Venture Capital Trusts (VCTs) have been instrumental in fostering entrepreneurship across the UK since their inception in 1995. These funds provide tax-efficient investment opportunities for individuals while channelling essential capital to early-stage innovative businesses.

The past few years, however, have tested the resilience of VCTs and their portfolios. Rising inflation, interest rate hikes, and political instability have created a challenging environment for the growing companies backed by VCTs.

Despite these challenges, the most recent Budget underscored VCTs as a means of revitalising the UK economy. This endorsement by the Labour government could prove to be a pivotal moment for the sector.

Reanimating VCT fundraising

The VCT fundraising landscape has evolved significantly, shaped by both macroeconomic pressures and changing investor expectations.

Investors remain drawn to the tax benefits of VCTs, which include up to 30% income tax relief on investments of up to £200,000 per tax year, provided shares are held for at least five years. Dividends are also tax-free, and any capital gains realised upon selling VCT shares are exempt from capital gains tax.

See also: Edison: Saba’s ‘sub-par corporate governance’ is breaching FCA rules

These incentives have made VCTs particularly appealing to IFAs advising clients on tax efficiency. But at the same time, uncertainty brought on by high inflation and interest rates has prompted greater scrutiny, with IFAs and individual investors conducting more rigorous due diligence. 

This translates to heightened interest in fund performance and the resilience of underlying companies. Investors are not only seeking growth but also assurance that their capital is being deployed into businesses capable of navigating economic turbulence.

Over the last couple of years, the higher interest rates and stagnant economic environment have created new challenges for the growth companies that VCTs look to back. These conditions have required fund managers to refine their approach to identifying and assessing potential investments.

See also: ‘Strap in’: Trump returns to questions on tariffs and inflation

In today’s climate, VCT managers place an even greater focus on understanding how companies can weather economic challenges and adapt to evolving market conditions.

Restaurant chain Farmer J, which joined the ProVen VCTs’ portfolio in early 2024, exemplifies this. The brand closed all its restaurants during the first lockdown but quickly adapted by reopening its sites to serve home deliveries and continue trading despite an empty city. Since then, the chain has added three new sites and grown revenues – by backing businesses with proven resilience, managers can build portfolios prepared to thrive in uncertain times.

The cautious optimism in the market is reflected in the £882m raised by VCTs in the 2023/24 tax year – the third-highest figure on record – as well as the significant fundraises already delivered in the latest tax year by the likes of the British Smaller Companies VCTs and Mobeus VCTs.

Encouraging signals from the Budget

The Autumn Budget of 2024 reinforced the government’s support for VCTs, with the Chancellor highlighting their role in supporting entrepreneurship.

This followed the earlier extension of the sunset clause for VCT and EIS schemes to April 2035 – a decision that provided much-needed certainty about the future of VCTs for fund managers and investors alike.

It also reaffirmed the government’s commitment to maintaining the tax benefits of VCTs while introducing tax increases in other areas, such as higher capital gains tax rates. These changes have enhanced the tax appeal of VCTs, sparking renewed interest among high-net-worth investors seeking shelter from rising taxes. 

See also: PA Live A World Of Higher Inflation 2025

Moreover, the government’s commitment to innovation was evident in the £20.4bn allocated to research and development (R&D) for the year. This investment aligns with the mission of VCTs, creating fertile ground for portfolio companies in high-growth sectors such as healthtech, climatetech, and artificial intelligence.

These policy measures reflect the Government’s recognition of growth companies – including those backed by VCTs – as vital drivers of economic growth.

Yet, fund managers must remain vigilant, ensuring investments contribute meaningfully to this broader agenda while still delivering returns for investors.

Resilience and opportunity

The VCT sector’s 30-year history demonstrates an ability to weather economic downturns and emerge stronger.

From the dot-com crash of the early 2000s to the 2008 financial crisis, periods of upheaval have tested VCTs, but also revealed their potential. Businesses that pivot, embrace technology, or address societal challenges can thrive amid downturns, creating opportunities for bold, innovative companies.

See also: RBC’s Justin Jewell resurfaces at Ninety One

Today, we find ourselves at a similar inflection point. Rising interest rates and inflation present undeniable challenges, but they also create opportunities for disruptive technologies and resilient business models.

For VCTs, the alignment between government policy and their mission is encouraging. Potential lies in supporting entrepreneurs who are not just navigating adversity but turning it into opportunity.

The journey ahead for VCTs continues to be one of resilience and innovation. With economic headwinds come challenges, but also a renewed sense of purpose. This could be a moment to drive meaningful growth, both for investors and the broader UK economy.

