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The collapse of risk-taking has crippled Britain’s stock markets

stock market
stock market

Functioning market economies need risk-takers. Entrepreneurs lubricate and enable our capitalist society by anticipating future trends, losing money if their calls are wrong, but profiting if they’re right.

Such behaviour is the antithesis of a centrally planned state system, where a government, or committee of government, decides a top-down solution, normally addressing the lowest common denominator.

This system has been proven to fail without exception. The problem we have today is somewhere in between: regulatory bodies see risk as the enemy and do their best to suppress it.

Britain established its position as a leader in agricultural, industrial and financial development through risk-taking. Lloyd’s of London, the commodity markets, and the stock market facilitated surplus capital supporting economic growth.

But the Financial Services Authority (FSA) and Financial Conduct Authority (FCA) have done near-terminal damage to the UK stock markets over the last 20 years by creating and delivering the disastrous “FSA/FCA Handbook” in response to the Financial Services and Markets Act 2000.

The “Handbook” delivers multiple interwoven obstructions to both investors and entrepreneurs. As usual, the Labour cabal of Brown, Blair, Mandelson and Campbell created all sorts of obstructions for capital market and investment activity.

Since 2007, EU MiFID regulations have been imposed and surreptitiously eroded our equity and capital markets from both top down and bottom up. Tragically, no attempt to reverse the process has been made since Brexit – and we can see the catastrophic effects in the total capitalisation of the UK stock markets, currently at just 64pc of their 2007 value. Wealth-creating entrepreneurs are simply going elsewhere to raise capital.

Labour leader Sir Keir Starmer chairs a meeting with shadow chancellor Rachel Reeves
Keir Starmer and Rachel Reeves conveniently appear to ignore the decline of our stock market since Labour’s last spell in power - Stefan Rousseau/PA

Compare, for instance, our junior stock market, Aim, versus the US equivalent Nasdaq. The former has a market capitalisation of approximately $50bn against a Nasdaq market capitalisation of $20 trillion. This means that our entry level stock market is 0.0025pc of its US equivalent. The overall capitalisation of the total UK stock market is about $2.7 trillion, not accounting for the additional capitalisation of the main Wall Street-listed stocks.

How strange that politicians and commentators are rarely heard championing the importance of stock market capitalisation to economic prosperity. When Keir Starmer and Rachel Reeves talk about the importance of growing the economy, they conveniently appear to ignore the decline of our stock market since Labour’s last, destructive spell in power.

In Europe, by contrast, the main driver for funding company growth is bank lending. It lacks the equity market culture that exists here and in the United States. Many banks in Europe had shareholdings in the companies to which they lent, providing better stability but greater risk of conflicts of interest.

A larger market capitalisation is an important indicator of a vibrant private sector which creates wealth, economic growth and generates tax revenue.

Regulation has also created several Orwellian circumstantial outposts. Corporations have become bloated, with many building up quasi-monopolies through acquisition, managed by boards with tiny individual shareholdings. The management of these companies appear less interested in boosting returns for shareholders or creating long-term growth than they do cosying up to the Government’s arms-length bodies in an effort to shape regulation.

It was George Stigler who in the 1960s coined the phrase “regulatory capture”, and in the intervening decades this has become a profound yet oft-ignored issue. Regulatory agencies are being influenced by the industries which they should be regulating, with the result often that smaller, ambitious firms cannot reach their potential.

The FSA, which mutated into the FCA and PRA (Prudential Regulation Authority), have both grown like a weed, and so the vicious cycle has been sustained.

But this has been made possible by an approach which almost seeks to eliminate risk-taking. They regulate to mitigate against losses, then wonder why the markets have floundered.

The Prime Minister insisted more risk is needed at his recent Artificial Intelligence Summit, aware that new, cutting-edge businesses will never get off the ground without it.

Andrew Bailey has complained about a lack of risk-taking, having spent his career nudging people into collective investment vehicles where it is largely shunned.

Jeremy Hunt is pursuing a mad policy of trying to “centrally plan” pension fund capital to invest in high risk start-up businesses, which is a recipe for disaster.

And, of course, this is being done against the backdrop of a lockdown disaster, which was itself driven by the precautionary principle and enforced by career-minded ministers and civil servants concerned that any measure short of the most draconian might threaten their own careers.

In Sweden, let us not forget, much of the relevant Covid decision-making was delegated to the state epidemiologist Anders Tegnell, resulting in more principled, informed policies and a freer society.

Risk is good, not bad. Fear of failure often results in failure itself. We need to throw off all regulatory capture and rejuvenate our attitude towards those who lubricate our financial system through speculation.

As Thomas Jefferson presciently opined: “I predict happiness for Americans if they can prevent the government from wasting the labours of the people under the pretence of taking care of them.”


Rupert Lowe is Reform UK’s business spokesman

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