Insiders cannot provide answers on finance

The consultation document authored by Sir David Walker, the former regulator and investment banker, on the governance of financial institutions follows other reports led by senior City figures, including Financial Services Authority chairman Adair Turner on banking regulation and Sir Win Bischoff, former Citigroup chairman, on London’s global competitiveness.

The combined results are exactly what you would expect from asking a group of practitioners how to rectify faults that were of their own industry’s making. Their ideas are practical, sensible but, despite squeals from an industry that does not wish to appear to be getting off too lightly, uncontroversial. They are supportive of the financial services industry’s structure and locus, not questioning of it. They reflect the authors’ provenance in concentrating on making a better fist of the system that has failed rather than considering alternative structures and wider options.

This is an inevitable consequence of the government’s decision to use in­siders to lead and inform its response. Given the mess that accepting conventional wisdom got us into, it is disappointing that alternative ideas are being marginalised at the very time when they are most needed. This can be illustrated by the Bischoff re­port’s recommendation that “the government and the industry should lead an informed public debate on the role of financial services in the economy”. It is the right idea, in the wrong hands. The combination of misplaced government policy and irresponsible banking was what caused the system to fail. The notion that those deeply involved in the inception of the problem should now be entrusted with leading the public debate on its solution is astonishing.

The prime minister has recently intimated that he will learn from his mistakes. Financial services would be a fitting area for the man who was chancellor during the City’s glory days to prove that he means what he says. He could do this by rejecting the territorial claim staked out in the Bischoff report and instead commission an over-arching independent review that looks at the structure and scope of the financial services industry and the role it plays it Britain’s social and economic fabric.

Such a review would need to be crisper and less ponderous than the Royal Commissions that sat in the last century but it would still need a year or so to do a proper job. It would therefore straddle a general election and, if it was not to be a lame duck, would need to have cross-party commitment to support its work.

The composition of the review board would be crucial. The industry has suffered enough from alpha male influences, so it would be preferable if a woman, ideally from a background outside financial services, chaired the review. Members should include representatives from several constituencies, including the industry’s private and corporate consumers, trade unions and the academic world. The officials supporting the review should be drawn from a neutral government department such as the Cabinet Office rather than the City-influenced Treasury. The review should be informed by the industry, but not led by it.

Getting the mandate right would also be crucial. There is no need to ask the same questions, but it should instead provide a different framework to interpret the answers that have been received.

The crisis exposed deep-seated issues about the structure and influence of financial services in the UK. It marked the end of the 30-year free markets bubble during which time the pattern of British social and economic life was revolutionised. We need to understand the new relationship between finance and society and how that might be shaped in the future.

Questions must be asked about the post-modern institutional ownership of the corporate sector and whether this works as a governance model. Integrated financial institutions have become the norm and conflict of interest has been accepted as a fact of life. This assumption needs to be challenged. For many workers, pension pro­vision has moved from being an employer-provided certainty to a risky personal responsibility. This is a profound change in the terms of engagement between employer and employee that for years was camouflaged under the reassuring vocabulary of “defined contribution not defined benefit”.

Providing answers to these questions is no easy task for any panel to undertake and it is important not to prejudge the answers. But the industry’s performance provides a once in a generation opportunity to review the monster that it became. An independent review may decide that society does indeed need monsters, but if so it would be much more reassuring if we did not have to rely on the monster’s own word for it.

The author is a former investment banker. His latest book is Chasing Alpha: How Reckless Growth and Unchecked Ambition Ruined the City’s Golden Decade

original FT article

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