Siddiq had referred herself to the ministerial standards watchdog last week after allegations that she had lived in properties paid for by the Bangladeshi government.

The properties were alleged to be linked to her aunt, the former Bangladeshi prime minister Sheikh Hasina, who fled the country after her resignation last August.

Siddiq, whose roles include the City and anti-corruption minister, said when she referred herself to the watchdog last week: “I am clear that I have done nothing wrong. However, for the avoidance of doubt, I would like you to independently establish the facts about these matters.”

She is accused of owning multiple properties purchased by people linked to her aunt’s party, the Awami League, including a flat in King’s Cross flat that was bought for £195,000 in 2001, according to the Financial Times.

Reeves raised an extra £40bn in revenue for the government through tax rises and announced a £70bn increase in spending on public services and infrastructure in her first Budget.

But measures as bold as these will not be needed again, she told the Committee yesterday, stating that the government have “drawn a line under the chaos and instability of the last few years”.

See also: Autumn Budget 2024: Ten key takeaways

“We’ve drawn under that now,” Reeves said. “There’s been a reset that means our public finances are now on a firm footing and the trajectory of public spending is much more honest.

“So we’re never going to have to do a Budget like this again. This was a once in a Parliament reset so that we start on the right foot.”

Gilt yields rose in the wake of Reeve’s sizable Budget – although AJ Bell investment director Russ Mould said they have everywhere, suggesting there is “a wider issue at work” globally – so she reassured the Committee that such sizable tax hikes will not be repeated.

See also: Autumn Budget 2024: Capital gains tax hiked to 24% in ‘blow for investors’

“In terms of whether we’ll be doing something similar in the future – no,” Reeves said. “This was a Budget of reset.

“We’re not going to be coming back with more tax increases, or indeed more borrowing. We now need to live within the means we’ve set ourselves in the budget and those allocations of spending totals.”

Could Trump derail Reeve’s growth plan?

Reeve’s also unveiled the Office for Budget Responsibility (OBR) latest forecasts during last week’s Budget, which predict positive economic growth over the next few years, including a 2% increase to GDP in 2025, and another 1.8% in 2026.

But the election of Trump could spoil these figures, according to the National Institute of Economic and Social Research (NIESR), who said his 10% tariff on all US imports could halve UK GDP.

Reeves said she would negotiate with Trump ahead of his inauguration next year and was “confident those trade flows will continue under the new president,” but members of the Committee questioned whether it was “realistic to influence a president who is so set on a course that is so well defined”.

See also: How will Trump’s tariffs impact markets?

Reeves responded: “I think it is too early to start making changes to forecasts for our economy because of the election of a president in the United States, but I would say this – our trading relationship and economic relationship with the United States is absolutely crucial.

“The US are our single biggest trading partner. Trade between our two countries is around £311bn a year, so of course our relationship is crucial and our special relationship obviously goes much beyond trade for our security and defense.”

Industry spokespeople such as IBOSS CIO Chris Metcalfe said Trump’s isolationist levies against the rest of the globe could lead to a trade war that “further dismantles the globalization narrative,” but Reeves said she will do all she can to convince the new president of the importance of free trade.

“We’re not just a passive actor in this. It’s a trade relationship with the United States and we will make strong representations about the importance of free and open trade not just between ourselves and the United States, but globally,” Reeves added.

“I am optimistic about our ability to shape the global economic agenda as we have under successive government.”

It has become seen as a basket case to domestic and international investors alike, with UK equities losing £22bn over the last three years following 36 consecutive months of outflows, according to Calastone data. A shift in narrative is essential to stem these losses, and a new government could signify a fresh start, according to UK equity fund managers.

Tamworth says: “It’s not been seen as a stable place to invest. If you listen to the likes of Rachel Reeves, her message is about stability, and that’s what we haven’t had over the last few years.

“If you’re at an extreme point, things don’t need to go really well, they just need to stop getting worse.”

Tamworth points to certain goals outlined in the Labour Party’s manifesto that are unlikely to take place for some time, yet have markets excited. For instance, its pledge to replace higher business rates on retail stores with a fairer system that will level the playing field between high streets and online sellers, who are currently charged less.

“This makes complete sense and they should reform it, but it has also appeared in the last five Conservative manifestos. Therefore, you need to read the manifestos with an enormous pinch of salt,” he explains. “I take some comfort from the fact that the Labour Party recognises the value of financial services and it is trying to support it – and you don’t need big changes to drive a change in narrative. Even little things could make quite big differences.”

Minor policies could have big consequences

As millions of pounds continue to flow out of UK equities, investors are eager for remedies to be sought more hastily. Many solutions have been circulating over the past couple of years – the British ISA, removing Stamp Duty on UK stocks, forcing pensions funds to invest in their home market – but none have been implemented.

