Regulating for Growth in an Era of Rising Economic Nationalism: UK and EU Perspectives

In a recent working paper, I consider how the UK and the EU are responding to the strategic vulnerabilities of globalised capital markets by turning regulation into a retention tool. While neither the UK or the EU seeks to become isolated from internationally mobile companies and investment flows, they are both increasingly focused on using regulatory policy proactively to create the best structural conditions for domestic companies and investors to start, scale and stay within their respective markets. At the heart of this shift lies a common thread: economic nationalism. 

Despite their shared concerns, the UK and the EU diverge in their regulatory responses due to fundamental differences in their capital market ecosystems. The UK has a deep, centralised capital market and a largely coherent legal regime. The EU has a fragmented landscape, multiple legal systems, and persistent barriers to cross-border capital flows. Different institutional, legal and investor-specific distinctions shape their respective trajectories. The paper interrogates these similarities and differences through a comparative analysis of certain initiatives aimed at making capital markets more accessible and appealing to domestic growth companies, large privately-owned companies, and their founders/owners.  The persistent difficulty of closing funding gaps for growth companies and providing exits for investors in privately-owned companies, coupled with the blurring of lines between public and private sources of corporate finance and the rise of alternative investment channels, has elevated this policy area to one of strategic importance.

The UK’s ’private plus’ bet: PISCES

A key difference between the UK and the EU highlighted in the paper is that the UK has sought to innovate in how regulation caters for the needs of companies through its Private Intermittent Securities and Capital Exchange System (PISCES) initiative. PISCES is a new regulatory framework for intermittent trading of shares in privately-owned companies.  PISCES-enabled venues have been presented to the world as a new type of stock exchange, promoted by the Financial Conduct Authority an example of the ‘bold risk-taking that has made the UK the leading financial centre it is today’ (here).  In practical terms, PISCES is intended to make public market infrastructure available for secondary market trading of shares in privately-owned companies. The London Stock Exchange has championed its development and is expected to launch its own PISCES venue later this year.

PISCES is built on a ‘private plus’ model—ie taking private market practices and ‘buyer beware’ risk tolerances as the starting point and adding to them sparingly. The absence of many of the safeguards traditionally associated with public markets presents a material risk that PISCES-enabled markets will not gain the level of company and investor trust to be viable on a long-term sustainable basis. A key subset of investors whose interest in using PISCES-enabled markets is unclear is venture capital and private equity firms.  They may be deterred by pricing transparency, even though this is quite limited and is meant to stay within the PISCES perimeter. 

While billed as a complementary initiative to support the pipeline for future IPOs, PISCES could divert companies from public venues, undermining markets like the Alternative Investment Market (AIM) that already suffer from low liquidity. Overall, PISCES represents a bold but risky regulatory experiment with unclear long-term viability. 

The ’public minus’ approach: EU caution

Designing an appropriately differentiated regulatory framework for public growth markets like AIM that avoids overburdening scaleup companies while still delivering investor protection and ensuring the proper functioning of the market is an area of convergence for the UK and EU. Here, ‘public minus’ is the defining regulatory strategy: lightening regulation while staying within traditional public market frameworks.  In the UK, this strand of work has been somewhat overshadowed by the fanfare around PISCES. For the EU, it is more central. 

The EU Listing Act, 2024 simplifies prospectus disclosure requirements for admission to trading on public growth markets and introduces a minimum level of harmonisation for multiple voting share structures for companies trading on those markets. This is not the EU’s first attempt at lightening disclosure requirements for growth markets. Persisting with a strategy that has not succeeded in stimulating vibrant public growth capital markets could be described as a triumph of hope over experience. In an era when private capital markets offer abundant funding and the population of publicly traded companies is shrinking generally, even the lighter standards of a public growth market and the attendant public visibility may be burdens that scaleup companies prefer to avoid. 

Why is the EU not racing to copy PISCES?

PISCES is a response to the market forces that are driving the shrinkage of the publicly traded company population.  Yet while facilitating secondary market liquidity in the shares of privately-owned companies is also on its radar, the European Commission does not appear to be racing to copy PISCES. The paper identifies structural and cultural factors that help to explain why the EU has other priorities. 

Structurally, the fragmented state of the EU trading landscape is a pressing issue. Creating yet another market type would risk compounding inefficiencies when the bigger priority is to improve the efficiency of existing trading and post-trade infrastructures, ideally through market-driven sectoral consolidation. Culturally, the UK lags many EU member states in levels of household savings.  Unlocking the large amount of EU household savings languishing in bank accounts so as to put citizen funds to more productive use has assumed considerable importance within the EU’s Savings and Investments Union agenda. A ‘private plus’ buyer beware trading environment is not an apt solution to this challenge. 

The EU’s legal fragmentation problem

The EU’s most ambitious idea for regulatory innovation is the proposed optional 28th corporate law regime for innovative companies.  Legal fragmentation is a critical obstacle for scaleup companies as they seek to expand beyond their domestic market. The paper acknowledges the importance of the 28th regime initiative in principle but also notes the discouraging history of EU corporate law harmonisation reform proposals, which tend to move slowly and often fail because they run up against political roadblocks when they touch on national legal sensitivities. 

Regulatory Competition

The paper uses defensive regulatory competition, where regulation is used to prevent capital and firm outflows, as its analytical lens. Three key points emerge: 

1. Regulatory competition can drive jurisdictional learning, but local reforms ‘inspired’ by foreign laws will invariably have distinctive local flavours. This hybrid nature has the potential to improve the appeal of domestic markets for homegrown actors but can also be a constraint. 
    
2. The UK and the EU are facing ecosystem problems for which over-reliance on regulatory solutions is not the answer. Deep market forces are the real drivers behind the trend towards staying private, not the burden of compliance with listing rules or related requirements. 
    
3. Regulation is a public good, not a market service. Catering too closely to the preferences of powerful market actors risks undermining broader goals especially if, as might occur if PISCES is super-successful, it contributes to the entrenchment of a world in which large companies can remain indefinitely private and beyond the reach systems of corporate law, governance and regulation that are built around assumptions of larger companies being publicly traded. 

The author’s working paper is available here.
 

Eilís Ferran is the Professor of Company and Securities Law at the University of Cambridge.