This morning saw the launch of a plan for giving away bank shares from Liberal Democrat MP Stephen Williams. Laid out in a pamphlet published by CentreForum, Stephen Williams’s plan is to give shares owned by the government in the banks to everyone on the electoral register. A floor would be set so the shares could not be sold until they had passed the price paid by the government and individuals would only keep any gains made above that floor price. In other words, as the shares rise in price and get sold the government gets back the funds it put into the banks and, if the banks do well, the public gets to profit from that.

It’s a neat idea, and one of the first substantive plans for what the government could do with its 83% of RBS and 41% of Lloyds. As is to be expected with any plan for such a controversial area, it raises a number of questions.

First, the government only gets back the money put into the banks if people sell their shares. If people hold on to them, those funds do not come back to government – and in particular that means a large source of possible government funds ends up being highly dependent on what can be very volatile stock markets. Such uncertainty would apply to other policies too – including direct government selling of shares on the stock market – but it is still an issue.

Second, even leaving aside the uncertainty, would this route raise more or less money for the government than a straight-forward sell off of shares? Stephen Williams and colleagues think so, as their Q&A explains,

The absolute and relative size of the Government’s shareholdings in Lloyds Group, and RBS make it conventional exit through share sales impossible at a reasonable price. In other words, shares would have to be sold at a substantial discount over many transactions over a number of years. This increases the risk that the public would never get its money back – as has happened in the US, where the Obama Administration has lost at least $10bn in selling a tranche of its GM shares.

Third, the degree to which shareholders have failed to hold boards of directors to account has been bad enough even with big institutional shareholders, let alone with mass small-scale shareholdings. But given how poor institutional shareholders have been, would this situation really be that much worse?

Fourth, by giving the same amount of shares to everyone, there is a neat piece of simplicity combined with fairness. Because the sale of shares would be subject to capital gains tax, the initial allocation of shares would have the virtue of simplicity whilst subsequent capital gains tax revenues would mean that the richest end up paying more of what they have been given back in tax.

Fifth, although I said “simplicity”, relying on the electoral registers raises issues of principle and practicality. The principle is about whether the electoral register should be used solely for electoral purposes. The practicality is about the accuracy of the electoral register. The offer of money in return for being on the register would most likely be an extra incentive for people to register, but what about then deliberate fraudulent register entries? Having a system that is resistant to fraud makes the idea not quite as simple as it looks at first.

(Strictly speaking, it’s not just the electoral register the proposal uses. As the Q&A explains, shares would go to “those on the electoral roll for UK elections who are resident in the UK for tax purposes. In addition, non-UK nationals serving in HM Forces and their dependents should be eligible on the same basis”.)

In other words, there are plenty of questions that the scheme raises, but as this is a proposal designed to help set the political agenda rather than a finely worked out imminent piece of legislation, that is as much a compliment as anything else. It’s a good contribution to the debate.

The Facebook page to support this proposal is at http://www.facebook.com/supportpublicshares.

Getting your share of the banks: Stephen Williams