How capital markets firms got established and operated before the era of regulation

In February I managed to blag (so I’m blogging it now) my way to the London Hilton for a conference entitled “European Family Office Conference”. The cost was almost $3,000 but I managed a freebie less my cost to get there which itself was quite cumbersome.

The opening panel tried to define “Family Office” (F.O.) and this in itself threw open a few interesting descriptions. There are two types of F.O.’s. Some are SINGLE F.O.’s whilst others call themselves MULTI F.O.’s—the latter seem to model themselves more on new age WEALTH MANAGERS and pride themselves in sophisticated platforms.

The Victorians used to build sophisticated railway stations on this basis which is why the internal architecture at Waterloo, Charing Cross, Paddington, King’s Cross, Liverpool Street etc all appear to look the same.The rail services thus are pretty similar too as are the fares and rude Revenue inspectors (my experience). It seems that many WEALTH MANAGERS are replicating in the same way.

Some F.O’s had chosen to become REGULATED but it didn’t seem to matter that many had managed to delay the inevitable.

During one of the coffee breaks I remarked to a fellow delegate (I felt like a EU Commissioner at this point) that I wondered how many people working in F.O.’s had considered that their enterprises were in many ways replicating (repetition) the way that many banks and firms of stockbrokers had started up in 18th & 19th centuries. The reaction from the first delegate was strange. He hadn’t considered it as today F.O’s according to him were doing¬† something new. Similar conversations ultimately repeated.

On the old London Stock Exchange, referred at the time as The Stock Exchange, London EC2 many of the household names some still around today started up as Unlimited Liability Partnerships with one or as many as forty partners all applying for membership of the exchange which itself was truly regulated by a council. If there were any wrong ‘uns they were initially given a slap on the wrist but if there were any repetitions then severe penalties could have been handed out.

The members books of the 1870’s to 1900’s were full of names that made it to the 1970’s period when around 50 firms closed their doors and many more made it to 1986 when ‘Big Bang’ arrived. A few lucky ones were bought by banks heralding the current age of dominant proprietary banks trading their balance sheets but since then around 200 firms (all partnerships initially) have been absorbed by larger firms, banks and those that have converted themselves to ‘wealth’ managers.The excessive red tape, regulation, demands on capital ratios (Basle I, II & III), technological developments, broadening of synthetic and socially useless products, extra volatilty and a host of other reasons have forced these firms out of business. In the last 18 months Pritchards (evolved out of Dunkley Marshall), Seymour Pierce (a very respected name on the exchange with an historic penchant for water and perks) and just last week Fyshe Horton have closed their doors. Assuming it is fair to say that the period from 1980 until 2000 and arguably 2007/8 heralded the greatest bull market in history it does seem illogical to reflect that such a high percentage of firms focused on private client investing ultimately closed their doors when it’s common knowledge that many provided excellent bespoke services. The main common denominator for closure was cited as ‘excessive regulation’. This may surprise many who are supportive of so called ‘external regulation’ but this is the truth. Regulation is not a British invention when it comes to ‘stocks & shares’ and investing. It’s arguable that this grave error embarked upon by Thatcher and her City specialist, Cecil Parkinson (he came around for lunch at Beardsley’s in the early ’80’s and thoroughly unimpressed some) in the mid 80’s came through the back door of the then Common Market and was based on german banking oversight but this is only conjecture. One thing is for certain is that despite the political and unparalleled view that the great bull enhanced wider share ownership the opposite possibly happened as firms were at times forcibly closing their doors. There have been a few success stories in the private sphere to balance the argument such as Killik, Hargreaves Lansdown (are they brokers or product suppliers and distributors?) and those that have been massaging ‘wealth’ through their efforts within the more recent RDR.¬† These firms, like many others that have evolved from other areas of finance, cannot though argue their case for wealth creation or risk taking which is what any member firm should applaud. The almost total disconnect today between the City and the UK economy (even the FTSE is mainly overseas earnings led) and the new RDR driven market will simply NOT create the right kind of environment for SME, small-cap & micro-cap investing that the old UK market formally embraced due to the modern risk and suitability rules.

But there is one thing which no-one appears to have noticed.

Back in the 80’s ALL the market investing and trading was executed by people with MARKET EXPERIENCE. Looking around the F.O. conference I guaged that possibly 70% of those present had NO to LIMITED practical capital markets experience. The lack of incisive questions or questions at all directed at the panellists was alarming. Perhaps this is the result of the rise of the ‘collective’ over direct EQUITY and possibly the fact that regulation and CPD and such like dominates proceedings everywhere in the new City. This trend is not just found clearly in the F.O. arena but I suspect (I’ve spoken to many across all aspects of the now fragmented market and none disagree with my analysis) also in Hedge Funds, Institutional Fund Management and all aspects to private ‘wealth’ which has just about pidgeon-holed almost everything in financial services.

The Drury Report covers many ways that UK government can improve and repair the investing environment for private investors but the real culprit has been the demise of the once great exchange that embraced share ownership with a direct connect to companies traded. Many of the regulatory supported investment and trading operations and ideas created since ‘Big Bang’ only support the City interests rather than Industry as a whole. The recent scrapping of Stamp Duty for AIM stocks albeit a good idea misses one important point. If brokers are no longer being encouraged to support this end of the market due to new age risk and suitability rules then the tax incentive will be lost to many.

Looking at the executives running the new replacement regulator, Financial Conduct Authority (FCA) I cannot believe that I’m the only one who has noticed the appalling lack of market knowledge at the VERY highest level.

Since June when I left the exchange due to my abhorence of RDR I have tried to engage with many about these fears but in my view (for record I worked across markets for 36 years and personally conducted over 40,000 investment trades so I think I have some knowledge) it is imperative for the UK economy and its overseas interests to reflect on what assisted the growth of the economy since the Industrial Revolution. In simple terms it was a MARKET or more importantly an EXCHANGE that understood its raison d’etre for existing with practitioners who knew what it meant to operate within a market. I regret to say that many of my former colleagues and counterparties simply had NO interest in anything other than the trade and the short-term profit deriving from it…all ably supported by pointless and aimless compliance personnel representing the vested interests of the regulators, the executives in many of the surviving firms and their allies —and there are many!

I believe passionately that a fair and well oiled UK economy must be supported by an exchange free of external regulation, with unlimited liability for practitioners who in return are FREE to operate in proper equity, bonds and physical derivatives, all bound together by a RULE BOOK similar to the old YELLOW BOOK that operated for over 150 years.

The current breed of regulators appear to be making alot up as they go along!

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