However, Tamworth says all these plans will have an insignificant effect on the UK equity market. But the perception of change – even when little is actually happening – could convince investors to buy back in.

“At the edges, we then need to make sure we are doing everything we can to make the UK as attractive as possible, but that’s a secondary tailwind,” he explains. “Many of Reeves’ proposals are sensible, but they’re not going to make a huge difference in the short term. It takes time for these things to come through, but sentiment can change instantly.”

This sentiment was echoed by Ninety One UK Smaller Companies manager Matt Evans, who says these policies are likely to have a minor material impact, but could become considerable drivers in the story around UK equities.

“It might just generate a few billion pounds of extra money, but in a world where outflows have been suffered, any additional inflow is quite positive,” he says. “It is a narrative where investors think there might be more flows, which often stimulates more flows, so it becomes quite self-fulfilling.”

The starting bar is low

“How much worse can things get? It’s been really tough, so we’re starting from a fairly low base,” Evans explains. “At the stage we’re at now with inflation and interest rates, there’s a chance to really set things up differently. It’s a real chance to be glass half full. We can start really creating a more positive, optimistic environment and narrative.”

Tamworth also aired his frustrations on inflated cynicism, stating: “We’re brilliant as a country at talking down our strengths. We always love berating things that are successful.

“But the UK economy is nowhere near as bad as people feared it is, and it’s easier to build a new conversation around it if there’s also a change in government.”

It’s no wonder that the UK has been burdened with such a reputation given the turbulence of the past few years – namely former prime minster Liz Truss’ Mini Budget during her short stint as premier. It sent the UK markets into disarray, but this single event has set a tone of fiscal probity that could last many years to come, according to Evans.

He says: “I don’t see why [policies addressing UK outflows] wouldn’t be a good thing to accelerate, but it should be done in the right way. I think [Truss’ Mini Budget] will hopefully remain in memory long enough to know the damage that can be caused, and serve as a reminder to implement policies you fully understand and know how they will be perceived by markets.

“It is a critical part of government to have well-structured policies that remove the element of worry or shock that might seep into the system. So I don’t think it’s a bad thing, but equally it shouldn’t hamstring any kind of decision-making.”

Equally, the UK’s move towards stability differs from that of some major economies. With the far right gaining influence in countries such as France, the UK has gone from being a volatile spot in Europe to a voice of reason, according to some managers. And the polarised election campaign in the US could further improve the narrative for the UK on the global stage.

Evans adds: “Everyone has a comment on how the UK looks challenged and uninventable, but we have some really good businesses that operate on a global basis, and that’s always been the case. So without any shadow of a doubt, as things become more complex elsewhere, people will look at the UK and it will look in a better position.”

‘It can all be undone pretty quickly’

A change in the UK’s narrative has investors excited, but this momentum could easily be derailed. Close Brother Asset Management’s investment officer Isabel Albarran said earlier this week that a strong Labour majority would be positive for markets as it would allow the party to implement its policies unimpeded. However, Evans warns this benefit could also be its downfall.

“Majorities are good because things can get done, but they can also be bad if you feel that there’s no risk because you’re in power and can just do what you want. [Labour’s] plan needs to hold up to scrutiny and stay within the realms of what it has suggested.”

Questions remain as to how Labour plans to finance some of its goals. It has pledged not to interfere with Income Tax, National Insurance, VAT, and Corporation Tax, but the £7bn it expects to raise by tackling tax avoidance, closing non-domiciled and carried interest loop-holes, and putting VAT on private schools, may not be enough. Labour could be spending £25bn a year on building up the UK’s renewable infrastructure, and would be dishing out an additional £1.7bn per annum on establishing publicly-owned energy provider GB Energy.

Nevertheless, Evans is maintaining his ‘glass half full’ approach, noting that markets will have to wait and see for a more detailed plan once Labour has settled in office. “I can imagine it is difficult to have a plan fully costed until there is full visibility and foresight on what those things might look like,” he says. “To have a policy and direction of travel is good, but the reality of how you can actually implement it and the costs is needed to build confidence.

“Everyone likes well signposted plans, so laying that out clearly and nailing down timeframes will be really critical. It’s that roadmap that would be the most supportive for long term benefits to capital markets.”

Ultimately, whatever direction the new government takes will need to produce results. A change is narrative is essential, but that alone is not enough to convince investors – they are looking for palpable effects, according to RSMR CEO Ken Rayner.

