Can reforms save the London stock market?

The decline of the UK stock market has finally reached the Financial Conduct Authority (FCA). It has proposed to deregulate it in order to attract more companies to list in London rather than do as, for example, UK-based chip-maker ARM is doing and choosing to list in New York (it was once a UK-listed company before being bought out by the Japanese Softbank and is now being refloated).  

The FCA has proposed that the London market become more tolerant of dual share structures – where, for example, a start-up might float on the stock exchange but retain a ‘golden share’ to ensure that the founders remain in full control over non-voting shareholders. It has also proposed that mandatory votes on things like the takeover of other companies be dropped, making it easier for the directors to grow the business against the wishes of more conservative shareholders.    

Deregulation is all very well – and in many cases is the right thing to do. It is also true that there is something about the UK market which is deterring start-ups: the number of new listings has fallen by 40 per cent since 2008; between 2015 and 2020 they made up only 5 per cent of Initial Public Offerings (IPO). Yet the inevitable reality is that the changes proposed by the FCA will put investors at greater risk – especially small investors who may be less aware of how companies are run and who is running them.

Even in our supposedly heavily-regulated markets there is no end of horror stories. In March shares in software company WANdisco, which had until then enjoyed a fantastic year, were suddenly suspended in response to ‘potentially fraudulent’ sales figures reported by a senior employee. The FCA has since launched a fraud investigation.    

There is also the cautionary tale of iEnergizer, an Indian-based operator of call centres and other corporate communication services. Until three weeks ago investors might have congratulated themselves on picking a company which has continued to grow and pay dividends. In the middle of last year there was also the prospect of a payday in the offing as the company put itself up for sale – although that came to nothing.

Then, suddenly the company announced plans to delist from the Alternative Investment Market (AIM). Existing shareholders will retain their holdings, and should continue to be paid dividends, but the share price collapsed by over 90 per cent as fund managers – many of whose funds only allow investments in listed companies – rushed for the exits.

Under AIM rules, the delisting proposal has to be approved by 75 per cent of shareholders, but given that over 80 per cent of shares are in the hands of a single shareholder, that is a formality. That shareholder gets to take the company private at a discount price. Some overseas stock markets protect small investors from this kind of action by excluding large shareholders from voting on proposals to delist, but not AIM. (I declare an interest in that I am a shareholder in iEnergizer, though I am not claiming hardship as it never accounted for more than a tiny proportion of my portfolio).

Some will say, who cares? They will say that stockmarkets are for grown-ups who should be aware of that they are doing and the risks they are taking. But there is difference between losing your shirt because a company has failed and feeling you are being taken advantage of. 

If the government wants to support capitalism it should be encouraging small investors – that was certainly the approach taken by Mrs Thatcher and Nigel Lawson in the 1980s, when Personal Equity Plans (PEPs) were introduced and privatisation floats were targeted at ordinary investors. For them, mass participation in stock markets was an essential part of the entrepreneurial society they wished to create.

Relaxing regulations of share listings – which in many ways are already quite liberal – is not going to help the reputation of stock markets, and capitalism more widely, especially at a time when young people seem increasingly drawn to socialism.