UK's culture of fear when it comes to equity – and how the government is limiting shares
10 min read
03 December 2015
Do you remember it was just three years ago that the FSA was minded to make VCTS unregulated collective investment schemes? Many of us rode forth to do battle. My contribution was to go and see them in their lair at North Colonnade with a fellow VCT director.
You know you are in unfriendly territory the moment you enter the FCA’s reception area for there on the wall in front of you is the most amazing inscription on a large stone plaque. It contains the words to Bob Dylan’s classic, “Positively 4th Street”. For those of you who are not totally up to speed with the lyrics, here are some of them: “You got a lot of nerve to say you are my friend. When I was down you just stood there grinning. You got a lotta nerve to say you got a helping hand. You just want to be on the side that’s winning.”
And just in case you still haven’t worked out you are in a hostile environment, or possibly our regulator has a dark sense of humour, the wall plaque ends with: “You see me in the street, you always act surprised. You say how are you? Good luck, but you don’t mean it. When you know as well as me you rather see me paralysed, why don’t you come out once and scream it.”
Usually when you request a meeting with a regulator you go in there for a good rant, but this time we decided to play it differently and let them ask the questions. So first question from the FSA “lifer” (he had already been there 11 years) was “Who do you see as your investors?” I said, “Well, we are a fully listed company with a 16 year track record and an independent board of directors, therefore anyone who invests in fully listed companies”.
The man from the FSA was dumbfounded. When he had regained the ability to speak his second question was, “Surely you don’t want a 70 year old to invest in your VCT?” I said, “I repeat, we are a fully listed company with a 16 year track record. Furthermore, we have been a consistent dividend payer and are committed to paying our dividends which provide a yield of five per cent. In these days of very low interest rates where most 70 year olds are short of income I would have thought it might form a part of any 70 year old portfolio.”
The FSA lifer was dumbstruck again. Evidently such thoughts had never occurred to him! This tells you everything you need to know about our regulators attitude to small company equity investing, which is “it is far too dangerous to let the small general public anywhere near it. It is a job for the professionals.”
This culture of fear and attitude has now been all pervasive for generations. Everyone out there on the street has been brought up to believe that buying equity in any business outside of the very best known household names is so dangerous that best leave it to the professionals. You can spend what you like on holidays and gambling. You can drink yourself into oblivion. You can max out on credit cards. You can even put sugar in coffee! But heaven forbid you should have unfettered access to shares in small companies!
Successive governments recognise this state of affairs of course, and wisely realise that tax incentives are needed to overcome the ingrained, schooled in, fear of investors. The result is what you see today. A much needed and successful VCT and EIS industry.
I submit we exist because there is a fundamental flaw at the heart of our society. We have been brought up to believe that if you want to get on then the way forward is to get involved with debt, but you must think twice, thrice or even more if you are considering an involvement in equity.
As ever this manifests itself as the FCA. The latest example is when it set investor eligibility rules for crowdfunding. In short, there are no restrictions on British citizens lending money through P2P platforms, but if the same citizens want to go equity crowdfunding he/she has to pass certain eligible tests. This is nuts! As Andrew McNally recently pointed out in his brilliant book “Debtonator”, we live in a world where if you expressed total debt in dollar bills those notes, when laid to end to end, would stretch to Mars and back 50 times!
Things have got so absurd that Martin Gilbert, the CEO of Aberdeen Asset Management, felt duty bound at a Financial Times seminar to point out that the ultra-low interest rate policies pursued by central banks had forced the vulnerable part of society to buy bond funds to survive.
There are a few tentative signs that the government realises there is a problem. For example, Xavier Rolet the head of the London Stock Exchange feels safe enough to issue a series of speeches and articles advocating much more equity investment and less use of debt and occasionally a government minister (i’m thinking of Sajid Javid) appears alongside him and agrees. But action speaks louder than words so what would I like to see happen?
I would like to see every member of parliament sent on a course that explains what equity is and what are its advantages? Right now I suspect most of them still think equity is an actors trade union! Actually equity shares shouldn’t be a totally foreign concept to MPs as of course once every five years the country’s shareholders, in the form of us voters, hold the equivalent of an AGM and decide whether we want to re-elect the directors to carry on running the company, or country if you will.
I would then like to see compulsory courses at all secondary schools that introduce our children to the world of equity and what can be achieved by its judicious use. Right now our children enter adulthood, go to university and so on, with 100 per cent competence in every handheld gizmo known to man but not the faintest idea about how the companies that built these things found the wherewithall to do so. The objective would be to get everyone from our politicians, to our media, and our citizens to be just as comfortable with the use and understanding of equity as they are with the deployment of their credit cards on a daily basis.
Then the regulatory obsession with avoiding even the tiniest possibility that granny may lose her life savings in an equity speculation, whereupon her constituency MP stands up in parliament and asks where was the FCA at the time this happened, would be extinguished. Such a regulatory obsession is a crazy way to run a regulatory system i know but believe me that was the name of the game under Martin Wheatley and probably his yet to be named successor as well.
So will “the powers that be” continue to insist that investing in small companies is more dangerous than the 2.30 at Haydock Park thus preserving the need for tax incentivised VCTs and EIS portfolios? The betting of course has to be “yes”. But i believe in a generation this will change. We cannot and should not go on with the current status quo. It is insulting to our citizens and it is unhealthy for the capital formation needed to grow the businesses and the economy of today and tomorrow.