Has the FTSE lost its lustre? With activity, returns and listings all falling over the past 20 years, with companies de-listing to other markets or leaving public markets altogether, it’s a question being asked in boardrooms across the country.
Whilst London remains one of the top financial markets in the world for many activities such as foreign exchange, derivatives, debt and private equity, having a thriving stock exchange is foundational to our ability to support other financial markets. If you want to see what a financial services centre looks like when it loses its stock market, you only have to look at Edinburgh and Manchester, both of which closed their stock exchanges in 1973.
Many reasons have been advanced for the relative decline of London: the lack of mega-cap technology companies; the switch of defined benefit pension funds away from equities and towards bonds; low levels of risk appetite amongst UK investors; few new listings; Brexit; the migration of listed companies away from the market — either into the arms of private equity, other corporates or to alternative venues such as New York.
In many of these factors, regulation has had a — not always wise — finger in the pie. Markets absolutely need strong, effective and efficient regulation to allow investors to do their thing, and to stop criminals and shysters from doing their thing. But that regulation needs to be wise and proportionate, and over the past 20 years it has not always been so.
By way of example, it was regulation that forced companies listed on the London market to divert £250 billion away from investment in their businesses and into their pension schemes to fund deficits. A few years later, the same schemes are said by the same regulators to have an aggregate surplus of £475 billion, more than double the annual cost of the NHS or five times the 2024 public spending deficit. Oops, as a regulator might say.
Could it have been different? There is a voice that has been largely absent from the development of stock market regulation over the past two decades — and that is the voice of the regulated themselves, listed companies. Historically, regulators have taken their input from highly organised lobbying groups of investors, proxy agencies and sundry governance mavens; the voice of the listed companies was barely heard. To the question “Do we need more, or less, regulation?” they might have usefully remembered Warren Buffett’s advice that you should never ask a barber if you need a haircut.
The CBI, which counts many listed companies amongst its members, has formed a group to correct this, and to give voice to the regulated. The CBI listed companies group comprises more than 20 companies, many of them in the FTSE 100 and represented at chair, chief executive or finance director level, and its purpose is to provide fact-based research and policy proposals to make sure that the voice of listed companies in the market is properly heard. It will focus on ways of improving liquidity in the market, reducing the burden of reporting and responding to the growth of “tracker” funds and how they affect the relationship between investors and companies.
More generally, working closely with other bodies, the group will seek to make the default relationship between boards and investors one of trust and pragmatism, centred on the interests of the company, rather than mistrust and the unthinking adherence to rules. In other words: be able to explain when complying is not the right thing to do.
Rupert Soames is chairman of the CBI