“There are still some diehards who think the UK will come back, and arguably we have a lot of valuation discrepancies between the UK and other global markets which could be made up at some point, but there would have to be really strong reason for that to happen,” he explains. “It’s very much orientated around commodities and energy, whereas the world is all about technology, so it’s very difficult to see that coming back.

“I don’t think [policies addressing UK outflows] is enough. At the end of the day, people want returns, and if they don’t think the UK is going to deliver those, then I don’t see it making a huge amount of difference.

“I think a new government would probably be a fresh start – that might be an impetus for change. People are looking for change and maybe that will stoke some optimism. Whatever your affiliation, I think people are looking for change, whatever form that takes.”

Despite the electoral uncertainty, US economic growth remains strong with the S&P 500 closing the first half of the year up 14.5%.

However, many commentators have expressed nervousness about US equity valuations, particularly following the strong run of numerous AI-aligned tech names recently. Five investment professionals give their outlook for the US economy in the run up to November 5^th.

Jill Jortner, investment analyst at T. Rowe Price

The 2024 US presidential election campaign has been noteworthy for the lack of big‑ticket issues or policies from either leading candidate.

Healthcare, for example, historically has been one of the hottest of all political potatoes during election years – given the scope for impactful change – but it has featured much less prominently in either candidate’s campaigning in this election cycle.

This low-key focus has been less disruptive for the healthcare sector than in recent election year campaigns, which has been duly reflected in markets, with the sector posting positive returns in 2024 to date, albeit trailing the broader equity market’s rally.

Whoever is ultimately elected in November, we would expect healthcare spending to continue rising. Even though both candidates have voiced a desire to bring down medical inflation, and specifically to rein in high drug prices, total spending will continue to be driven higher by patient demand, an ageing population, and the cost of medical services and innovation.

Should president Biden win, we expect total healthcare expenditure to increase, with public spending outpacing private. In the event of a Trump victory, we anticipate increased private health expenditure, at the expense of public programmes. Pharmaceutical companies could also be better off, should a new Trump administration revoke Medicare’s power to negotiate drug prices directly.

Rebekah McMillan, portfolio manager at Neuberger Berman

We continue to see slowing growth in the US. While normalising inflation and monetary policy should be supportive, lower macro tails have made way for higher political tails as we approach the election.

Historically in closely contested US election years, we see a pattern whereby risk premium builds up in the fourth quarter before being released in November post-result as uncertainty is removed, irrelevant of the winning candidate, party or policies.

However, recent elections in India, Mexico, Argentina reminds us surprises can disrupt markets, making us more wary of volatility coming in throughout the fourth quarter.

The policy differences between candidates are clear, be it fiscal, tax or regulatory matters. But much will hinge on the composition of government in supporting or impeding the ability of the president elect to enact policy change. Large shifts in fiscal policy are more likely under unified governments, potentially resulting in larger asset price moves.

Markets may also pay attention to sustainability of public debt as it relates to any proposal for meaningful fiscal expansion. Additionally, the candidates’ approach to tariffs (particularly on China) and climate policies differ, presenting opportunities for more tactical equity investors. Foreign and domestic security priorities also diverge between the two, but defence spending should remain robust in both scenarios.

Paul Middleton, manager of the Mirabaud Sustainable Global Focus fund

There are few certainties when it comes to the US election in November – save for the fact that whichever way it goes, the outcome is likely to be contested, even more so if Biden wins. Because of this, the initial reaction to the result may be fairly muted.

A Biden victory would clearly mean little change in the markets, but volatility around certain sectors like managed care – which tend to underperform in election years – would be removed, enabling these stocks to start performing better.

A Trump victory would cause more disruption in markets, but it would be much less of a shock than in 2016 as he is the current favourite and we know more about his policies now.

The market’s overall tone would likely be constructive. Trump will be seen to be more favourably biased towards large M&A, and in general more business friendly. He has been very vocal about his dislike of some renewables sectors such as offshore wind and EVs, and these sectors are likely to be volatile. We would also be cautious on companies with supply chain dependency on China.

Raphael Olszyna-Marzys, economist at J. Safra Sarasin Sustainable Asset Management

The upcoming US elections will significantly impact the global economy and financial markets. Both candidates’ programmes share significant similarities and differences.

What is clear is that both will persist with protectionist policies to bolster the industrial base and reduce reliance on China. However, such protectionism is likely to hinder long-term economic growth.

The budget deficit will remain substantial for years as spending continues to rise due to an ageing population, while tax revenues remain insufficient. Persistent large deficits could partially crowd out private investment and push up the long-run equilibrium interest rate. The debt-to-GDP ratio will almost certainly climb under either Trump or Biden.

