The London Stock Exchange needs wide reform, but recentering the role of retail investors could be a shot in the arm, writes Fraser Thorne
The City is probably enduring one of the most challenging periods since its foundation. A plethora of reforms have been put forward to try and help revive it: Lord Hill’s UK Listings Review, the FCA’s push to deliver the Edinburgh Reforms and Rachel Kent’s Investment Research Review. Various recommendations borne from these reviews, while rightly addressing the need to increase the London Stock Exchange’s appeal both domestically and globally, also give a strong nod to enhancing the role of retail investors. Historically they have been an afterthought, but now is the time for them to move centre stage in the drive to rejuvenate the City.
Of course, wider reforms are still required. Positioning investment research as a public good will create both better transparency on listed equities, and a well-educated investor base. Similarly, the imminent introduction of the Private Intermittent Securities and Capital Exchange System (PISCES) will allow private companies to raise capital outside of traditional public offerings and, it is hoped, attract emerging companies, particularly in the tech arena, back to London. A relaxation on rules over dual class shares and the merging of the premium and standard segments into one are also welcome initiatives.
However, the need for a larger role for retail investors, seeing them switch from being perceived as awkward and difficult to VIP status, is clear.
The power of retail investors
There are currently 3m private investors with accounts at major aggregators and the number continues to rise. Much of this investment is tied up in funds but the addressable market remains sizeable.
Retail investors’ impact is felt most keenly in the smaller cap companies, outside of the FTSE 350. Here, traders’ armchairs turn to thrones. While institutional money is becoming increasingly large-cap centric, small-caps are reliant on a bedrock of retail investors for their net inflow of capital. For these companies, retail investors could represent ten per cent of share capital and as such are critical in setting share prices.
Indeed, if an AI chatbot were tasked with defining the traits of an ideal investor, the list would likely include the following: more long term, more willing to back good ideas, more loyal, more engaged, more likely to vote and more domestically focused. Thankfully, that creation has already come to life in the form of a retail investor. However, what does need galvanising is the market in which they operate.
Get Sid investing again
Given this backdrop, it’s perhaps no surprise that the government has rightly taken a keen interest in accommodating retail investment. The open secret that its 36 per cent stake in Natwest will be sold off prior to any general election, which Chancellor Jeremy Hunt signalled in last year’s autumn statement when he quipped that “it’s time to get Sid investing again”, is generating a buzz. But perhaps not quite yet on par with the original campaign to get the British public to invest in the listing of British Gas in the mid-1980s. Actually, given the dwindling of share ownership among the public in recent decades, there are likely comfortably more than six degrees of separation between the average person and any Sid in the UK in 2024.
Yet the aggressiveness with which the government is pursuing a more pro-retail investor agenda is understandable given that 2023 saw UK investors withdraw the highest amount in more than two decades from London-listed equities. The government’s sale of its Natwest stake could see 2m retail investors swiftly stampede their way into the City. This move, along with the likely-imminent launch of the Great British ISA (tax-friendly for retail investors and investable only in UK-listed stocks), should clearly be welcomed.
Closing the knowledge gap
There does still exist an inevitable knowledge gap between many retail and institutional investors. Financial influencers prey on them with the knowledge that 58 per cent of under-40s investing in high-risk products were influenced by social media. FCA moves to clamp down on such poor advice are overdue.
The research platform promised as part of Rachel Kent’s Investment Research Review, if marketed correctly, also has a powerful role to play. As Kent notes, the “increased provision of investment research… will help create a much stronger capital markets ecosystem [and] a stronger and more resilient UK economy”.
A tech-enabled platform will chime with the growing number of traders who use the internet and apps to trade. Its focus on the dissemination of expert research will in turn build a better educated retail market, far more able and willing to invest in London-listed equities.
Ultimately, it is perhaps a cultural shift which could truly see the UK mirror the success seen across the pond. In the US, there exists a culture of personal financial responsibility which in turn drives saving habits, encouraging individuals to save and invest for retirement via pension funds and 401k plans. This audience of well-informed retail investors, married with the liberalisation of Wall Street, creates a petri dish of liquidity, investment and diversification.
However, with this cultural revamp unlikely to come any time soon, London needs to become a fire around which retail investors can coalesce. For it to burn brightly and for the City to be revived, we all have a part to play.