In the City
Misbehaviour of markets
Tony Rudd
Free markets can produce devilish inconvenient results. The movements of market forces show no respect for establishment opinion and the better organised and more liquid they are the less convenient can be the result. Take for instance the way that the Malaysian government interests snapped up control of the Guthrie Group last week in a few short hours in the market place. Disposing of a couple of hundred million pounds, this giant Far Eastern corner disappeared into the maw of the potential aggressor as quickly as a rabbit down a lion's throat. A few marks in the sand, the noisy licking of lips was all the evidence remaining by afternoon. This was a pretty large operation by any standard but there have been several other recent takeovers of this kind (Amalgamated Power and Law Land to name but two) which indicate that many more major companies may in fact be vulnerable to a sudden purchase by a third party than had hitherto been supposed by the authorities.
Does this really matter? The authorities obviously think it does. The Chairman of the Stock Exchange has referred to the situation with some concern. And it is understood that the Council for the Securities Industry (the organisation which is at the top of the heap of the system of self-policing run in the square mile) is going to discuss the issues raised and deliberate upon them. Meanwhile informed press comment has included the observation that unless the pension fund managers behave themselves (meaning, presumably, unless they desist from selling their holdings to a bidder in a Guthrie-type situation) they can expect to be the subject ultimately of state direction. But trying to stop water flowing downhill is no easy matter. Rules and regulations can be enacted till the cows come home; it's like building little dams and sluices; the water still flows. This will happen whichever approach is used. The fund managers can be told to behave more 'responsibly', which simply means in this context that they must be made or induced to act as though they were nincompoops. They must, if they are not to respond to market forces, behave in an artificial manner and without due regard to the fiduciary responsibility of doing the best for the funds which are entrusted to them. If, last week, fund managers genuinely thought that they were doing the right thing by selling their Guthrie shares, then sell them they had to. To suggest that this was in any way a form of misbehaviour is ridiculous. And so really is any attempt to fix up new rules and regulations to prevent the fund manager behaving in a rational way.
The problem, if there is one, arises from something much more deep-seated. The Chairman of the Stock Exchange himself got to the heart of the issue when he referred to the effects of the growing institutionalisation of the market as being the real culprit. What has happened is that as a result of the way various kinds of savings are taxed at different rates, savers have behaved rationally and channelled an increasing proportion of their wealth into the most tax-efficient savings media. In other words they have concentrated on building up their pensions, which they can do out of untaxed income, and watch these pensions grow without their having to attract any form of subsequent tax. They have gone for all forms of savings which have been linked to insurance contracts because of the tax concessions which these bestow. They have done everything but invest their savings directly in stocks and shares because there is absolutely no tax concession for the person who does that. Not unnaturally, as a result of this tax discrimination the bulk of the nation's savings are now channelled through what are known as the institutions, run by a few hundred fund managers who will sell their Guthrie or indeed any other shares, if they are offered a price well above the market, at the drop of a hat.
Now it so happens that this situation has caught the eye of the powers that be down in Whitehall. But unfortunately so many things catch the eye of those gentlemen and there is so little time to attend to so many pressing matters that a reform of the taxation of savings hasn't as yet got onto the action sheet. Nor, we fear, is it really likely to. Because it's not just a simple matter of altering the method of taxing savings. If you are going to have what may loosely be called tax neutrality as between various types of savings, there is no way that the present level of concessions for pension funds and superannuation schemes can possibly be continued. If people are to paY less on their private savings, then these other forms of contractual savings must pay at least some tax. A prime difficulty is that there is a strong lobby in Whitehall which takes the view that individual investment in shares is really rather a speculative sport which is not to be put into the same serious category as the building up, for each individual, of a nest egg which will see him through later life. The latter is such a deserving aim that it is only reasonable to make tax concessions available.
It is difficult to see how this very strong prejudice in favour of contractual savings can be broken. Perhaps the only way is to try to get the debate out into the open and to keep it there. If we really want a securities market which is not dominated by a few hundred managers acting on behalf of the millions who save, then we have to get to a system of tax neutrality under which there is no penalty for an individual doing his own investment. That means a radical change in the tax structure. No government ever has time to do that unless it is made into an issue which politically it is forced to attend to. Overseas interests buying up great slabs of companies hitherto controlled in London may be a phenomenon which concentrates the official mind. Certainly, so far as the Conservatives are concerned it is worth pointing out that unless they act on this matter a forthcoming Labour government will certainly grasp the nettle, but in a way which they, the City and many of the rest of us would deplore, namely by the simple expedient of nationalising the institutions. The tax system having neatlY packaged up control of the nation's savings into the hands of a tiny number of people, those people will just be transferred down to Whitehall. It will be as simple as that. Perhaps that argument might make then] get a move on.
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