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Stockbrokers and other financial market participants urging the British government to change the rules to force more domestic retail and institutional capital into UK equities.
Investment bankers urging light-touch regulation.
Two things on the UK financial agenda but relevant to other jurisdictions that are driving me nuts. Because while the rhetoric coming from both camps is wrapped around claims of altruism and the best interests of clients and country, it is flagrantly self-serving.
Clients are important to banks and brokers but predominantly as income generators for themselves. I have no issue with the principle that profit-seeking private enterprises exist to reasonably compensate themselves, their creditors and their shareholders in return for providing good service to clients. But their credibility and neutrality when it comes to their support for topics like those above can surely only stretch so far.
And when it does come to the topics above, their self-interest has been artfully designed to align, in the first instance, with the British government’s policy drive to steer domestic capital into UK capital markets to reinvigorate UK listings, promote the UK as a financial centre and accelerate economic growth. On top of those policy objectives, banks/brokers are additionally telling customers they’ll deliver better returns.
In the second instance, pushing for light-touch regulation on the basis that it will make the UK more competitive and will reinstate the country as a leading world financial centre is a ploy to get authorities to take their feet off the pedal so the animal spirits ( that is, the sellside and institutional market’s animal spirits ) of those bygone pre-global financial crisis days can be re-invigorated, when risk, leverage, complexity and opaqueness were good things and investment bankers’ bonuses were off the Richter scale.
Let’s not mistake claims made by the very people who will be first in line to load up from the things they are pushing for as unselfish, no matter how earnestly those claims are delivered. Many of those lobbying hard for light-touch banking regulation and screaming that over-zealous regulation has killed innovation by stifling risk appetite are the same people who were in situ before the global financial crisis hoping that we’ve forgotten why the rigorous banking regulation put in place since the GFC was installed.
Quick reminder: it was because the behaviour of investment banks was so often found to have been serially predatory, flagrantly dishonest and crafted to boost their own compensation. Only last month, the UK Competition and Markets Authority fined Citigroup, HSBC, Morgan Stanley and Royal Bank of Canada £104.6 million ( US$132.75 million ) for illegally exchanging sensitive information about gilts and gilt asset swaps in bilateral Bloomberg chats between 2009 and 2013. Deutsche Bank was also involved but was granted immunity because it reported its conduct.
When it comes to the UK, the behaviour of commercial banks and finance companies towards retail and consumer clients hasn’t been much better: £50 billion in customer compensation – yes, £50 billion – for mis-selling consumer Payment Protection Insurance, billions more potentially to be paid out in compensation pending the court resolution of the in-process auto finance mis-selling scandal, and a litany of other examples tell their own sad stories.
Despite all of the above, I understand that times change, that we live in a horses-for-courses world and that ultimately imposing regulation that is fit for purpose is about striking the right balance. But regulators and policymakers should proceed with extreme caution. Since the GFC, tighter banking supervision has protected financial stability, has largely protected us from bad behaviour by banks and it has protected banks from themselves.
Not everyone has unbridled risk appetite
When it comes to the story about how to reverse the significant decline in UK equity investment by domestic retail and institutional investors, it’s true that the numbers do make for sober reading. But here, there’s been an opportunistic upsurge of lobbying by those who will directly benefit for new regulations that will potentially force domestic institutional investors to allocate some of their funds to listed UK equities, alongside generous tax breaks.
Brokers are also pushing at a half-open door to have the government significantly reduce the tax benefits available to retail savers in cash savings products ( Individual Savings Accounts, ISAs ) in order to redirect those savings into retail capital markets investments, including through so-called stocks and shares ISAs.
Some have gone as far as to infer that UK institutional and retail investors investing in non-UK equities to the benefit of foreign companies and economies and to the detriment of the UK and UK companies are somehow unpatriotic. That is just offensive. As offensive as suggesting that the UK adopts the same retail investing culture as the US is ridiculous. This plays into the same hackneyed narrative we are forever being fed about the higher proportion of capital markets funding relative to bank funding in the US versus Europe and how Europe should adopt the US model.
The US and UK financial ecosystems have evolved over decades into what they are today. Look at an array of money-related things across countries, from savings to pensions to investing to borrowing to home ownership and you’ll find an array of differences driven by cultural, social and other factors.
According to official UK data, the market value of retail funds held in tax-efficient UK ISAs was £725.9 billion at the end of 2023. Cash products ( time deposits that pay savers a fixed return over a fixed period with tax-free interest ) accounted for 40% of that value. Stocks and shares ISAs ( where money is invested in shares, investment funds, government or corporate bonds free of income tax and capital gains tax ) accounted for 60%. That strikes me as a pretty reasonable balance.
We’re constantly told that equities outperform other financial instruments over the long term. For those who want to invest over the long term, who are young enough to do so or have a reasonable risk appetite, that’s fine. But here’s a spoiler alert for those who don’t have a long-term horizon or risk appetite: the market value of UK ISAs fell 2.1% year over year to 2023 because the market value of stocks and shares ISAs fell by 5.6%.
That’s a red line for a lot of people even if it’s only one-year performance. If you put money into a solid bank at a fixed return for a fixed period, you know with roaring certainty what you’re going to earn over the horizon of the investment. If the bank goes bust but is signed up to its country’s deposit protection scheme, deposits are protected up the limit of the scheme. That’s reassuring to many.
Investing in securities can expose you to stressful market volatility and poor investment choices. And you could lose everything. If people want to deal with that stress and uncertainty in the hope that they will earn a better return, good luck to them. But people will not buy equities if they lose tax breaks on cash savings. That’s a non sequitur. But, alas, it seems lost on those thinking that’s what will happen, including Rachel from accounts ( the hilarious but rather unfortunate nickname the UK finance minister has been given ).
To people banging on that cash deposits don’t contribute to economic growth as opposed to money invested in the stock market, what on earth do they think banks and other regulated savings providers do with cash savings? Convert them into paper banknotes and stack them in huge piles in a massive safe until they mature? Hardly. Arguing that cash deposits have no economic value may serve the intended narrative but it’s plainly dishonest.
The idea that we in the UK should all of a sudden ditch cash and embrace equity investing or invest in growth companies is just fanciful. Some will do that; many already do. Imposing punitive measures on those that don’t want to in order to force a shift in their investing stance isn’t a workable way forward.
