Why is it important to increase public share ownership?
Between them, individual investors own fewer than half the number of shares traded on the London Stock Exchange than they did 25 years ago. Yet the recent huge public demand for shares in Royal Mail and Lloyds Banking Group, along with the growing popularity of stocks and shares ISAs, has shown that share ownership is as popular today as it was in the 1980s.
Last October’s Royal Mail flotation was seven times oversubscribed, with 700,000 people applying for shares, reflecting an appetite for share ownership from consumers that is partly being driven by low interest rates. Due to current rules, however, smaller investors are too often shut out of flotations, with shares instead distributed among the big institutions.
Rather than ignoring public demand for share ownership, we need to recognise this demand and ensure private investors can invest in initial public offerings (IPOs). Buying shares in a company gives individuals a sense of pride and ownership, while stimulating growth in the UK economy. It also adds an extra layer of accountability, as most individual investors do not, as a lot of people think, try to ‘stag it’ and take a quick profit from shares. Instead, they tend to take a long-term interest in a company’s behaviour.
How are private investors being excluded from flotations?One of the main reasons is a piece of EU legislation called the Prospectus Directive, which relates to the prospectus that has to be published when shares are issued to the public.
When the Directive was revised in December 2010, the minimum amount at which investment firms are granted exemption from the requirement to prepare a prospectus rose from €50,000 to €100,000 per investor or unit: a large sum that is out of reach for many private investors. Therefore, when it comes to a public offering, it is easier for financial institutions to sell shares in sizeable lumps to a small group of large institutional investors and accept that private investors will have to go into the secondary market. This has meant that a number of recent so-called IPOs were not true public offerings. The nearest the offerings got to private investors were if the investors were discretionary clients of a firm, but no further.
Once they have been pushed into the secondary market, retail investors face having to pay stamp duty on their first involvement in the shares: something they would not have to do in the primary market. In addition, by the time these investors have had an opportunity to purchase shares in a listed company, the share price may well have gone up, leaving them with less of a return on their investment. So stamp duty acts as another barrier to public share ownership.
What can be done to ensure public participation in IPOs?
Back to the futureFor many of us, the huge demand for Royal Mail shares last October brought back memories of the 1980s, when UK public share ownership was at its height. A wave of privatisations caught the public’s imagination, with “If you see Sid... Tell him!” – a line from the 1986 advert encouraging people to buy shares in British Gas – even becoming a national catchphrase.
The decade saw more than 50 state-run companies sold including British Airways, British Telecom (BT) and Associated British Ports. As a result, the number of people in the UK who owned shares rose from three million in 1979 to 12 million just ten years later. By 1989, around one in four adults owned shares.
Many of the new shareholders reaped instant rewards, as share prices in popular privatisations such as BT and British Gas doubled following flotation.
Watch the famous British Gas advert on YouTube
In June, the WMA launched the Wider Share Ownership Council (WSOC), a new initiative aimed at encouraging personal share ownership and investing for all.
We are writing to FTSE 100, FTSE 250 and Alternative Investment Market (AIM) companies, as well as MPs and industry bodies, to encourage them to promote personal share ownership. Then, when the new EU Parliament is in place, we plan to take a delegation over to Brussels to try and convince them that although changes to legislation such as the Prospectus Directive might be good for some countries, they can have a negative impact on others, and that the rules need to change again. We are also planning to look at how investment firms can work around the Prospectus Directive without breaking any EU rules.
The WSOC is not trying to force companies or their advisers to offer shares to retail investors, as with any share issue there is risk involved which individuals need to assess appropriately. However, we believe companies should be asked: “If you are not planning to offer shares initially to private investors, are you able to tell the public why?” There were some public offers recently involving purely retail companies, such as Poundland, that excluded individual investors initially, which is something many people find hard to understand as these companies rely on individuals’ custom to survive.
Whatever the barriers to public share ownership, it is time to remove them and help more individuals share in the success of the many companies helping to power the UK economy.
Do UK savers and investors get a fair deal?
Dr Tim May is speaking at the CISI Annual Integrity Debate at Plasterer's Hall on 24 September 2014. He will be part of a panel that will discuss whether successive governments have failed to regulate the UK savings industry, and whether savers get a fair deal. Panellists include, Will Hutton (Author and Financial Commentator), Martin Waller (Tempus Editor at the Times) and The RT Hon John Redwood MP.
For more information on this year’s fierce debate, visit cisi.org/debate2014. CISI members can reserve their place at the debate online, by calling +44 20 7645 0777 or emailing firstname.lastname@example.org