Separating the Wheat from the Chaff in the City of London

Last night St Paul’s Institute and JustShare hosted a debate on the social usefulness of the City at St. Mary-le-Bow Church in Cheapside, a beautiful if ironic place to discuss the activities of what the Economist has termed the “banksters.”

Speaking on behalf of the City was Raquel Hughes who, despite predicting an increased emphasis on ethics and deterrents to future scandalous behaviour in the City, did not own up to the structural or cultural problems embedded in London’s financial sector. She admitted that much needs to be done to regain the trust of the sector’s customers and the UK citizenry, but was vague on identifying the source of the problems. She was of the view that higher capital requirements and a Leadership programme for young City workers would be sufficient address any issues related to immoral behaviour. She also warned us not to bash a sector which sustains  such a large number of jobs and generates tax receipts. (No need to mention the thousands of jobs lost over the course of the past few years due to the crisis the instability of the sector produced.)

Tony Greenham, head of finance and business at new economics foundation gave an impassioned speech, explaining how an enormous proportion of activities in the city are wasteful, corrupt and wealth extracting and that - crucially - it has not been fully acknowledged just how deep reforms in the City need to go. He stressed that years into this crisis, there still hasn’t been a proper identification of which activities in the City are essential and which are corrupt. He said that it’s rather a deception to conflate the banking and insurance activities of the entire UK financial industry with the investment banking activities of the City. It’s not enough to separate retail from investment banking; there are still activities in investment banking which allow bankers to gamble dangerously with other peoples’ money. He believes that those activities should take place in partnerships so that the risks of asocial financial activity are borne by the gamblers.

When asked what two changes to the City the speakers would recommend, Mr. Greenham cited the closure of tax havens, including the return of stolen money to its countries of origin and the proper taxation of the remaining funds. Secondly, he reiterated the need for the breakup of the investment banks so that casino activity is segregated into partnerships – a practice which was more common before the Big Bang of the '80s.

I asked whether shareholders have any role to play in changing the financial system in order to address the systemic problems of short-termism and instability. Ms. Hughes responded that shareholder activism was welcomed by the boards of financial institutions but I think that activism so far has been rather limited due to shareholder heterogeneity with some short-termist investors adding to the problem. The Kay Report recommends that financial intermediaries be legally required to act in the best interests of investors, subjecting them to much stricter controls on conflicts of interest. Strengthening investors’ responsibilities represents a major challenge to the status quo; those profiting from finance even as savers’ returns slump are bound to lobby vigorously. The ultimate owners of the capital may be a key source of change in the City of London.