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SPEECH BY BARBARA ROCHE MP, FINANCIAL SECRETARY TO THE TREASURY, AT THE CISCO CONFERENCE, MONDAY 29 MARCH 1999

SQCs: Removing the barriers to growth

Role of SQCs

1. You are only too aware of the importance and benefits of the SQC sector of UK plc. And as a former small firms minister in DTI - and now Treasury Minister responsible for growth - I too very much recognise the vital role this sector can play in the economy.



2. The 1500 or so smaller quoted companies make up over 80% of the total number of listed companies - and are a diverse group of companies with market capitalisations ranging from less than £1 million, to several hundred million - and in a full range of industries including financial services, high-tech, consumer goods and utilities.



3. SQCs provide new ideas, products and services, as well as jobs. The sector allows smaller private companies to access the capital they need to finance further growth. And through bringing in new ideas and challenging larger firms, they provide further competitive edge that is vital for a successful and dynamic economy.



4. And of course SQCs provide 2 million jobs - 10 per cent of total private sector employment. And profits of £9 billion a year.

1. But in recent times, the performance of the sector as a whole has not matched expectations. Looking across the sector as a whole, that is true both in terms of valuations on the market and in terms of the returns earned by companies. I have just described the importance of the SQC sector in our economy - so it is clear we need to look at how to encourage the SQC sector can fulfill its potential - to the benefit of everyone in the country.



2. That was why the then Paymaster General Geoffrey Robinson set up a working group to look at potential barriers facing SQCs - I am pleased to see a number of those who sat on the working group here today - and I would like to record my thanks for their useful work.



3. Today I want to set out how the Government is addressing some of the issues raised in the Working Group's report. Of course governments have an important role to play in laying down the foundations for a dynamic and prosperous SQC sector. But it is ultimately the sector itself that will determine its own future. You have the creative potential, and the knowledge of how to use and exploit it.

Foundations for growth - stability

1. The first thing we as Government can do is to put in place a framework of macroeconomic stability. When we came into office, we first, to put in place a new monetary framework. And second, we established a new fiscal framework with rules that achieve discipline and prudence.



2. In both cases, for monetary and fiscal policy, we have frameworks with clear objectives - the inflation target and the fiscal rules. Both have clear procedures - independence for the Bank of England and the Code for Fiscal Stability. And both are transparency - publication of MPC minutes and parliamentary scrutiny.



3. These two years have not been easy. But at the end of them, for the first time in a generation, Britain can look forward to sustained low inflation. Long term interest rates are at their lowest for over 40 years. Mortgage rates are at their lowest for 33 years. And this year the budget will be in surplus.

Foundations for growth

1. Stability is the essential foundation, but it is only the foundation. For an economy fit the 21^st century we must also strive for the higher levels of productivity and investment that are the foundation of a modern, knowledge based economy. That means we must encourage each and every business in this country - including the SQC sector - to try to maximise its performance.



2. Government has a role here. We are cutting taxes so that more businesses - large and small - will invest, grow and prosper.



3. When we came into government, corporation tax for companies was 33 per cent. From April 1st we will further reduce the main rate of corporation tax from 31p to 30p - the lowest rate in the history of British corporation tax - the lowest rate of any major country in Europe - and the lowest rate of any major industrialised country.



4. And we are cutting taxes for small companies too. When we came into government, small companies tax was 23p. From April over 350,000 companies will benefit from the further reduction to 20p, including some smaller companies listed on AIM and the main market.



5. But these are tax assurances not just for a year. We have made an unprecedented commitment that tax rates will be 30, 20 and 10 - or lower - for the life of this parliament.



6. The SQC Working Group report itself called for more tax breaks for individual investors. We have carefully considered the groups findings, and have concluded that it would not be cost effective to divert tax resources into extra reliefs for SQCs generally. They would dilute the measures already in place to encourage private capital flow into smaller companies. It is those companies that face the greatest difficulty in raising finance, and those companies where both the risks and potential gains are typically greatest.



7. Our reform of capital gains tax in last years Budget introduces a taper which explicitly rewards long-term investment. In this Budget, we encourage serial investment in smaller companies through the Enterprise Investment Scheme by giving CGT taper relief in a gain deferred from one EIS investment to another.

Competition

1. The sharpest spur to enterprise, the ingredient too often missing, is competition. One of the conclusions emerging from our productivity review was that competition is not only the best stimulus for innovation and efficiency but the best prospect for a better deal for consumers.



2. On 10 March, Trade and Industry Secretary Stephen Byers set out a new competition policy for Britain that will work in the best-term interests of both the economy and consumers. With an extra 20 per cent resources, the Office of Fair Trading will be charged with a pro-active remit to root out cartels and restrictive behaviour.