Overall, we believe Trump’s policies are likely to result in slower economic growth, higher inflation, increased bond yields, and a weaker dollar in the medium to long term. In the short term, a looser fiscal policy stance could provide a temporary boost to the economy, potentially lifting equity prices.

And any additional tariffs under Trump might initially strengthen the dollar, though this effect would likely diminish over time.

Tom O’Shaughnessy, head of North America at Amber Infrastructure

Renewable energy demand in the US tends to be driven by state initiatives rather than federal ones and is often largely apolitical. However, the Inflation Reduction Act (IRA) demonstrates the impact federal policy can have on the supply of renewable energy.

The act, which has been central to President Biden’s economic agenda, has been transformational for energy development projects by providing more upfront capital for construction, allowing developers to effectively monetise the additional tax credits, and therefore reduce project costs.

Despite this, the IRA remains highly politicised, with former President Trump and some Republicans criticising the act and pledging to repeal parts of it should the party win.

So the future of federal support of renewables remains uncertain. We think any changes in federal policy that delay or inhibit new development are likely to have the knock-on effect of increasing Power Purchase Agreement (PPA) prices, which would be broadly positive for operational assets. But any policies that accelerate or subsidise new project development could result in cheaper renewable energy.

The role of state and federal governments and their policies will play a vital role in shaping the US renewable energy landscape regardless of who wins in November.

In his Autumn Statement, Hunt said he hopes the changes will help bring about £20bn in fresh business investment a year, equivalent to 1% of total GDP, and drive increased productivity across the economy.

He did not attempt to list all 110 points, but laid out some of the broad changes he plans.

Making ‘full expensing’ permanent was the centrepiece. This could save companies £10bn a year in tax by allowing them to claim back on investment in plant and machinery. This scheme had been due to end in 2026.

The Chancellor said it would be the ‘biggest ever’ boost for business investment in modern times and that it is the most effective way to ‘raise wages and living standards for every family in the country’.

He added that he wants to ‘get Great Britain building’ and deliver energy security by reforming the planning system to remove barriers to investment in critical infrastructure.

An additional £4.5bn of money is to be made available for ‘strategic manufacturing sectors’ such as auto, aerospace, life sciences and clean energy.

Artificial Intelligence investment was another of the big pledges, with £500m earmarked to promote the industry in the UK.

New ‘investment zones’ will be created, Hunt said, as well as increased devolution for the UK’s member states.

The cuts to national insurance announced will also help businesses, particularly small businesses and the self-employed, Hunt said.

Michael Field, European market strategist at Morningstar commented: “For businesses, the biggest measure of the day was making the tax rules permanent around offsetting of plant and machinery expenses against profits. Although businesses are still pulling back on spending in light of the weak state of the global economy, this at least gives some visibility of the tax implications of doing so.

“The announcement of a green fund, to the tune of £4.5 billion, could also boost investment in manufacturing at a time when it is badly needed to stimulate the economy. The auto industry is likely to be a huge beneficiary here.”

See also: Rising bond yields: A one-off adjustment, or a warning light for investors?

Labour has said that it would reinstate the pension lifetime allowance cap following the announcement by chancellor Jeremy Hunt in the Spring Budget that the UK government will remove the cap.

The lifetime allowance is the total figure Brits can build up in all pension savings without incurring a tax charge.

Shadow Chancellor Rachel Reeves described the move as “the wrong priority” and as a tax cut for the rich.

The cap currently stands at £1.07m ($1.3m, €1.23m). Hunt was expected to raise the threshold to £1.8m – but he scrapped the allowance instead.

The lifetime allowance charge will be removed from April 2023 before the allowance is abolished entirely from April 2024.

Hunt said during the Budget: “No one should be pushed out of the workforce for tax reasons.”

The maximum tax-free cash someone can take will be frozen at the current level of £268,275 as part of the reforms.

Political ping pong

Andrew Tully, technical director at Canada Life, said: “You simply can’t play political ping pong with the pensions system. People plan for the long term and that relies on having confidence that the goal posts won’t constantly shift.

“We need cross-party consensus on issues like this to deliver the stability required or else we seriously risk wrecking savers’ retirement plans.

“There are already restrictions in the system limiting pension savings and tax breaks − just let the annual allowance do the job its designed to do.”

For more on pensions, go to our sister title International Adviser.

They will be located in East Midlands, Manchester, Liverpool, the Northeast, South Yorkshire, Tees Valley, West Midlands and West Yorkshire, with each zone receiving £80m over five years. The devolved nations will also receive at least one investment zone each.

