Rules shake-up is just first step, says HAMISH MCRAE

About time too! At last we may be starting to correct some of the absurdities in the way this country regulates financial activities, to encourage British companies to list in London, and for British investors to put their money into ventures here rather than their savings to to send abroad.

The Financial Conduct Authority has just proposed changes to the rules for companies seeking a listing on the London Stock Exchange. The reason is simple. Companies choose New York instead.

The high-profile example is Arm, the Cambridge-based designer of the microchips in 95 percent of the world’s smartphones. It was a member of the FTSE 100 until 2016 when it was bought by Japanese group SoftBank. Now it is being sold to the public again, but despite a vigorous campaign by Rishi Sunak, it is doing so on Nasdaq, the US high-tech stock exchange.

We don’t even get a secondary listing. The reason: it is expected to get a much higher rating in New York. But why? Rationally, the same company should be valued at the same price wherever it is listed. But London-listed major oil companies like Shell have lower valuations than Exxon, despite being broadly similar companies.

Foreign investors are buying into the UK, with more than half of the shares on the Footsie on board. In contrast, British institutional investors have sold almost all of their shares. While they controlled more than half of the UK market 25 years ago, it’s now around 5 percent.

So what to do? It is partly a matter of listing requirements, so tackling it is a start. Since the number of listed companies has fallen by 40 percent since 2008, the FCA had to act.

It has also said it will change secondary trading rules to lower the cost of buying and selling shares of already listed companies. But we really need a change of mindset towards business and investment, instead of bending over regulatory failures.

There are good principles behind what we’ve done: protecting the investor, trying to make sure one share gets one vote, monitoring the composition of the board so that directors don’t overserve. All that sort of thing.

But if companies move their headquarters abroad, investors are unlikely to be protected by UK regulations. And if companies remain private, they cannot invest in them anyway.

Take our two most successful large commercial companies established in the last 25 years, Dyson and Ineos. Many people would like to invest in it. But both are private companies, and while Ineos is still headquartered in London, Dyson has moved to Singapore.

This is a disaster on many levels. Making London more attractive as a place to list is a start, but we need to make it more attractive to be a public company than to be a private company so that ordinary investors can share in the wealth created.

We also need to find out why our pension schemes have made it so unattractive for UK institutions to hold UK equities.

This isn’t just a money issue, although I suspect most people with private pensions would be baffled to know that much of their savings were sent abroad or put into gilding. It is also a governance issue. Our institutions used to monitor the behavior of companies and vote against boards that neglected their duties. Now they don’t have enough stock to matter. Getting worse. Several large institutional investors are about to merge or have just done so.

A few months ago, Smith & Williamson and Tilney Evelyn became Partners. Last week, Rathbones said it would buy Investec’s wealth division. Why? The general reason is that compliance costs have made it difficult for smaller managers to remain competitive.

Consolidation is a polite way of putting it, but the effect is less competition, fewer new fund management companies and fewer decision points in the investment process. This cannot be in the long-term interest of savers.

In a sense, establishing listing requirements is the easy part. We just have to follow American practice. The US accounts for more than half of global stocks by market value, so that’s the global system. Why should we expect to do better with our 5 percent market share?

Much more difficult is to see what investors really want. Everyone who buys Bitcoin has rejected financial regulation. But most of us want protection against mismanagement. Holders of the Woodford Equity Income Fund get only 77 percent of their money back. And we all want lower costs.

So let’s see the FCA reforms as a first step. We have a long and difficult road ahead of us to fix the mess we’ve made of regulation.