The Capital Markets Industry Taskforce (CMIT) has published a report recommending changes to revitalise the UK investment landscape, putting retail investors at the heart of its proposals.

The paper, The Capital Markets of Tomorrow, outlined four priorities to drive growth and create wealth, and called for the government to help with “unleashing the power” of UK retail investors.

Investing in UK plc

To achieve this, the CMIT recommended the implementation of measures to encourage more retail investment, including in UK companies, by creating incentives through a streamlined ISA product, removing barriers to retail investment, and promoting investment in risk assets by those who can do so.

The report also urged the Financial Conduct Authority (FCA) to continue to work on the reshaping of the UK’s prospectus regime, with a particular focus on broadening retail access in a “meaningful way” and progressing the recommendations in the Advice/Guidance Boundary Review.

“These efforts should be combined with progressing the work of the Digitisation Taskforce to support simplifying capital market participation in the UK,” it stated.

The CMIT added that greater UK investment in domestic companies could generate substantial economic benefit.

“At present, there is limited investment into our capital markets by large UK institutions, with fast-growth UK scale-ups receiving a disproportionate share of their funding from US VCs,” the report stated.

Empowering retail investors

Over the past 20 years, the number of households directly owning shares in the UK has more than halved from 23 per cent to around 11 per cent.

The CMIT argued that the UK was limiting its growth potential by not leveraging ‘home advantage’ in the way other countries will successful capital markets do.

It urged the government to create incentives for retail investment in UK companies, such as a streamlined ISA product that builds on the idea of an increased tax-free allowance for investments.

The government was also encouraged to remove barriers to retail investment in UK companies, including exploring ways to lower or remove Stamp Duty Reserve Tax on shares, and to urge individuals in the UK with the capacity to invest in risk assets to do so.

On the supply side, the UK needs to ensure it is creating the environment for high margin, high growth companies to flourish and remain in the UK, the report argued.

“As equity index funds grow and active equity funds shrink, there is a risk that our markets represent an ever-diminishing share of the MSCI and other global indices,” the CMIT warned.

“This is because whilst the FTSE 100 is a global index, it does not yet represent all of the global industries, particularly the new large ‘tech’ businesses that attract the highest valuations.

“As more funds flow into US markets at the expense of investment in UK markets, this trend risks becoming self-perpetuating.”

Risk appetite and the green transition

The CMIT also called for the UK’s risk appetite to be restored, stating that a capital market that was ‘risk on’ rather than ‘risk off’ was needed to help achieve the UK’s growth ambitions.

To enable UK capital markets to best support the UK’s green ambitions, the report recommended that the government focuses on those interventions that can help move the dial on unlocking greater investment capital for the green economy from its own capital markets.

It outlined these as the Long-term Investment for Technology and Science (LIFTS) iniatives, the close-ended fund market, and Solvency UK.

Commenting on the report, Hargreaves Lansdown (HL) head of money and markets, Susannah Streeter, said: “It’s clear there is a great deal of work which needs to be done to boost investment in London listings and help power up economic growth.

“This report makes some helpful suggestions on revitalising the UK investment landscape to help lay the groundwork for long-term expansion.

“Retail investors are enthusiastic holders of UK equities, helping provide the capital for companies to expand. Of those equities held on HL’s platform, 80 per cent of the trades in the last year were on the London markets. But greater efforts need to be made to encourage more people to start investing.

“As the report points out, Britain has had a strong tradition of pensions savings and direct retail investment in shares. This peaked with the privatisations of the 1980s and 1990s and continued through the dotcom boom of the early 2000s. But it’s shocking to see that retail share ownership levels among UK households have more than halved over the past 20 years.

“In many ways, it's not surprising people have been turned off from dipping their toe into investing. All too often they have been left out of initial public offerings on the stock market, only able to get a small foot in the door after institutional investors have taken their pickings. Time after time retail investors are left disappointed by the their small allocation in IPOs.

“What would also help simplify retail investing and encourage more people to take the plunge into the stock market is reducing the Lifetime ISA (LISA) penalty from 25 per cent to 20 per cent.

“The 25 per cent penalty not only claws back the government bonus to save, but also applies an additional 6.25 per cent penalty based on the net amount invested. It would give investors more confidence to use this highly useful tax wrapper to climb onto the housing ladder or save for retirement with the knowledge that they won’t be penalised if their circumstances change.’’

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