Disintermediation of the US, EU and UK capital and financial markets

Abstract

In recent years, we have seen a progressive movement towards disintermediation of the US capital and financial markets. This ongoing evolution is evidenced by the rapid growth in these markets of alternative financing options that involve a reduced role (if such a role remains at all) for traditional regulated intermediaries, such as brokers, dealers, underwriters and exchanges. This change presents both benefits and risks for investors given that regulated intermediaries’ responsibilities are geared towards investor protection (in particular, retail investor protection) and mitigating potential conflicts of interest. The continued erosion of the intermediary role and the protections embedded within that role poses significant challenges for regulators who are tasked with monitoring these ever-evolving markets and protecting investors from attendant risks—risks that are further compounded by the rapid digitalization and decentralization of modern financing activities. The primary drivers of disintermediation include recent economic crises; technological advances that stem from the online nature of many modern financing activities and the costs of regulation, including, in particular, regulatory capital requirements that apply to many intermediaries. These economic flash points include the funding gap that followed in the wake of the 2008–2009 financial crisis; the inherent funding limitations of smaller markets; and, most recently, the economic effects of the coronavirus disease-19 (COVID-19) pandemic. These developments have increasingly led to companies seeking alternative financing options outside of traditional sources that are, or are perceived to be, cheaper, quicker and more flexible or easier to access. This trend has been further fueled by a large amount of capital waiting to be invested in the markets (the so-called ‘dry-powder’) and reduced bank lending during the first 2 years of the COVID-19 pandemic—which many believe led to the meteoric increase in the popularity of alternative capital raising vehicles, such as special purpose acquisition companies (SPACs).