It’s been an important week in an extraordinary year for the UK stock market. Among the issues ailing the market in the past 12 months are its plodding performance; absentee pension funds, the stream of foreign takeovers of cut-price British companies; a dearth of IPOs, a lack of growth funding, discounted valuations, a decline in the number of listed companies, and the decision by some Plcs to up sticks and list in the US.
But regulators and governments have been responding robustly with a host of papers and policies. In the past few days, the chancellor has cemented some of these proposals with the Mansion House milestone pension and regulatory reforms, the London Stock Exchange has hosted a key-stakeholder conference to thrash out how the financial ecosystem can pull together to attract and retain capital in the UK market and a consultation on an overhaul of investment research has been launched.
These are all ropes that will help to haul London back into an upright position. We welcome the batch of proposals from this week, although it is deeply disappointing that more has not been asked of pension funds in terms of committing capital to UK companies. As the pact stands, the 5 per cent commitment to high-growth investments can be allocated to companies anywhere in the world.
Flawed as it is, the shake-up is essential. The aim is to reinvigorate the market by ensuring it has deep pools of capital, where it is easy and attractive for investors to back companies at all stages of their journey, where pension funds become more Canadian and Australian in their approach and no longer shun risk, where returns are bigger, there is greater coverage of smaller companies and a more relaxed attitude to high fees when they are justified by the likely end returns. Regulators will be required to factor growth and competitiveness into their thinking rather than just risk and protection, to allow companies to innovate and thrive.
At its heart lies an attempt to lighten the burden of regulations and codes that weigh heavily on companies and pension funds – ultimately harming the economy – and to draw a line under an era when risk managers held complete sway. Many listed companies have become frustrated by the weight of regulations that dictate their every move and bulk out their reports and prospectuses. “We feel,” commented GSK chairman Sir Jonathan Symonds at the LSE conference, “like Gulliver at times, tied down in all directions”.
Risk control should not be the only guiding light in stock markets, and yet it often is. Conference speaker Matt Scullion, founder and chief executive of non-listed company Matillion, which has raised the vast majority of its capital from US investors, remarked how a start-up business handed a £4mn cheque here would be told “don’t lose it”, a directive to which the company would then be subservient, while in the US, a $5mn investment would be very much seen as seed capital, with the company given free rein to use it as it sees fit.
Risk warnings are used to scare away individual investors too. In a report published by the Centre for Policy Studies (CPS) on the state of retail investing in the UK, author Nick King compared the typical warnings issued to any new investor venturing in the direction of the stock market as akin to visiting a restaurant and being handed a menu that stated at the top that all the food listed might give you food poisoning. One banker told the CPS they were effectively forbidden from suggesting to customers with significant amounts in cash that they should think about investing in the stock market.
The trouble is that well-meaning and necessary attempts to root out fraud and blatant rip-offs and prevent investors from being misled have resulted in a blinkered fixation on risk and costs. Risk management should not be scorned, it’s too important for that. But when it is embedded in every facet of investing and overzealous, it becomes the problem. It’s not an issue that can be ignored any more.
Our capital markets – the stock market and the financial ecosystem that supports it – are in a foot race and struggling to keep up with strong competition. What is at stake isn’t only better returns for investors but also jobs, tax revenues and a thriving economy.
