UK financial system 'must be changed': Committee seeks controls on hostile takeovers

The government should consider restricting hostile takeovers, changing the tax rules to reduce dividend payouts and overturning the entire pension funding system, the Trade and Industry select committee said yesterday.

In a report on the competitiveness of British manufacturing, it said current financial systems encouraged investors and managers to take a short-term view, and that changes were imperative. 'The worst option would be to maintain the status quo,' it added.

The committee said fund managers should have been more ready to accept dividend cuts during the recession and that managers should not link their pay to short-term financial performance. But it added that both these were a function of the system.

While rejecting a wholesale change in the UK's financial system, it also suggests that pension funds should lock in a proportion of their funds with particular companies for years, and insider shareholders should be created - for example, institutions with access to the books - to take a close interest in the company.

The report is more upbeat than most on the state of manufacturing. Low inflation means there is 'an unprecedented opportunity to leave behind decades of relative decline and restore UK manufacturing as a whole to a position as world leader'.

The committee rejected calls for tax relief on capital investment and said the state should intervene only where the market was unable to provide. These areas included funding for research and development and training.

It should help small companies by matching the service provided by the Kreditanstalt fur Wiederaufbau, the development banks that enable small firms to borrow at the same rates as large ones.

The report was welcomed by the CBI and TUC. Robin Cook, shadow trade and industry secretary, said it 'buries the government case that Britain can achieve competitiveness through low wages and poor job security'.

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