In the years before the 2008 financial crash, Britain allowed the development of a financial system which was paying bankers handsomely for taking too many risks. It had grown so large that the then recently appointed head of the City regulator, Adair Turner, described much of the Square Mile’s activities as “socially useless”. Memories are short in government, however. The City reforms proposed earlier this month by the chancellor, Jeremy Hunt, will unfortunately squash whatever useful functions finance provides in favour of its useless ones.
Britain’s departure from the EU should have been an opportunity to rethink the country’s stagnant economic model and reduce its reliance on the City. Instead the finance sector has used its influence to see off any threats to its dominance and then loosen the bonds that currently constrain it. Whatever the promises to tame finance, little has changed. The sector remains the same size, as a proportion of UK economic activity, as it did in 2008. In some ways it’s got better for bankers. Their bonuses have doubled. The banks that were deemed “too big to fail” are now even bigger than they were.
The plans unveiled by Mr Hunt this month included more than 30 reforms to financial services regulation that would help make Britain “competitive”, specifically giving the City watchdog that as an objective. A similar direction was made to regulators in the run-up to 2008 – surely a warning from the past of how risky this approach could be. The government’s package also seeks to replace some safeguards designed to prevent the risky lending and investment practices that contributed to the financial crisis. Sir John Vickers, the economist who led the inquiry into the UK banking industry after the 2008 crisis, warned that the chancellor may be taking Britain down an “extremely dangerous path”. It’s hard to disagree.
It’s been more than a decade since the world’s financial system was brought to its knees and had to be bailed out by governments at a cost of trillions. Millions of people lost their jobs or suffered from lower living standards because of the recession that followed the banking crisis. Yet almost no bankers have faced legal sanctions for their part in the collapse. The UK introduced a law in 2016 allowing senior bankers to be jailed for up to seven years for taking reckless decisions that cause their institution to fail. But since then not a single senior manager of a bank has even been banned. Now Mr Hunt wants to water down the law. This would be a mistake. As Andy Verity, the BBC economics correspondent, has argued, the current regime ought to be strengthened, not weakened; he points out that there is no responsibility placed on bank directors for letting criminals launder their ill-gotten gains.
Underlying these reforms is the fact that financial services in this country lost their advantaged access to EU markets. Ministers have responded by deregulating to make it cheaper, and riskier, to do City deals here to keep the hot money flowing. Banks were once about providing capital for productive companies. A firm would issue shares or bonds and financiers would make sure capital was available. Investors would bet on firms making money, but their incentive was taking ownership stakes. It would be better to return to this model rather than provide an accelerant for casino-like practices that predominate today. Mr Hunt should be regulating finance more, not less. Shadow banking, a hidden world of bond funds and cryptocurrencies, lacks meaningful oversight.
In the next financial crisis, it may not be clear to regulators what is owed and by whom and to whom. If a big bubble bursts in shadow banking, which now accounts for nearly half of all financial assets globally, it risks the deepest economic slump ever seen.
