by Chris Elms, Chief Executive Officer, Euroclear UK & International

Why modernising financial services should be a priority for the UK's new Labour government

A new Labour government means new priorities, but growing our financial services sector and enhancing one of the UK’s most globally competitive industries should remain near the top of the pile. Financial services firms contributed (www.thecityuk.com) over GBP110 billion in taxes in 2023, making up 12.3% of total tax receipts - more than the country’s education budget.

The sector’s 12% contribution to the UK’s economic output is substantial, totalling GBP243.7 billion in real gross value in 2023 (www.thecityuk.com). The sector is also almost 2.5 times as productive as the rest of the economy with output per hour at GBP97.30 in 2022, compared with the whole economy, which was GBP40.50.

The Institute of Fiscal Studies has already outlined that this next parliament will face a fiscal 'trilemma' (www.cityam.com), hemmed in by party commitments to public sector spending, debt reduction and tax levels.

Not only this but the UK must also tackle its productivity puzzle by raising levels of investment, for which the country is last in comparison to other advanced economies in the G7. A recent report (www.ukandeu.ac.uk) highlighted that 'there is a consensus that low levels of investment, both private and public, have held back productivity growth'.

The new Labour government needs to deliver a programme which strengthens financial services and provides the right framework for increased investment into the City of London international financial centre.

Digitising the shareholder framework

We must continue the work to modernise UK capital markets set in motion by Mark Austin’s Secondary Capital Raising Review (www.gov.uk) and taken forward by the Digitisation Taskforce (www.gov.uk), led by Sir Douglas Flint. Taken together they set out a number of structural recommendations to modernise the UK’s financial infrastructure and support and stimulate further capital raising.

Included in this work is the Taskforce’s remit to improve the UK’s shareholding framework by removing paper-based processes in securities settlement. Paper share certificates have posed a challenge for years because finding, moving, and validating physical certificates takes time and resources, and risks them going astray.

The continued existence of paper shares requires companies, investors and their intermediaries, to operate and fund separate and duplicative issuance, settlement and communications processes for digitised and paper-based shareholdings.

In July 2023, the Taskforce published its interim recommendations, including the progressive vision of a single digital register, with final recommendations due later in 2024. Today, on average 99% of the share capital of FTSE350 shares reside in the Central Securities Depository. Consolidating all shareholdings into a unitary register offers the possibility for new data-enabled means for companies to communicate with all their investors, and vice versa.

Moving ahead with these recommendations will make the whole process of owning and managing shares much more transparent and efficient - eradicating unnecessary paperwork and redundant processes. Adopting this progressive approach will also lay the groundwork for new open finance applications, empowering citizens to control their financial futures in new ways.

Increasing retail investor participation

Even though the UK is the biggest financial market in Europe, there has been a growing disconnect between households and capital markets, with the public shying away from putting their money in stocks.

The Investment Association believes around GBP25 billion (www.standard.co.uk) has been taken out of the UK stock market by small investors in the last two years alone; meanwhile, we have seen great enthusiasm for investment in well-known US stocks (www.telegraph.co.uk).

In Sweden, the proportion of household assets held in shares trumps the UK by almost four times, at 40% compared to 11%. This has helped Sweden boost the value of capital market activity relative to GDP faster than any other EU country.

Sweden boasts a healthy retail and institutional investor base willing and incentivised to put capital and savings to work. This supports a continuous funding escalator, as companies move from privately held through to small and medium-sized enterprises (SME) growth markets and ultimately main market initial public offerings (IPOs).

A modern shareholding framework comprising a single digital share register and hybrid direct-indirect holding model for shares underpins the success. This highly digitised environment reduces pain points for issuers, investors and intermediaries.

The transparency around beneficial ownership empowers retail investors to participate in corporate actions like secondary capital raises, in a way they often cannot yet in the UK.

As other jurisdictions advance in modernising their financial market infrastructures, we need to adopt the transparency principles of open finance and recommendations from the Digitisation Taskforce which fed into this, including a single digital register and the common standards for communications protocols.

This will future-proof and democratise securities markets helping the UK to remain competitive internationally and make it easier for retail investors to access capital markets. The potential benefits of widening and deepening participation are compelling.

If households in the UK invested a quarter of their financial assets in equities and funds, it could unlock an extra GBP740 billion (www.standard.co.uk) of capital, while incentivising smaller companies to list.

Reducing settlement cycles

Another way to drive modernisation in the financial services sector is by accelerating settlement timelines for securities from T+2 to T+1, making securities trading more efficient.

With the US relatively smoothly moving to T+1 in May, the support for building similar processes between trade and settlement in the UK is increasing.

There is also an emerging consensus that the UK should align - or do its best to coordinate - with EU and Switzerland on this matter.

The issue is currently being explored by the T+1 Technical Taskforce led by Andrew Douglas to determine the operational changes necessary for the transition.

The move to a shorter settlement cycle for shares provides opportunities for further automation and digitisation. But it is essential that other key parts of modernisation work in harmony with T+1 such as the dematerialisation of share certificates to enhance productivity and improve retail participation.

The next steps of innovation

Delivering this modernisation for financial services will require collaboration between the new government and industry stakeholders.

Dematerialisation of paper shares and accelerating settlement are mutually supportive elements for wider modernisation. Adoption of new technologies such as distributed ledger, and open finance enablers like Application Programming Interface (APIs), will require a fully digitised environment.

The digitisation and modernisation of the UK’s capital markets can be positively transformational for communication between issuers and investors, capital-raising, productivity and future innovation. Through these initiatives, we can boost the UK’s position as a leading innovator on the world’s financial stage.


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