A 70-page report by the Institute for Public Policy Research, Don’t Bank On It: The Financialisation of the UK Economy, claims that while the UK’s financial services industry is an important source of earnings for the UK, its performance has not benefited the rest of the economy.
Tony Dolphin, the report’s author and senior economist for the IPPR, said that the industry had been the main driver in the process of rent extraction – where an organisation makes a profit by manipulating the economy, rather than by creating new wealth, and without contributing to a society.
He also claimed that massive increases in income for those at the top of the industry had affected pay inequality in the economy as a whole, and suggested that directors should be held responsible for losses.
Laying out recommendations to reform the financial services industry, he also called for increased transparency and competition.
The proposals included:
• Retail and investment banking activities should be split into separate organisations.
• Competition in retail banking should be increased by reducing barriers to entry.
• Risk-taking in investment banking should be reduced by, for example, making senior directors and managers liable for financial loss when things go wrong.
• A British investment bank should be set up to fill the financing gaps left by commercial banks.
• Investors should stop paying high fees for what can only, on average, be investment performance in line with the market.
• More should be done to make the case for wide-ranging financial transaction taxes and to explore ways to minimise avoidance.
• The overall level of credit in the economy, in particular speculative credit, should be controlled.
Michael Mainelli, chairman of financial consultancy Z/Yen, agreed that banks should be split up, competition should be increased and risk-taking should be reduced by making managers liable for losses.
However he disagreed with the introduction of financial taxes, claiming “tax is tax and hypothecating it never works, pure posturing”. He also disagreed with the launch of a British investment bank, stating it would displace private sector initiatives.
Ashley Clark, director of London-based needanadviser.com, said: “These proposals seem very similar to those announced within the European Stability Mechanism treaty.
“Some of the proposals make sense, especially when talking about accountability for regulators and senior officials at high-risk consumer detriment firms such as banks, and I agree they should be broken up. The difficulty with this is that it will almost certainly spell the end of free banking in the UK.”