Ruth Porter: Fair exchanges a step in the right direction

For a long time now, this has been his key refrain. He may or may not be right, a lot of the discussion is anecdotal and the banks would argue that there is little demand among firms for borrowing.

However, even if Vince Cable is right, it could also be said that risky loans made by banks were a major contributor to the economic crisis – especially in the US – and should the Government really be artificially encouraging more bank lending that the banks themselves do not regard as profitable?

There is little coherence or logic to many of the arguments around this area of banking, regulation and lending. The Government Green Paper, released last week, is yet another example of this.

Buried in the middle of all this contradiction, however, is the kernel of a thoughtful proposal. The Lib Dem manifesto floated the idea of setting up regional stock exchanges as a way of helping SMEs access more funding. Then, this week, a Green Paper from the department of Business, Innovation and Skills requests input on the idea, within the context of trying to generate more local finance for businesses.

The idea of regional stock exchanges is not a new or terribly radical one but it could be a useful way of drawing local investment into local businesses in which there is a special local interest or which are too small to list on the London Stock Exchange or Alternative Investment Market.

However, in welcoming this idea, I would suggest one major caveat. Regional exchanges will be worthwhile only if they are allowed to regulate themselves. They should not be subject to the same bureaucratic and expensive statutory regulation as the London Stock Exchange.

At the moment, exchanges are subject to extensive regulation from the EU, as well as from the FSA. Even when the FSA is abolished, this function will be maintained within another body.

This high level of centralised regulation is inefficient and counter-productive. A stock exchange has a natural incentive to ensure that its rules and requirements are structured in such a way that safeguards both the investors and the businesses whose shares are quoted on the exchange. Their reputation and survival depends on it.

Furthermore, when there is competition between regional exchanges, good self-regulation becomes even more of an imperative. Investors and businesses would use another exchange if they felt the one in their region was not appropriately regulated.

It is then vital, if the coalition goes ahead with this idea, that it ensures these regional stock exchanges are free from centralised regulation.

The old provincial exchanges that used to exist in Britain operated independently and free from state control. Springing up organically, the regional exchanges of Liverpool and Manchester, in 1836, were some of the earliest, with Leeds following suit in 1844. It wasn't until 1973 that the remaining regional exchanges merged with the London Stock Exchange. Regional exchanges, and then the London Stock Exchange, functioned exceptionally smoothly, governing their own affairs without state interference.

Then, in 1986, statutory regulation was imposed – to the detriment of all concerned. This was then reinforced by the creation of the FSA. Statutory regulation has failed to reduce scandals and it bears most heavily on small firms.

If modern regional exchanges were to be subject to the same level of intrusive state regulation, there would be no point in their re-forming.

Regional stock exchanges may not be the best solution to small company finance. Other problems need looking at, too, but, we have nothing to lose by trying, and this fledgling idea could become a model for the deregulation of company finance elsewhere.

Vince Cable shares a concern with Alistair Darling, the former Chancellor, that there is too little competition in the banking sector; they both look to yet more heavy handed regulation as the way of

dealing with this.

It's time we realised that more regulation is not good regulation.

But, while the Government meddles with the banking system, it should implement the idea of regional stock exchanges substantially free of statutory regulation.

De-regulating the provision of non-bank finance to small companies would be a small step in the right direction.

Ruth Porter is communications manager of the Institute of Economic Affairs.