Peter Harrison: The City needs to embrace risk
Proposals to overhaul listings rules are a step in the right direction but much more work needs to be done.
It seems the City of London has developed a new passion — commentating on its own demise. The challenges the UK faces are significant and important. The long-term wealth creation capacity of the country is at stake. But the arguments over those challenges have been well rehearsed to the point of becoming cliched.
The Financial Conduct Authority should be applauded for joining the movement for change with proposals for a regulatory overhaul last week. Reforming the listings regime and simplifying related party transactions will make London an easier place to do business.
As importantly, the FCA‘s move recognises that we cannot aspire to a risk-free market in which there are no participants. Understanding the need to take risk to achieve return is a fundamental tenet on which the City was built.
“It’s not enough” has been a familiar refrain in the past few days. Nobody says it is. But it is part of a set of wholesale changes that are now moving swiftly in the right direction. A series of government-sponsored reviews led by Ron Kalifa on fintech, Lord Jonathan Hill on listings and Mark Austin on secondary capital raising have all made important contributions.
The Edinburgh reforms proposed by chancellor Jeremy Hunt for financial services set out an ambitious agenda. The Prudential Regulation Authority is engaging constructively on reforms of the so-called Solvency II for insurance. Nicholas Lyons, the lord mayor of the City of London, is making strides in pushing for the creation of a UK sovereign wealth fund. Regulators, politicians and the wider business community have reached an extraordinary state of agreement. The skies are brightening.
Reform is never comfortable, and we should not expect diehard defenders of the status quo and corporate governance fanatics to lead the charge. Equally, they should not hold us back. The reality is that neither companies nor savers have been better off for their protestations. My own industry, asset management, needs to come to the party wholeheartedly if it wants a vibrant market in which to operate.
This will include some uncomfortable conversations over executive compensation. It is a critical issue. I applaud Julia Hoggett, the London Stock Exchange’s chief executive, for speaking out and sparking that debate by calling for UK executives to be paid more if the country wants to retain talent and deter companies from moving overseas.
No one person, politician, regulator or corporate can answer this question in isolation; it is a question for broader society. Which is more important: limiting the gap between chief executive and worker pay, or accepting that boards need the freedom to attract the best talent to run Britain’s global companies for the best long-term outcomes?
This is just one problem. There is more work to do elsewhere. Asset managers need to support productive growth by allocating finance to those businesses that deserve it. They must also not indulge in tick-box governance — slavishly following proxy agencies instead of investing resources in independent thought. And asset managers cannot continue to apply strict rules to UK companies listed in London but show less rigour elsewhere.
The excellent returns achieved by the huge pooled pension funds in Canada and Australia also provide an important signal for one area the UK should focus on. We need to push for the consolidation of the fragmented defined contribution pensions plans nationwide. Likewise, requirements on local government to pool their pension funds need to be properly implemented. Insurance company regulation needs to permit investment into more growth assets.
Our efforts should be directed towards the opportunities of the future. We should look to capitalise on our national ability to innovate in areas such as life sciences or green technologies. We should be preparing for the continued, rapid growth of private markets. Technology, particularly blockchain, will massively shrink the difference between public and private markets — and London has the opportunity to lead in this.
Seldom has there been such uniform agreement about how financial services can serve the country. Let’s seize the moment. The total pool of global wealth will continue to grow. London’s cultural, legal and time zone advantages remain strong. It is time to stop admiring the problem and — in the words of Canadian ice hockey player Wayne Gretzky — “skate to where the puck is going, not where it is”.
First published in the FT.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.