Can the City ever be good for Society?
– The Rt Hon David Davis MP and The Rt Hon the Lord McFall of Alcluith.
Since the Financial Crash in 2008, the City has quite rightly received its fair share of criticism for what went wrong. There are simply no excuses for the pain and misery they have caused to millions of citizens in this country and Lord Adair Turner’s (as Chairman of the FSA) words in 2009 that “The City has grown too big and parts of it are “socially useless” seemed to strike a chord with the public at large. Meanwhile, the topic of bankers bonuses still makes the blood boil of ordinary citizens of this country and they struggle to comprehend why senior bankers didn’t go to prison for the crisis they caused.
So five years later and after numerous Inquiries and changes in legislation to help prevent this situation ever occurring again – is there any way the City can ever build up a positive image in the eyes of the public?
The answer requires a high degree of clarity about the activities of the financial sector. We tend to view financial companies as successful in direct proportion to their profitability, without thinking too hard about where their profit comes from. If that profitability is a result of say, abstracting profits from over complex multi-layer investment instruments, or hiding risks by creative accounting, or mis-selling unnecessary insurance or hedging policies to customers, then in those circumstances profitability is not a measure of public good. If, on the other hand the profits arise from financing business growth, or creating affordable, low risk mortgages, or financing valuable infrastructure, then it is a good measure.
It is important in the coming years that the financial sector is more imaginative about generating real social and economic value. One area in which this is happening is in social housing, with the recent announcement that the Prudential is spearheading a project worth almost £300m to finance the construction of around 1000 new homes. The insurer will provide £156m to approximately 17 local housing associations in Wales, which will unlock a further £120m of publicly funded construction grants. Prudential’s long-term insurance funds will provide the majority of the funding for the new homes in an innovative arrangement and this partnership is a new type of collective arrangement between the private and public sector that opens up more institutional long-term finance to smaller housing associations. Construction on the much needed new homes across Wales has already begun and the Welsh Government is clearly delighted to be involved in such a Partnership. This is the first project Prudential is believed to have become involved in since the insurance industry’s £25bn pledge last December to fund British infrastructure projects.
The £25billion pledge, over five years, was made by a group of six insurers, including Prudential, Legal & General, Aviva, Standard Life, Scottish Widows and Friends Life as part of the government’s “National Infrastructure Plan” back in December and it is encouraging that resolution of the European Union’s Solvency II directive in November has not prevented them from investing significantly in infrastructure.
This is, we hope, the shape of things to come and that is why we have founded ‘New City Agenda’ as a forum to give fresh thinking to issues in financial services, and assist in the development of appropriate and sustainable public policy. It is a response to the lack of new ideas and challenging perspectives emerging from current analyses of the issues facing the industry, government and consumers. Over the next few months we will be looking at imaginative schemes to ensure that the interests of the City, Government and consumers are aligned.
In the run up to the General Election next year, all political parties will be looking for financial institutions to become involved in infrastructure projects since we need infrastructure to deliver strong, sustainable economic growth for the UK. Social housing is clearly a good area to start as not only do we need new affordable housing but we need community regeneration to come with it. There are other areas, such as school building for example, which will need consideration but if these businesses can work together with government to leverage investment into areas of most need then that can only be a good thing for society.
In parallel with this we are likely to see more innovation in sourcing finance for business, and in due course more competition and therefore more diversity in conventional banking. It is important that throughout this period of transformation we keep a clear perspective of the purposes of the financial sector, so that it does not again veer off into avenues that deliver high incomes for bankers but negative returns for society. If we manage to achieve that “New City Agenda” will have fulfilled its purpose.