Banking Review

1. Competition in banking is also critical to the success of every business, including small and medium sized enterprises. And that is why the Chancellor asked the banks to work with Don Cruickshank to assess what steps can be taken to more effectively serve the needs of businesses in the economy.

Improving links between company performance and individual rewards

1. A key incentive in raising the performance of all companies is improving the links between company performance and individual rewards. Giving those who create wealth a greater stake in the wealth they create can also help foster a dynamic enterprise economy.

Employee shares

1. Research evidence suggests that employee share ownership has a positive effect on employee productivity, particularly when combined with other means of active employer participation. This is good for long-term company performance and so good for the economy.



2. And so in the Budget, we announced a new all-employee share ownership scheme. Under the new programme, employees will be able, for the first time, to buy shares in their own companies from their pre-tax income. And every employer will be able to match, tax-free, what each employee buys.



3. This will be the most tax-advantaged all-employee share ownership scheme Britain has ever had. And the only condition will be that it is offered across the company's entire workforce.



4. The aim of this programme is to double the number of companies offering share ownership schemes. Most FTSE-350 companies already have share ownership schemes. So to reach the target, we will need to see more ESO's in the SQC sector.



5. The Inland Revenue will be working with a Business Advisory Group to develop the scheme and to develop existing share ownership schemes. The group will specifically consider the specific needs of smaller and unquoted companies and how these might be met.

Enterprise Management Incentive

1. We have also looked at how to attract more skilled managers into smaller, riskier companies.

1. The proposed Enterprise Management Incentive would provide tax relief for certain forms of equity based remuneration in smaller higher-risk trading companies, broadly those meeting the criteria for VCTs and EIS. It will give tax advantages to allow the award of equity worth up to £100,000 given as part of a remuneration package for key managers.



2. The Inland Revenue published a technical note on 10 March, outlining the details of the scheme. Again I urge you to let us know what you think about these proposals.

Improving the flow of information from company to investor

1. A key recommendation of the SQC report commissioned by Geoffrey Robinson was to increase the flow of information between company and investor. Several initiatives in this direction are already under way -and the Government has played a key role in developments.



2. A key recommendation of the SQC working group is that the Treasury should continue to promote fair competition in the provision of primary and secondary markets.



3. The draft Financial Services and Markets Bill requires the Financial Services Authority to take account of competition when carrying out its duties, and also makes for provision for competition scrutiny of recognised exchanges.



4. I welcome the London Stock Exchange's commitment to ensure information about quoted companies goes on the Internet, to the potential benefit of both investors and companies.



5. Now that shares, insurance and banking can be promoted on the Internet, the old rules on investment advertisements and cold calling are becoming out of date. And so we need a new regime of financial promotion that is technologically neutral and can quickly adapt to future changes.



6. As part of the Financial Services and Markets Bill, the Treasury two weeks ago published a consultation document on the financial promotion regime. We want to take account of the views of consumers, financial services firms and companies - especially small companies - seeking to raise finance.



7. I urge you to look at our proposals - and let us know what you think. This is an important element of the information flow between investors and companies - and so it is important we get it right.



8. My previous department, the DTI, have sponsored a report which sets out best practice for better communication between SQCs and institutional investors. Called "Creating Quality Dialogue", and chaired by Paul Myners of the NatWest Group, this report sets out some very useful practical steps - and I would urge you all to consider its suggestions.

Institutional issues

1. Improving the flow of information between company and investor is key. However, this is just one aspect of a broader system, not all of which always operates as well as it might.



2. Just as we want to see effective communications and accountability between companies and their shareholders, we want to see similarly effective relationships higher up the chain - between fund managers and the institutions which employ them, and ultimately with the investors in those institutions themselves. It is through these relationships that the incentives of those making investment decisions are set and their attitudes determined.



3. The Government thinks that there may be room for improvement here. For example, should fund managers and institutions be expected to set out their objectives clearly, how should they assess performance, both short and long-term, what should be their attitude to venture capital, and their basis for assessing performance?



4. These developments would support, and go with the grain of rational, commercial decision making. These are important issues, particularly for the SQC sector, and we would be interested to have your views on how improvements to the institutional structure could be achieved.

Conclusions

1. This Government is committed to building a dynamic and enterprising economy: a thriving smaller quoted company sector is vital to achieving this.



2. We understand that the SQC sector faces some very difficult challenges at present - as many major investors focus increasingly on larger investments, as markets for capital increasingly become European and global, and as some of the more traditional industrial sectors become less popular with investors.



3. The Government has carefully considered the SQC Working Group Report - and in some areas we brought forward proposals in the Budget. We have reduced tax rates; we are taking steps to promote competition; and to improve the flow of information between investors and companies.



4. The Government believes that it has a key role to play in helping SQCs address the challenges that face them. But we don't believe that we can solve those problems ourselves, or that we should try to do so - anything we can do depends ultimately on you, the people who run SQCs and the people who invest in them.

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