The Daily Telegraph - Saturday - Money
British investors have their own reasons to be angry
Diary of a private investor
An exciting scandal has suddenly erupted in the world of investment. Read the article above for more detail but in short: a crowd of small investors on internet forum Reddit decided to buy shares in unloved American firm GameStop largely because they saw that hedge funds were shorting the shares.
The crowd of Reddit readers was so numerous that it was able to drive the price of GameStop up like a rocket and the hedge funds eventually had to accept big losses.
What made this story into a bigger scandal was that the small investors were abruptly stopped from buying certain shares, including GameStop, on a trading platform called Robinhood. This development understandably caused outrage.
One of the big features of the affair is that those who frequent the Reddit website have a strong sense of resentment and anger. They feel that the investment game is rigged against them by the big beasts of Wall Street. The resentment dates back to the stock market crash of 2007-08 when, in their view, Wall Street protected its own while small shareholders were smashed.
Back in Britain, there are certainly some people who also feel that the financial crisis was manipulated for the advantage of big investment companies. These people are not activist investors like the Reddit crowd, however. They are more likely to be living in Islington, tweeting angrily about capitalism and not buying any shares on principle. So we are not likely to see a GameStop equivalent here. But that does not mean that British investors – and particularly those who want to buy and sell shares themselves – don’t have reason to be angry.
I talked to Dean Buckner, policy director of the UK Shareholders’ Association, this week. He said that while “we’re sympathetic to the anger the people on Reddit feel” there were other ways of challenging the system.
Over the nearly 50 years that I have been an investor, I have seen the position of private portfolio investors increasingly undermined. And yes, I am pretty irritated by it. True, some good things have happened. The creation of tax-free Isas and self-invested pensions, both of which had their origins in the Thatcher administration, has been terrific, saving us a lot of tax and bureaucracy. But there is a lot that is now rotten in the state of regulation with regard to private investment. Here’s a little list:
1It is now very difficult for a private investor to get to see the reports that brokers write about companies. Even the big investing companies see fewer of them than before because of the unintended consequences of a bit of EU bureaucracy known as Mifid II. But the private investor can now see far fewer reports than in the past. This puts private investors at a major disadvantage and the regulations should be changed quickly.
2Regulations have unintentionally driven out the kind of broking where a broker would give some advice but the investor would make the final decision. Now investors have to choose between either handing over all responsibility to a wealth manager or else dealing without any advice at all. This is unfair to the individual investor who often wants a bit of help and fully realises that advice might be right or wrong. 3 Heavy overregulation has, again unintentionally, driven out small broking firms. The cost of compliance with rules on money-laundering, giving advice or not, learning the circumstances of the client and so on, is now so big that no small broker can bear the overhead and earn a living. One wealth manager I spoke to employs 100 compliance staff. The destruction of small brokers has inhibited healthy competition.
If ever there was a time to shake up investment regulation, it is now
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When I started in the City, there were plenty of contested takeovers. Any management that over-feathered its nest was in danger of a hostile takeover. This prevented the complacency that is now common in British boardrooms and their remuneration committees. I don’t know what changed but this should be investigated in the interests of all shareholders, big and small.
I could go on. If ever there was a time to shake up investment regulation, it is now. We don’t have to follow EU rules any more. The Government should begin removing the obstacles put in the way of sensible portfolio investment.