Jupiter Asset Management portfolio manager Richard Buxton said: “Measures to tackle low business investment and the large inactive workforce were at the heart of this Budget. 12 new investment zones had been well trailed, and consulting on greater regional financial autonomy, although the benefits of such moves are likely to be years in the making.”

The advantages of the zones include access to grant funding to improve infrastructure, as well as a range of tax breaks and relief.

David Kaye, CEO of Puma Investments, said: “The new local investment zones that were given the go-ahead today to drive business investment in key areas such as the tech sector and creative industries will help to level up the country. However, as often with the planning system, the devil will be in the detail and that remains to be set out.

“We hope sufficient thought will be given as to how this initiative will create conditions for meaningful investment right across the UK, and not prove to be a case of picking ‘winners’ at the expense of other regions.”

Good news for infrastructure investors

Welcoming the announcement, Fergus Laird, president of the Commercial Property Network and investment partner at Naylors Gavin Black, said: “In the Northeast, we have a shortage of good quality warehousing, distribution centres and factories, and so it is very pleasing to see the chancellor announce a new investment zone for the region. It will only serve to attract investment and jobs.

“One of the biggest issues facing the commercial property sector is the laborious planning system and a lack of financial incentives for new developments. However, investment zones have the potential to unlock real levelling up by making it quicker and easier for developments to get relevant permissions, alongside providing significant financial incentives in terms of preferable access to funding, zero-rated business rates and enhanced structures and buildings allowance.”

He added: “I am at MIPIM – an event for real estate investors – and investment zones are a hot topic of conversation with investors. The big test of their effectiveness will be the speed at which development begins. They have been on the agenda for a while now and we need to see action sooner rather than later if the UK is to compete with other countries which are also doing their utmost to attract investment. It would be a huge shame to waste this opportunity.”

The zones will also help to grow the tech sector in the North, according to Interactive Investor chief executive Richard Wilson.

He said: “We are encouraged to see today’s budget restate the government’s levelling up agenda, as we continue to invest in talent and technology in the North.

“As well as developing our Leeds office, we are one of many growing businesses who have made a firm commitment to Manchester, with its thriving fintech space. Over 400 of our staff are now based at our Manchester headquarters, and our headcount is rising in line with our significant ambition. We strongly welcome government support for the region as we attract and develop talent at pace. We were there long before the term ‘levelling up’ made it into the Conservative 2019 manifesto, and there is a lot to do.”

While the government seeks to boost investment outside of London, Roger Clarke, chief executive of real estate stock exchange IPSX, said the Budget does little to help retain listed companies in the capital.

He said: “None of the measures put forward adequately address the evident issues in the market that have seen London lose ground to New York in attracting and retaining listed companies. If the government is serious about supporting London’s capital markets performance then we must move towards implementing the sound proposals outlined in the Edinburgh reforms, including a reversal of the Mifid II policy which effectively decimated opportunities for small and mid-cap companies to access investors.

“Cutting the regulatory red tape involved, which hinders trading volumes and forces investors to focus on large-cap stocks, would make it more commercially viable for a far broader range of companies of all shapes and sizes to float, and ideally foster an environment where innovative firms choose to stay and grow in London, to the benefit of the wider investment ecosystem and economy.”

Go to our sister title International Adviser for budget coverage on pensions and tax, for green initiatives go to ESG Clarity.

Chancellor Jeremy Hunt revealed on 9 December that the Priips rules will be scrapped in a bid to move away from legislation inherited from the EU after Brexit.

Hunt said the UK regulator will be responsible for designing and developing an alternative disclosure system tailor-made for the British market.

This will include deciding what type of information retail investors should receive in order to make an informed decision on which financial products to purchase.

More specifically, the FCA wants to hear from industry about when and in what format the information can be delivered to consumers so that it can be useful and supportive of their buying experience.

As part of the discussion paper, the watchdog is also seeking views on who should have responsibility for product disclosure.

Less rigid regime

Sarah Pritchard, executive director of markets at the FCA, said: “The current rules make it very difficult for consumers to get the information they need in the way they need it to help them make effective investment decisions.

“We now have the flexibility to design a new regime which is less rigid and more focused on the outcome we are seeking – we want consumers to have the confidence to invest and understand the levels of risk involved.

“This discussion paper aims to seek views from industry and consumers to help us design a disclosure regime that delivers to support that aim, and we welcome views from across the market to help us do so.”

Comments on the matter can be submitted to the FCA by 7 March 2023.

This story originally appeared in out sister publication, International Adviser

See Also: Sigh of relief as government plans to scrap problematic Priips Kids

The amendment to article 62 of the Mifid II regulations– known as the 10% drop rule – was announced as part of chancellor Jeremy Hunt’s (pictured) ‘Edinburgh reforms’, which saw wide-ranging amendments to financial services regulation.

