Regulation has prevented long-term thinking among investors and financial companies, industry experts have warned.
Speaking at the unveiling of the Investment Association’s Productivity Action Plan, Andrew Ninian, director of corporate governance and engagement at the trade body, says there have been unintended consequences of regulation.
“There has been much concern that there have been some unintended consequences of taxes and regulation impediments in recent years forcing some investors not to think for the long term.”
He adds that solvency and risk regulations have led to a focus on “short term valuation issues, which could be having an impact on the ability to invest in the long term”.
Old Mutual Global Investor’s chief executive Richard Buxton agrees, adding that there have been “a lot of barriers for long-term equity investments from regulators and government”.
“There is clear evidence that regulation, especially on insurance companies and pension funds, have ended up with pro-cyclical consequences of financing things with debt and have been away from what could have been structurally helpful and good for the productivity and the economy,” he adds.
The action plan from the Investment Association lays out five main objectives, one of which is overcoming tax and regulatory impediments to the provision of long-term finance.
The paper states that the tax system incentivises businesses to use debt rather than equity finance, and in turn the financial stability of using debt becomes a focus for regulators.
For regulation there is a concern that solvency regulation is “inadvertently impeding long-term asset allocation strategies”.
Among the recommendations from the report is to review the causes of debt-bias and its effect on financial stability and pro-cyclical decision making, and ensuring that solvency and prudential regulation does not inadvertently impede investment managers from investing in a manner consistent with their clients’ long-term interests.