Decline is normally a leisurely business. Things, once established, take a while to fall apart. Hence Adam Smith’s sanguine response when a friend wrote to him that the loss of the American colonies would ruin Britain: “There is a great deal of ruin in a nation”.
That’s what makes the speed of decline of London’s stock exchange so startling. Early this century, 300 years after its birth in a coffee house, it was at its peak. The Big Bang, which deregulated financial services in 1986, had given the City such a boost that New York was worrying about losing its position as the world’s top financial centre.
Over the past 15 years, London’s share-trading business has plummeted. The number of companies listed on the London stock exchange has dropped by two-fifths since a peak in 2007, and the proportion of the world’s equities from a tenth to more like a thirtieth. The entire FTSE 100 index is now worth about the same as Microsoft.
Brokers are heartened by a flurry of company listings this year but it is a global phenomenon in which London has enjoyed only a small share. London’s proceeds from initial public offerings in the first nine months of this year have been half Hong Kong’s, two fifths of Shanghai’s and an eighth of New York’s. They’re less even than Shenzhen’s, a place that was a building site at the time of the Big Bang.
In part, this is the inevitable consequence of Asian economic growth. The announcement in September by the Pru that it would raise $2 billion (£1.48 billion) on the Hong Kong stock exchange rather than in London was just another move in its shift towards Asia, as was the decision by BHP, one of the world’s biggest mining firms, to give up its listing in London to concentrate on Sydney.
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Yet even by European standards London is doing badly. In a continent whose bourses are losing ground globally, the proportion of the value of equities that are listed in London has gone from over a third to less than a quarter in a decade and a half.
Brexit is partly to blame. Worries about political and exchange-rate risk have dragged down the valuations of companies listed in London; and this week Ryanair announced that European rules mean it is considering giving up its London listing. But London’s decline started long before Brexit. Bad management and corporate underperformance are part of the problem. The top British banks — HSBC and Barclays — have, for instance, performed worse than have the top American banks — JP Morgan, Bank of America and Citi — over the past five years.
There’s also a shortage of new blood. The proportion of companies that choose London when they go public has fallen sharply. Fifteen years ago the exchange hosted about a fifth of the global total of initial public offerings; now the figure is less than a twentieth.
That’s partly because the exchange has failed to attract tech companies. The problem is not so much a shortage of innovators — by European standards, Britain has done pretty well in spawning fast-growing tech firms — but the stock exchange’s rules. They require each share sold to have equal weight in determining how a company is run, and thus ban the dual-class shares that tech founders favour. All of London’s rivals permit these shares, which allow founders to keep control of the firms they started.
As a result, the FTSE is “really a 19th-century and not even a 20th-century index”, according to James Anderson, the Scottish fund manager who improbably propelled Baillie Gifford’s Scottish Mortgage Investment Trust to global stardom. It’s full of mining companies and banks, with barely a whiff of tech. While tech firms account for two fifths of the value of New York’s Standard and Poor’s index, they make up a fiftieth of the FTSE 100 index.
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The decline of London’s stock exchange matters, and not just to overpaid bankers and brokers. Financial services make up about 6 per cent of our economy, employ about a million people and contribute about 10 per cent of the tax take. Share trading is a small fraction of the sector but it generates lots of jobs in banking, accountancy and law firms.
The government is well aware of the problem and has belatedly made moves to do something about it. A review of the problem, written by Jonathan Hill, a former Tory minister and European commissioner, came out in March; Ron Kalifa, a financial technology entrepreneur, produced a report last year on how to encourage more companies from his sector to list in London.
Some of the causes of London’s decline are insoluble, in the short term at least. Poor British management is a matter about which academics and governments have scratched their heads for decades. Brexit was a disastrous piece of self-harm with which we are stuck for the foreseeable future. But it does at least mean that we have the freedom to change our regulatory system more than we used to.
One obviously sensible move, recommended by both the Hill and Kalifa reviews, is to change the rules on dual-class shares that put tech entrepreneurs off.
City traditionalists argue the “one-share, one-vote” rule is crucial to the high standards of corporate governance of which London boasts. The exchange’s rules have a democratic appeal. But there’s no point having a splendid corporate-governance system if you don’t have any corporations to govern. And that, if the Financial Conduct Authority does not get its skates on, is the direction in which London is heading.