Boosting the economy is the only way to sustainably raise living standards for all, so let’s stop messing around with small-fry policies, writes Matthew Fell
London is a great place to invest and do business. We’ve regained the top spot from New York in the global financial centres benchmark. Our supporting ecosystem includes some of the world’s best universities. And we’ve got an unrivalled arts and culture sector. It adds up to a melting pot of finance, innovation and creativity. But one of the key ingredients is off: we’ve got a problem in our capital markets.
Much angst has been expended about London’s listings drift to New York and our inability to convert start-up success into scale-up staying power. From Ferguson to Flutter, CRH to Smurfit Kapper, firms of different sizes and sector are looking elsewhere. It’s bad enough to lose established firms, even worse if we’re not nurturing enough scale-ups to take their place.
All this has ramifications way beyond the Square Mile. It matters for the economy because we need more of these innovative firms to lift productivity and growth, the only sustainable way to raise living standards across the country. It matters for London, because we need a foothold in the industries of tomorrow to safeguard future success. And it matters for all of us, because we need our pensions and savings to deliver strong returns to see us through longer, healthier lives.
Plenty of good work is underway to reverse the tide. The Capital Markets Industry Taskforce, under the thoughtful stewardship of the Stock Exchange and others, points the way. The Mansion House ‘compact’ is committing more funds towards high-growth firms. And the announcement of a British ISA and greater transparency over pension fund investment shows the Chancellor is on the case.
So, what’s to be done to get London’s capital markets firing on all cylinders?
First, let’s go after the gamechanger. Incentives such as a British ISA are helpful nudges. But it’s a peashooter compared to the big bazooka of scrapping stamp duty on share transactions. This tax adds to the cost of equity, acts as a drag on pension pots and hits market liquidity, especially for midcaps. It’s bonkers that the British public are taxed for buying shares in Aston Martin, but not Tesla. So let’s stop making the UK a more expensive place to list. Recent modelling by the economic consultancy Oxera shows that the measure would pay for itself by delivering a positive return for the public finances: a win-win for competitiveness and the Exchequer.
Second, let’s fix every step on the growth ladder. We need to deepen the pool of capital available to firms when they hit the scale-up stage of their growth cycle. For example, by further reform of pension funds to deploy more investment into British scale-up businesses through private capital funds and by making it easier for retail investors to invest in private capital. If we don’t feed the next generation of unicorns, they will have their lunch elsewhere – and the headquarters, R&D know-how and supply chains will follow.
Third, capital is only part of the equation. We need to play smart to counter both the size and riskier approach to capital allocation that exists in the US. That includes having the best regulatory environment for growth firms. The UK’s history of flexible, proportionate and principles-based regulation ought to lend itself to fast-evolving technologies such as AI and climate tech. There’s a regulatory sweet-spot that adapts quickly, encourages innovation and gives consumers confidence. We need more of the philosophy behind the regulatory sandboxes that contributed to London’s fintech success.
At BusinessLDN we’re ensuring that the private sector’s collective voice is heard by regulators and all tiers of government to tackle the key issues holding back our capital markets. Crucially, whoever forms the next government must put in place the conditions to encourage capital to flow and the industries of tomorrow to flourish. That will ensure London thrives, and all of us – savers, investors and the economy as a whole – win.