Yesterday I spoke at a Fabian Society seminar on Trust and the City. My basic argument was that our interactions with financial markets, like all meaningful relationships, have to be built on trust. Otherwise the relationship breaks down and we walk away. But, during the financial services boom the values that underpin trust - like integrity, honesty, fairness - were tossed out of the window and any notion of shared interest gave way to self interest. In place of casino capitalism, we need now to build a more principled capitalism.
To this end I made several recommendations for what the financial industry could do to re-build our trust - emphasisng that it is up to the financial services industry to regain our trust. So here are some ideas:
- - banks must pay their fair share of tax and be seen to do so
- - minutes of the remuneration committees of banks should be published
- - banks’ boards should be more representative of the communities they serve
- - shareholder votes should be more than indicative
- - AGMs should be more than box-ticking exercises
- - credit rating agencies should be reformed - those paying for their services should be investors rather than the issuers of debt.
- - banks and near-banks should publish their positions - whether they are long or short a company stock etc.
And while we might hope that enlightened self-interest could deliver the reforms needed, if it cannot, and because there is a role for co-ordination, there is an important role for regulation - both domestic and international. It is now time to put flesh on the bones of the reform urged by the Prime Minister, Chancellor, FSA and in the G20 communique. The new framework of corporate governance and institutional reform is not inevitable. It is up to us to shape it.
There were two broad themes of questions following the panel discussion: whether the retail banking business be separated from the trading arm of banking, and how can we put in place the institutional reform so needed to stop this from happening again.
On the first point, I believe that regulation should be put in place so that retail depositors’ money is not put at unacceptable risk through investing in highly leveraged and complex financial products, but that the same bank could also play in more risky markets - as long as its retail bank activities are protected. On the point about institutional reform, I think the international element is key to avoid a race to the bottom again with light-touch regulation. I also think that building a more balanced, sustainable economy will help reduce the reliance on the city, and its tax revenues. So building a stronger base in a range of industries - manufacturing, green technologies, creative and media sectors etc, will help create a more diverse economy, less beholden to the city.
Rachel Reeves is PPC for Leeds West and a former economist at the Bank of England.