Barriers to Retail Investment
There has been an announcement that the EU are to conduct a study into why retail investors are not flocking into capital markets and the investment products they are offered.
Immediate commentary on this announcement has focused on the additional bureaucracy of MiFID, the pages and pages of agreements that have to be signed in order to “protect the bank” that offers an investment product and the costs of fund products, with entry fees quoted as 5% and exit fees at 8%. This commentary is made by experts who are undoubtedly well-meaning, but miss the point by a mile (or should that be 1.6 kilometers?).
Some years ago, retail investor participation in capital markets was not only significant but important. As a result, the market structures and services catered specifically for their needs. One of the best examples of this was the train that was regularly put on between Brussels and Luxembourg to carry retail investors in Eurobonds to present their coupons and bonds to paying agents for tax-free cash payment.
These retail investors were so important to the functioning, and success, of the market that regulations, stock exchange rules and the design of the securities themselves catered for the convenience of retail investors.
But that is just one example of a problem that has been brewing for a while. John Kay provides an eloquent and well-researched analysis of the issue in his report into the functioning of the UK Equity market. He puts much of the blame on the rise and rise of intermediation for the sake of intermediation.
Concentrating on the listed equity markets, as the EU tends to do in rule-making and policy setting, also risks missing the point of the problem entirely - if nothing else for the demonstrable shrinkage of equity listings.
As is often said, and seldom acted upon, – “Follow the money”.
Retail investors are not stupid – stand outside your high-street bookmaker and admire the sophistication of some of the bets made on horse racing.
Retail Investors can combine loyalty and long-term, patient investment into a company that has personal resonance. This may be a local company, a strong brand or a vocational investment like a football club. And the cumulative size of investment resulting can be significant.
Despite many national stock exchanges being built on retail-driven investor interest, this is generally long-forgotten in the fight for short-term profits and trading volume.
New stock exchanges based purely on digital technology are turning back the clock to pre-intermediation domination and welcome retail investors.
However, I will wager that they will be outside the scope of the EU consultation.