The FCA had paused the rule at the beginning of the Covid pandemic to help firms support consumers during market volatility linked to Covid-19 and the Brexit transitional period. The reinstating of the rule was then deferred while a consultation took place around its future.

David Tiller, commercial and propositions director at Quilter, said: “Ditching the 10% rule is long overdue and has always had the capability of being detrimental to customer investments by breeding the exactly wrong sort of behaviour we would expect from long-term investors.

“The regulator [FCA] itself effectively admitted the rule was not fit for purpose given the rules were changed as a result of the Covid market falls we saw. Taking that example, if a customer sold out when a 10% drop notification was triggered, they would have missed out on the substantial returns seen in 2020.

“This does not mean providers and advisers simply do not communicate the bad news to clients. Doing so would be a complete dereliction of duty. However, and this is where the Consumer Duty can play a crucial role, using behavioural science techniques and properly framing your communications will be crucial to aid customer understanding and help produce good outcomes.

“People are taking more notice of their finances as a result of digital enhancements, and we need to tap into this and inform them of their investment performance that way. This can be so much more tailored and engaging, giving them the context and assurances they crave during volatile times.

“With this rule now consigned to history we must take this chance and put more of our energy into consumer engagement with their investments.”

Dubbed the ‘Edinburgh reforms’, the package consists of 30 planned changes to regulation.

Among them is the ring-fencing regime. Since 1 January 2019, the largest UK banks have been required to separate—or ring-fence—core retail banking services from their investment and international banking activities. The aim is to protect retail banking from shocks originating elsewhere in the group and in global financial markets. The ring-fencing regime will be reformed so that banks without major investment arms will no longer be subject to the scheme.

The government will also issue new remits for the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) which will offer “clear, targeted recommendations on growth and international competitiveness”.

A review to repeal EU laws ranging from prudential rules for banks to disclosure for financial products will also be introduced.

Hunt said: “Leaving the EU gives us a golden opportunity to reshape our regulatory regime and unleash the full potential of our formidable financial services sector.

“Today we are delivering an agile, proportionate and home-grown regulatory regime which will unlock investment across our economy to deliver jobs and opportunity for the British people.”

Key information documents (Kids) associated with packaged retail and insurance-based investment products (Priips) are also set to be scrapped under the reforms.

Reforms are ‘good news’ for retail investors

Industry commentators have reacted positively to the chancellor’s Edinburgh reforms.

Anne Fairweather, Hargreaves Lansdown head of government affairs and public policy, said: “The government has used today’s package of measures to underline this week’s commitment to reviewing the advice/guidance boundary. The review will be a game changer to allow firms to do all that they can to help people manage their finances better and rebuild their financial resilience over the longer term.”

She added: “Retail investors are significant shareholders in UK listed companies yet consistently get frozen out when companies raise more capital or when new companies list. Changes to the prospectus regime should focus on levelling the playing field for retail investors and remove unnecessary hurdles from their participation in these investment opportunities.

“Today’s announcement that long-term asset funds (LTAFs) are in the process of being authorised is good news [and] will allow for investment opportunities like private markets and infrastructure that have previously been hard to reach for modern workplace pensions and retail investors. The final FCA rules are due shortly which will set out how ordinary retail investors might be able to invest, but there remains need for reform to allow LTAFs to be held in Isas and Sipps.”

Chris Cummings, chief executive of the Investment Association (IA), said: “The IA shares the government’s vision for an open, sustainable and internationally competitive financial services industry that serves the interests of investors and the wider economy.

“[The] Edinburgh reforms are a very welcome acknowledgment of the need for reform to boost the UK’s place as a leading global financial services hub, and importantly, recognises the place of investment management at its heart. We will work with the government to ensure these necessary and positive reforms bolster the UK’s global attractiveness for investment management so our industry can play its part as an engine of growth and financial resilience.”

He added: “It is essential that the FCA and PRA hone their focus on competitiveness and economic growth if the UK is to retain its position as the preeminent international financial centre and to continue to attract high levels of investment.

“For our industry, there are a number of measures that we are particularly pleased to see, including the government’s support for the LTAF initiative, which will help to open access to private markets while providing greater capital for long-term investment.

“A commitment to a green strategy plan in 2023 is crucial, and we look forward to supporting urgent work on how we can transition to a more sustainable economy, so that we can work collaboratively to achieve the long-term net-zero goals. We also support the focus on regulation of ESG data to ensure there are transparent, robust and quality ESG data and methodologies to deliver clear and consistent sustainable and responsible investments to clients.”

