the Treasury actually followed through on that promise on 7 June, setting out its stall on how it wants those powers to look. The resulting document is thin, raising more questions than answers, mainly around whether such new powers are actually necessary, and whether they risk giving ministers unprecedented opportunities to stifle London’s competitiveness based on whatever political whim strikes them that day.
Of course, we should be able to stop companies that pose a risk to our national security from raising capital that they could use to threaten lives and livelihoods. But the fact is we already have the power to do so; adding a standalone new mechanism seems neither necessary nor proportionate.
The consultation document gives us little extra detail than what Sunak said in his initial statement. What we know so far, is that the Treasury says it does not want to reduce listings in the UK. Neither does it wish to put the shackles on companies that previously slipped through the net. It wants London to hold its place as a top destination in which to raise capital, and thinks reassuring investors that dangerous companies have no way of flooding our markets will help it do so.
With the recent Hill review also seeking to open up the UK’s prospectus regime, the Treasury said the consultation on national security would “complement” that work, where it has “committed to boosting the number of companies choosing to raise capital on our markets”.
The consultation says companies are “attracted by the depth and openness of our markets as well as the UK’s reputation for clean and transparent markets,” yet there are “remote but possible scenarios in which a company listing in the UK could be detrimental to the nation’s security”.
We are told to believe that this won’t restrict access to London’s markets in any meaningful way. The government claims that there are only a “small number of cases” in which national security concerns would be raised.
How many would that be exactly? The consultation doesn’t say. In fact, the government only raises a single example of the kind of float it might have had concerns about; Russian oligarch Oleg Deripaska’s listing of his EN+ energy business through a 2017 London IPO.
It only marshals a single more general instance of where it might invoke its new power; if a company based in a country with recent nuclear sanctions looked to list, and was part-owned by the energy minister of that country and there were fears the funds raised could be used to bolster the country’s nuclear capability.
Under such vague terms, there are no guarantees that national security will not be used as a catch-all to stop any politically unpopular companies from listing in London. In terms of scope, the government is looking to set its powers widely to include all initial equity listings and admissions on UK public markets.
Critically, there is scant definition of how the government would weigh or even define national security, saying “the circumstances and rationale for intervention will be covered more extensively in a further consultation”.
The questions the government is asking respondents to the current paper to weigh in on do not include how to define national security. Surely this is such a key element of the rules that they are completely adrift without a proper definition at an early stage.
Unless a tight understanding of the term national security is drawn, theoretically, the government could be given sweeping powers to intervene to stop a vast swathe of capital raisings.
You might not like the taste of some of the companies that are trying to list here. But that’s up to you, the individual investor, to decide. It has forever been thus: for the all the long-overdue move towards ethical investing, we still give people the right to invest in companies that make guns and bombs through public markets, because we know there could well be sound business and economic cases for said firms to raise capital. Those guns and bombs could be used to threaten our national security, but it would seem a massive leap for the government to kybosh IPOs for any and all companies who make potential dangerous products. We can then only conclude that political motives will drive such decisions, not rational economic ones.
More to the point, there is simply no need for an additional layer of formal authority when our existing framework would allow us to prevent companies that threaten our national security from IPOing in London regardless.
The FCA already can already block listings if they fear “investor detriment might be caused”. While this is ill-defined, it is still a power that could be used to the same end, as the Treasury willingly acknowledges in its consultation.
The government could also issue broader financial sanctions against the company that would effectively prohibit it from listing. The government argues in its consultation that while such a move would indeed block the listing, it would have a much wider impact on the company too – hence the new rules are needed.
But surely if your concerns about the national security risks of the company looking to list were so great, you would want to slap sanctions on them anyway? Deripaska had sanctions slapped on him in the US a year after his company listed in London. Achieve better cooperation between regulators in different countries, and you might have solved the issue without resorting to making new rules, a decision that is just going to bog the civil service down in even more paperwork when they could be using their time to try to clarify our post-Brexit minefield instead.
While the new powers might not strictly be necessary, you might argue that they will be basically ineffectual at the end of the day. They are there mostly for show, and the City won’t even know they are there most of the time. But again, if the goal is international competitiveness for London, any additional hoops to jump through are unwelcome at a time where the City is still trying to navigate the fallout from Brexit. And if there is no real prospect of using them, again, why make new rules in the first place?
Issuers would have to disclose information about their business including management and shareholder structures in order to be assessed for their national security credentials – disclosures that are likely to have been made in the process of listing anyway but are just another minor irritation that other jurisdictions might not subject them to.
We all want to see cleaner financial markets, and London should be leading that charge. However, the Treasury should use this time to rethink whether it really is going about that in the right way.
To contact the author of this story with feedback or news, email Justin Cash