Speech by Christopher Woolard, Interim Chief Executive at the FCA, delivered at a webinar hosted by The Investment Association.
Speaker: Christopher Woolard, Interim Chief Executive
Location: The Investment Association (webinar)
Delivered on: 8 July 2020
Note: this is the speech as drafted and may differ from the delivered version.
- The FCA has been trying to build a bridge across the economic aspects of the Covid-19 crisis to ensure that as many consumers and firms can come through the other side in the best shape possible.
- We will look to consult later this summer on finding a way in which funds could safely transition to a structure in which liquidity promises to investors are better aligned with the liquidity of fund assets.
- We now have an opportunity to look again at our rulebook, focusing less on tick box compliance and more on promoting outcomes that serve the public interest.
I want to reflect for a moment on the Covid-19 crisis so far, before turning to the challenges to come, not least the vital role the investment management industry could play as we look beyond the immediate crisis, through what may be tough conditions to come, to something approaching recovery.
As you know, alongside the Treasury and the Bank of England, the FCA has been trying to build a bridge across the economic aspects of the Covid-19 crisis to ensure that consumers and firms can come through the other side in the best shape possible.
Over the past few weeks I have heard from a number of people that it is in this crisis that the FCA has ‘found its feet’.
Leaving aside the suggestion that we had ever lost them, there is much to be proud of that we have been able to do, often working together with financial firms, trade associations, debt charities and consumer organisations, including many of the people on this call.
We moved quickly to provide the regulatory environment in which financial services firms could concentrate on serving their customers by delaying and deferring regulatory change where we could.
We promoted the smooth running of the financial markets so businesses continue to have access to raise money and support jobs. We provided clarity on our expectations of those listed companies that need to turn to capital markets. We have also – along with colleagues in Europe, the US and in Hong Kong – been strong advocates for these markets remaining open.
All of this has been made possible by changes in the way the FCA works as an organisation. We have embraced quicker, more nimble decision making and flexibility in resourcing.
And, like all of your members, we have drawn on the hard work and experience of years to manage the crisis and make us a more operationally resilient organisation. Without that focus – both internally and externally – the move to home working would have been impossible.
The resilience of investment management during the crisis
Overall, the fund management industry showed considerable resilience in the face of volatile market conditions. When material uncertainty over commercial real estate values made it necessary to suspend daily dealing in open-ended property funds, fund managers worked with us to make this happen quickly and safely.
While suspension is in the best interest of investors, this crisis, like the aftermath of the Brexit referendum, shows the difficulty for these funds of maintaining a promise of daily liquidity to investors when their assets are inherently illiquid.
There has been considerable discussion about how to ensure redemption arrangements offer a fair deal to those remaining in the fund as well as those who wish to exit. We will look to consult later this summer, in a genuinely open way, on whether long-term investor interests would be better served by finding a way in which these funds could safely transition to a structure in which liquidity promises to investors are better aligned with the liquidity of fund assets.
The challenge ahead
In creating a bridge across the crisis, government, central bank and regulators have tended to focus on credit. The government providing loans to those firms who need it; the Bank of England reducing the Bank Rate to near zero; and the FCA providing forbearance to those consumer borrowers financially affected by the economic impact of the pandemic and the measures taken to control it.
These measures were entirely necessary. But, as ever, turning off the tap – and where necessary mopping up – will be the greater challenge.
These interventions have given companies and consumers a fighting chance of weathering an unprecedented economic, social and health storm. But more debt does not, and cannot, provide a sustainable foundation for rebuilding. For corporates, robust health requires equity.
The scale of that need was highlighted in the recent The City UK report on recapitalisation, which estimated £100bn of investment would be necessary. We can debate whether that is the right number or not, but we know it will be big.
Helping address this need is the market’s fundamental purpose.
Listed UK companies have made good use of their access to the UK’s public capital markets over the past few months. Investors – your members primarily among them – have proved willing to supply. For example, UK companies listed on the LSE’s main market and AIM raised £14.7 billion in equity between April and June this year. That’s almost double (194%) the amount in the same period last year.
To continue to support the vital work of recapitalisation, we want to understand whether there are some types of issuers that are unlikely to be served by public or private markets over the period of crisis into recovery. And, if there are, whether we have a framework that accommodates a wide range of issuers and those investors able to understand and bear the inherent risks involved.
Our objective in this discussion is simple. And it is a constant. We want rules that balance and meet the needs of both issuers and investors. This is vital. High standards, properly monitored, and if necessary enforced, give investors the confidence to invest.
At the heart of these requirements are fundamental protections for investors. Without them markets would not work. But that does not mean that we cannot ask how the rules should be calibrated. There is a question about whether some elements of the framework inhibit rather than promote opportunities for issuers and investors.
For instance, issuers whose securities are traded every day must, rightly, meet continuous disclosure requirements. These are fundamental to preventing market abuse and supporting investor confidence in traded prices.
But, at the smaller end of the corporate spectrum, there are companies who do not have the scale to meet these requirements. It is unlikely their equity or debt issues would be large enough to support daily trading, and unclear they or their investors would need it. We would welcome a discussion on whether and how such companies could best access capital markets – for example, with periodic disclosures, perhaps with more periodic trading. Perhaps there is a link between such less liquid securities and the IA’s own work on the Long-Term Asset Fund.
For larger corporates, who already meet the UK’s super-equivalent premium listing standard, is there a case to simplify the process for follow-on equity issuance while maintaining valuable pre-emption rights and essential disclosures? Equally, away from the equity markets, for premium listed issuers, should we also allow debt issues in lower denominations and therefore make the debt of these corporates more accessible to retail investors?
The FCA cannot create markets. We cannot provide liquidity. But we can work – with others – to ensure we have a framework that accommodates markets in which others wish to participate.
As a result, in the coming weeks I would welcome your views on whether there are some types of companies who will find access to public markets limited as they seek to recapitalise post-crisis. And, if there are, why that is.
As I hope I have indicated in these few words, as part of this discussion we will be open to ideas about whether the current framework creates the right opportunities for both issuers and investors, as long as those suggestions are underpinned, as ever, by investor protection.
The questions I have posed are starters for 10. I hope to flesh these out over the coming weeks as we begin to engage market participants on these issues.
As I signalled in a speech last year, what we need is outcome-based regulation - deciding what it is we want markets to deliver for their participants and using all the regulatory tools Parliament has given us to achieve that. The Covid crisis and Brexit have only reinforced this need. We now have an opportunity to look again at our rulebook, focusing less on tick box compliance and more on promoting outcomes that serve the public interest.
And as we, the regulator, look for a regime focused on outcomes, I want to encourage the investment management sector to work with us to make sure we have a high-quality regulatory framework that supports a financial system fit for recovery.