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The writer is vice chair at Oliver Wyman and was senior adviser to Mark Carney when governor of the Bank of England
A paradox sits at the centre of Britain’s financial system. The more tightly regulators have sought to protect investors, the more they have drifted away from the stock market. Retail equity participation is now the lowest in the G7. Funds raised in UK initial public offerings this year are the weakest for more than 30 years.
In seeking to eliminate risk, Britain has inadvertently stifled opportunity, leaving its capital markets diminished at a moment when investment is needed. The solution is not another government task force or a minor tinkering with listing rules. It is a wholesale shift in regulatory philosophy.
The UK should take inspiration from a nearly 30-year-old American reform to promote vibrant capital markets. In 1996, Congress passed the National Securities Markets Improvement Act requiring financial regulators to consider not just investor protection but also “efficiency, competition and capital formation” when making rules. In other words, regulation was tasked with enabling growth as well as preventing harm. This shift helped forge the foundations for the deepest and most liquid capital markets in the world. Britain would do well to borrow from it.
“The root of the UK’s malaise is not the rules around IPOs, but the over-regulation of intermediation” of savings, argues Simon Gleeson, visiting professor in law at Oxford. Successive reforms have left ordinary savers herded into mass-market investment products and cut off from direct exposure to UK equities. Meanwhile, pension regulation, in its quest for prudence, exacerbated the retreat of defined benefit schemes from UK equities — from around 30 per cent in 2006 to barely 1 per cent today.
Savers have voted with their feet and poured money instead into property, crypto, US equities and even speculative schemes. The regulators deem this irrational; in fact, it is the rational outcome of a system where domestic regulated investing is too constrained and too expensive. The costs of over-regulation are diffuse and harder to measure than the benefits of new rules, but no less damaging to capital formation.
Advisers drown in compliance; only the wealthy can afford meaningful advice. Everyone else is nudged towards the dullest options. A system built to protect investors now deters them instead.
Today financial regulators are judged by whether anyone loses money, not whether the economy gains. Every mis-selling scandal triggers compensation, every complaint is met with tightening rules. Given this incentive structure, it is rational for regulators to err on the side of suppression unless they have explicit political cover to balance safety against growth. As the chancellor Rachel Reeves acknowledged in her 2024 Mansion House speech, “the UK has been regulating for risk but not regulating for growth”.
A vibrant investing culture is not a luxury. It is how a country funds growth. Without one, Britain will struggle to finance innovation, renew infrastructure or boost productivity. Some tentative steps have been taken. The Financial Services and Markets Act of 2023 gave regulators a secondary growth mandate. The Leeds reforms of July promised less red tape. But Britain needs a genuine shift in regulatory philosophy.
Three reforms would help. First, rebalance the mandate. Regulators should be required to consider “efficiency, competition and capital formation” in rulemaking. Europe faces a parallel challenge, and a mandate similar to the US could also provide the framework to advance its saving and investment union. Second, recalibrate restrictions on sophisticated retail investors. This would allow them access to a wider range of UK investments within the regulated system. Third, tax policy should encourage long-term saving in UK companies. Recent reluctance to reform the Individual Savings Account rules in the UK to limit incentives to invest in cash-focused vehicles was a missed opportunity. What’s more, the Personal Equity Plan, the predecessor to ISAs, had restrictions that half had to be invested in the UK. That principle is worth reviving
History suggests that financial systems thrive not when investors are over-protected but when markets are allowed to take managed risks. Adopting a US-style mandate would not solve everything but it would send a decisive signal — that Britain is regulating not only to prevent losses but also to foster growth. That signal, coupled with other pro-growth reforms, could begin to shift Britain towards the capital markets revival it urgently needs.
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