From overcaution to opportunity: how to make risk work for Britain
Britain is shifting from a culture of excessive risk aversion toward one that embraces calculated risk to drive investment, innovation, and economic growth, says Charles Hall
Brits appear to be obsessed by risk. Warnings abound throughout our lives such as endlessly repeating ‘mind the gap’, providing heatwave advice that warmer countries don’t seem to find necessary – and don’t get me started on trigger warnings.
The proliferation of risk warnings has long-since moved from sensible safeguards to an overbearing culture of caution, inflating costs and stifling activity. It’s the same in finance and it’s been getting progressively worse, where innovation and entrepreneurship are being stifled, supposedly to make us safer. The result? a generation of savers that don’t invest in ‘risky’ equities, pension funds fully invested in ‘secure assets’ and a lack of investment in growth businesses. What makes it worse is that so many risk warnings are intended purely to avoid litigation rather than to actually provide helpful information.
The tide is turning
The good news is that, at long last, the tide is turning. A key takeaway from the Mansion House Speech and the Financial Services Growth & Competitiveness Strategy is that risk is now to be welcomed and encouraged. Retail investors will be urged to understand the benefits of investing rather than focus on the risks. There will be targeted support to help inform consumers of savings and investment choices and a marketing campaign alongside the ISA season. There will be lower capital requirements to enable banks to increase lending and help people secure mortgages. The Chancellor has announced that regulators will allow financial firms to be more responsible for their staff rather than having to endlessly tick boxes to report to the FCA. Pension funds are being encouraged to assess value for money rather than cost, and invest five per cent of their funds in private assets in the UK.
There’s lots more in the Financial Services Review that shows that growth and risk are to be desired rather than feared and shunned. Many of our regulators are warmly embracing the need for change and hopefully others will see the light.
So there’s a lot to applaud in this comprehensive review. But what’s missing? Well, we still encourage investors to send their capital overseas rather than at home in the UK, through our ISAs, our pensions and our tax system. We cannot expect international investors to fill in the gap if we don’t ourselves see the importance of home investment.
Investors are rational – if they are given tax incentives to save in cash they will, if they are taxed more to buy shares in the UK they will invest more overseas
We are in an increasingly global competition for capital and companies, both private and public. Regulation and risk are important, but incentives are core drivers of decisions. Investors are rational – if they are given tax incentives to save in cash they will, if they are taxed more to buy shares in the UK they will invest more overseas.
Similarly companies will make decisions on where to list based on a comprehensive set of criteria which includes valuation, tax and liquidity. We have to incentivise investors to invest in the UK and companies and entrepreneurs to scale, list and stay in the UK. This is clearly in the national interest and essential if we want to grow the economy, pay for public services and ensure that investors are rewarded for investing at home. The biggest pots of capital we have are ISAs and pensions and we give away £60bn of tax benefits every year with zero domestic requirement. Everyone likes a tax incentive, but surely these should be benefitting our economy and companies.
Reeves has decided to make taking a chance good again, we now need to make investing in Britain the obvious choice.
For the Chancellor, the biggest risk of all is that she fails to make the bold and necessary changes and loses the most important drivers of economic growth.
Charles Hall is head of research at Peel Hunt