Reforms miss fintech’s potential

But the reforms were not universally welcomed. Matt Barrett, CEO at Adaptive Financial Consulting, believes that the changes miss an opportunity to tap into the potential of the UK fintech sector.

“The UK government’s announcement of a loosening of financial services regulation to increase competition is welcome in principle. However, in practice, it will need to be executed carefully to ensure financial institutions that have spent many years and a significant amount of investment preparing for the implementation of EU-wide regulations are not caught off-side.

“As important as liberalising financial rules, maintaining high standards and making London an attractive city to do business, is playing to the UK’s strengths – particularly in its standing as a technology hub for some of the world’s most sophisticated institutions. Regulatory reform needs to have an eye to the future, with a clear vision of how London can differentiate in the long-term and reimagine its role in the global financial ecosystem beyond tradition financial services.

“The government’s homegrown rulebook contains some interesting proposals, but we would like to see more done to invigorate institutional financial technology services that are the lifeblood of the modern sector. To do this, we need to see greater incentives for firms to do business in the UK and more done to encourage and develop the best talent to work in the sector.”

He continued: “A second key impact will be in how global financial services firms adjust their infrastructure to accommodate shifting regulations. Accommodating new rules clearly does not happen overnight – it requires planning and often material changes to institutions’ operations.

“In today’s fast-changing market environment, firms that own their technology stack can update their platforms with new regulatory and market requirements quickly as they are not tied into a vendor’s timetable decision to implement these changes. Those reliant on vendor technology may struggle to adapt quickly as they are beholden to their rate of adaptation to far-reaching regulatory change.”

While #RishiOut was trending on Twitter just hours after his victory was confirmed, amid growing calls for a general election, markets responded rather more positively to the news. Edward Park, CIO at Brooks Macdonald, observed that sterling rallied on news that Johnson had exited the contest, and while it is too early to conclude whether Sunak will be successful in his bid to unify the Tories, Park regards him as a safe pair of hands economically, as well as someone who will work in partnership with the Bank of England to restore the UK’s finances.

Gilt yields fell sharply on signs that the more fiscally conservative Sunak was set to become Tory leader; 10-year UK gilt yields remain well below 4% at 3.82%, one of their lowest levels in a month. The lower gilt yields have positive implications for UK government borrowing costs, and a new fiscal outlook may allow the BoE to be less aggressive with their interest rate policy.

Park, like many others, sees this as an opportunity for stability. He believed that a Sunak and Jeremy Hunt alliance would be welcomed by financial markets eager to move on from a tumultuous month of political chaos. At the time of writing, it is not yet confirmed that Hunt will remain chancellor, although many expect it.

In tackling the questions about the implications of a softer BoE stance for the strength of sterling, he said: “A more stable political environment is likely to trump any concerns that currency traders have over a less hawkish Bank of England.”

Vince Hopkins, head of business development at BRI Wealth Management, also sees the recent developments as a small step towards restoring credibility, and thus stability. He was in little doubt that, once Johnson had withdrawn, Sunak would become the new prime minister, and he subsequently observed that markets and sterling started the day “in positive territory”. The more UK-focused FTSE 250 index was also up 1.3% just after the 2pm confirmation of Sunak as Tory leader.

Monday’s market movements contrasted strongly with the nervousness that defined last week, when the identity of the future prime minister was still unclear. Abrdn investment director James Athey noted that the similarity between the economic package laid out by Hunt, and that on which Sunak campaigned during the summer, meant that another U-turn would have been possible had Sunak not won this time around.

However, now that Sunak is nailed on to become PM, there is no longer a requirement to roll the dice with the Tory members, and Athey believes Sunak’s swift appointment is the most market-friendly, short-term outcome.

While a feeling of cautious positivity has met news of Sunak’s victory, there is widespread acknowledgement that this has not put an end to the economic uncertainty.

Morningstar’s UK editor Ollie Smith said, despite this pending clarity, it is not yet clear where Sunak stands on economic matters, or whether indeed he will keep Hunt as his chancellor. He added: “Himself a former chancellor, Sunak has given no interviews or statements to the press since the prospect of him becoming prime minister looked like a serious possibility over the weekend.” Sunak is yet to confirm his fiscal plans, and the market nervousness of last week is unlikely to be assuaged until the government’s medium-term fiscal plan on 31 October and subsequent budget on 23 November.

Abrdn’s Athey summarised the mood succinctly: “The economic future, however, remains fraught; inflation remains far too high, and the Bank of England hasn’t yet really grasped the nettle.” As such, he says, the future is far from ideal for UK investors.