British companies keep being acquired by US competitors because of over-regulation

The financial system needs an overhaul with damaging legislation repealed and the regulator disbanded

At a time when fears abound that the London stock market is in a doom spiral of decline, the news that yet another listed British company has succumbed to a bid from a Nasdaq-listed American firm is far from welcome. In a deal valued at about £1bn, West Sussex-based Spirent Communications, formerly named Bowthorpe after its founder, is in the process of being acquired by tech multinational Viavi Solutions following an agreed bid. Founded just before the Second World War and listed in 1955, Spirent specialises in testing 5G networks – an exciting growth sector.

In response, the financial media barely blinked. But it continues a trend that has been under way for some time: the acquisition of our listed growth companies by better-funded foreign rivals. They exploit the liquiditystarved UK market, where domestic pension and insurance funds own less than 5pc of quoted companies – down from nearly 50pc in 1997.

We can date the rot back to the start of New Labour rule. Gordon Brown’s dividend raid abolished a tax credit for pension funds on dividends received. Since then, the finance sector has been subjected to a barrage of poorlywritten, excessively-complicated legislation. Tony Blair and Brown wove a raft of complex, collaterally damaging laws into all areas of government, large banks and corporations. The damage is hard to overstate.

The Financial Services and Markets Act (FSMA) of 2000 is a glaring example of this type of legislation. Combined with EU regulations, it materially obstructed both entrepreneurs and investors. The Financial Services Authority (FSA), which was replaced after the financial crisis by the Financial Conduct Authority and Prudential Regulation Authority, has been allowed to freely interpret the act with the “rules and guidance” contained in its vast “handbook”. It even has its own complex legal system.

When the principle of “let the buyer beware” (or caveat emptor) was deemed by the FSA as in question, it was a huge and disastrous misstep for the London capital market. It had, after all, served Britain well over many centuries. The FSA followed by the FCA appear to have hounded companies listed on stock markets, and their investors, often in pursuit of “mis-selling”. Undoubtedly, it is important to root out wrongdoers, but the regulator has repeatedly thrown the baby out with the bathwater.

And it continues to get worse and worse. The FCA’S latest wheeze is to “consult” on its proposals to publicise investigations at the outset by naming firms and individuals. It has long been hard to avoid the conclusion that the body’s current modus operandi involves damaging reputations and livelihoods (as opposed to criminal sentencing), combined with the uncertainty of delay.

This latest proposition, if imposed, would allow the FCA to do this before an investigation even begins if the regulator considers it in the “public interest”, meaning the accused will have to spend precious resources attesting their innocence, and later on reputation management. Some mud will inevitably stick regardless of outcome. It’s difficult to reconcile with the basis of our democratic law: innocent until proven guilty.

How do we find ourselves in this sorry state of affairs after 14 years of Tory government? Could it be that many ministers and MPS are clueless as to the FCA/PRA’S activities? And what hope is there that Sir Keir Starmer and Rachel Reeves reverse the harm wrought by their forerunners?

The FSMA together with any lingering elements of Mifid II need to be abolished, and we need to start again. If not, the goose which has been laying the golden egg for London will swiftly die under flawed but constantly evolving FCA regulation. We must ask: who regulates the regulator, where is the Treasury, and why do neither appear particularly concerned about London’s lack of competitive edge?

There can be little optimism that the Edinburgh Reforms, a raft of financial services reforms designed to boost the City’s competitiveness post-brexit, will make enough of a difference to our regulatory framework to ensure that entrepreneurs and investors believe the London market is a viable proposition. Yes, we should tear up hundreds of pages of what the Chancellor described as “overbearing” EU legislation. But the Government’s plans risk being too little, too late.

The entire system requires an overhaul. Financial services regulation need only cover a few areas. First, the management of conflicts of interest – admittedly a big field, which will include personal account dealing and guard against insider trading.

Second, the identification of entrepreneurs and investors by stock markets and agents acting for their investment clients. All market participants must be identified to avoid money laundering. And lastly, the need to educate people who invest in stock markets to modify their activities with appropriate risk assessment by acting with caution and recognising “buyer, beware”.

FSMA should be repealed, and the existing regulators disbanded and the aim of new regulation for financial markets could simply be to police conflicts of interest, identify market participants and remind investors to beware. If this were to happen quickly, London still has a small chance of regaining its position as the preeminent European financial centre.

‘The regulator has repeatedly thrown the baby out with the bathwater’