Ideas that are attractive-sounding but impossible to implement effectively never really go away. They just return in slightly different clothing every decade or so.
Think, for example, of the land value tax. It’s brilliant – by taxing the value of land (and nothing else at all) it could solve all our problems. It has a burst of popularity every generation, but once everyone sees how hard it would be to implement it goes away again.
It’s the same for flat rate taxes, for UK identity cards and for pretty much any sensible idea about the NHS or train services.
There’s another good example knocking about right now: regional stock exchanges. In the 1800s every reasonable sized city in the UK had its own – Bristol, Cardiff, Glasgow, Liverpool, Sheffield, Dundee and Birmingham.
In 1914 there were 22 exchanges, 11 of which survived into the 1970s. The Scottish ones merged into a Scottish stock exchange in the 1960s and then into the London Stock Exchange in 1973. Birmingham’s market only shut down in 1986.
Their disappearance made sense at the time. A 2016 paper on the matter, The rise and decline of the UK’s provincial stock market, 1869-1929, put it down to a change in the types of firms listed in the UK.
The provincial markets had been happy homes to local railway companies and banks, but as these merged, so their number fell. At the same time, there was an increase in the number of businesses shifting headquarters to London, and more foreign companies listing there, too. London became more important; regional markets withered – and given that the infrastructure once required for a stockmarket didn’t come cheap – eventually died.
But that doesn’t mean the idea of them isn’t still attractive. People in the UK are not particularly engaged by the idea of stockmarket investing at the moment. They see investing in shares as akin to gambling. They see the big companies listed on the big exchanges as distant, financialised, exploitative and obsessed with greenwashing over real environmental, social and governance issues.
These impressions might not be entirely wrong, but they are nonetheless a very bad thing. That’s partly because pension freedom will not be kind to those who aren’t paying at least some attention to their money (if you don’t look after it yourself, the financial services industry will “help” you in a very expensive way) and partly because capitalism works best when everyone understands that they have a stake in it – and want to have a stake in it.
In matching regional companies with regional savers so that investors feel both close to and as if they have some shareholder control over what they hold, local exchanges could change that.
They could also help with the UK’s funding gap. As the authors of the 2016 paper point out, the “centralised structure of the capital markets in the UK has not been able to provide the capital needed by small, growing firms”.
Look at the smaller companies listed in the UK and you will find a “disparity between smaller companies located in the southeast near to London and those located elsewhere”. Those listed tend to be “those that are located in or near to London”.
The longer that goes on the more London-centric the UK becomes. Regional markets might be part of a plan to shift more economic activity to the rest of the UK.
Finally, if you could succeed in setting up a network of regional stock exchanges you might even be able to play a part in reversing the fall in the number of listed companies in the West as well. Between 2000 and 2018 the number of listed companies in the US fell from around 7,000 to around 4,000. In the UK the fall is less dramatic but, nonetheless, there has been a fall of about 300 companies since 2015.
World Bank data shows a mild but similar trend in the same direction globally. That’s bad for shareholder democracy, transparency and liquidity. Turning the tide even a tiny bit would be a very good thing.
This all sounds so absolutely marvellous that you won’t be surprised to know that the idea of bringing back regional exchanges pops up all the time. There was a proper conversation around the idea of a Welsh one in 2009; there have been efforts to create one in the Midlands; and in 2010 Nick Clegg and Vince Cable promised to create a network of regional stock exchanges “to act as regional platforms, matching local investors with growing small businesses to provide cost-effective access to equity”.
So far, so bad. Like lots of other good ideas, this one is just too hard. It is tough to get companies interested; they want the branding and safety of a known exchange and private equity money is easy to come by if they need money. At the same time, setting up is expensive, the regulations are always going to be onerous – they have to be, given how hard it is to get investors to protect themselves – and in many places the network of advisers needed to support a real exchange no longer exists.
Enter Project Heather, a group trying to set up a new exchange in Scotland. They reckon they can solve some of these problems. They can make it cheaper to list on their exchange, given that it costs hundreds of thousands of pounds a year to maintain a listing in London.
They can cut the regulatory burden, by starting from scratch rather than having to work with layers of rules built up over decades. They can use new technology to start up cheaply and they can persuade a few big companies to do a dual listing with them to kick things off (perhaps some of Scotland’s famous investment trusts).
Then to all of this they intend to add a little magic dust – the thing that might make the difference. Everyone but everyone wants to know that they are investing ethically at the moment – witness the National Trust’s decision this week to divest from fossil fuels, thanks to companies making “insufficient progress” with their self-improvement. So a new exchange that promises to list only those companies that can show they are making a positive impact on society and the environment in the course of doing business could offer a fabulous short cut.
There are mountains to climb – regulatory approval is a long way off and it will need to sign up eight to ten companies to launch. There will also be liquidity problems (something London’s Aim market has long suffered from – ask Neil Woodford). But it is a neat idea coming at a time when capitalism needs a new look and when there is a clear social and political shift under way to localism. Think of Project Heather as a kind of green Scottish Aim and you can see how it might just be the one that works.
• This article was first published in the Financial Times