The writer is the founder and managing director of capital markets think-tank New Financial
In the latest round of self-flagellation over the state of the UK stock market and the City of London, it is worth remembering the words of American writer HL Mencken that “for every complex problem there is an answer that is clear, simple, and wrong”.
It is easy to dump on the stock exchange and argue — wrongly — that it is becoming a global backwater. And it is easy to point fingers at who or what is responsible, and to come up with some easy solutions. The trouble with this approach is that the stock market is a symptom of the UK’s economic malaise, not the illness itself.
The underlying challenges facing the UK market are to be found much further upstream than the listing regime or the mores of the country’s asset managers fixated on dividends over growth.
The argument about the decline of the UK market is well-rehearsed. Over the past 25 years, the number of UK companies listed on the stock exchange has virtually halved and the number of new issues each year has dropped by about three-quarters (although there has been a welcome bounce in activity in the past year — relative to gross domestic product, companies raised more money on the UK market last year than in the US).
The UK is drifting backwards on the global stage with an increasingly analogue market and rule book unfit for a digital age, while the US and China race off into the distance. Tech stocks represent less than 2 per cent of the UK market, compared with nearly 30 per cent in the US.
The stock market is not, of course, an end in itself. It is a microcosm of the structural challenges facing the UK economy and the City in the wake of Brexit and the pandemic. That is why rebooting equity markets in the UK is one of the main areas of focus in our report on “The Future of UK Banking and Finance”, published today in partnership with US think-tank the Atlantic Council.
Public equity markets sit at the heart of capital markets in the UK, and they feed through into every corner of the economy. Fix equity markets, and the rest begins to fall into place.
What is immediately clear is that adjusting regulation is an important starting point, but only a start. The UK needs to go further and faster than the 30 or so government consultations and reviews into different aspects of banking and finance published in the past two years.
Ultimately, the question is how can we reverse a vicious circle and reconnect equity markets and the City with the wider economy and with society? To do that, we need to encourage more companies to launch, scale, grow, list and stay in the UK. And we need to get UK investors — institutional and retail — more engaged to provide these companies with the capital they need for the benefit of the UK economy.
The UK may be blessed with a pool of £6tn in long-term capital through pensions, insurance and retail investment, but how can we encourage more of these investors to put more than a miserly 12 per cent of these assets to work in the UK stock market?
How can we widen participation in the UK equity market when just 8 per cent of working-age adults directly own individual stocks? Last year, 20 per cent of UK adults bought a cash Isa on which they are guaranteed to lose money in real terms — but only one in 20 bought a stocks and shares Isa despite the huge tax incentives.
How can we encourage more UK investors to put more of their money to work in unlisted growth companies, when 90 per cent of the money raised by UK growth funds comes from outside the UK?
How can we narrow the tax differential between debt and equity funding, which means that equity investment is taxed four times (on actual earnings by a company, capital gains, dividends and stamp duty) while debt is tax deductible?
How can we narrow the disclosure and governance gap between public and private markets when the UK has had more iterations of its corporate governance code in the past 25 years than it has had prime ministers?
And how can we ensure that in the rush to redesign the rule book post-Brexit, we build one that is flexible and forward-looking to embrace the inexorable trends of tokenisation and blockchain?
The UK has a once in a generation opportunity to start afresh. The best time to address these problems would have been a few decades ago before they took root. The second-best time is now.
Letter in response to this article:
Big Bang was start of the City of London’s decline / From Tony Smith, Bishops Stortford, Hertfordshire, UK