Future of Financial Services - Chuka Umunna
Speech at Canary Wharf
- Check Against Delivery -
Chuka Umunna MP, Labour's Shadow Business Secretary, said:
Thank you for that introduction and thank you for inviting me here today.
The importance of the City to British business
For us, the future of financial services - the City - is incredibly important. Any potential Government hoping to take office and any current party of Opposition charged with scrutinising what the Government does, should want to see the City thrive.
It is a key business sector which - along with the associated legal, accountancy and other professional services - gives us a competitive edge and a comparative advantage due to our talent, our legal system, the liquidity of our financial markets and our time zone.
It is a sector which we look to pump oxygen into the rest of the economy, helping businesses in other sectors expand and grow.
The need for business growth was starkly highlighted in the recent Budget. We learnt that the Government is now borrowing £245bn more than it planned, with welfare spending up by £20bn and nearly one million young people unemployed. The Government’s interest seems to be exploiting our economic problems, as we have seen on welfare, rather than solving them. They are trying to blame the very families who are paying the price for the Government’s failure. What we actually need is action now to boost house building and get people back to work with a compulsory jobs guarantee. And we need a different kind of economy with a financial system that serves our businesses.
When we talk about diversifying our economy, we are not talking about reducing the size of our financial services sector but growing the size of other sectors of the economy. The financial services sector has a crucial role to play in that diversification, which is why - to coin a phrase - I am intensely unrelaxed about the problems small businesses and entrepreneurs face in dealing with our banks.
And, of course, it goes without saying that the sector performs vital utility functions for us as individuals. Like water and electricity, our banks are essential to every day life, safeguarding our deposits, providing a payment system and so on.
So my first point is this: we are unapologetically critical of the City when needs be but we cannot be anything other than pro City, given its central importance to the economy at home and paying our way in the world abroad.
Restoring the reputation of the City and rebuilding trust
Next, if the City is to continue to perform its functions – as a global financial hub and provider of finance to the real economy at home, it must command trust and confidence.
The attempted rigging of LIBOR, the gross misselling of interest rate swap products to small businesses and the payment protection insurance scandal, amongst other things, have done immeasurable damage to the international and domestic reputation of the City.
After these events, there were the usual expressions of regret from senior management, a reprimand and/or a fine from the regulator and strong adverse comment from Westminster. Yet, there was little visible collective action on the part of the sector as a whole.
Given the collective hit the sector has sustained through all these scandals, is it not time for there to be a very visible coming together of the principle players in the sector to address the ongoing reputational crisis the sector faces – a public summit of the key industry leaders where action points can be agreed and then implemented?
Yes, regulators and Government have a role to play, but supervision and regulation cannot act as a substitute for trust – you cannot regulate or legislate for being trust worthy.
So my second point is this: if the sector is to recover trust, it needs to be seen to very visibly be getting its own house in order. That is why I very much welcome today’s event.
It is why I welcome the fact that there are those who are now speaking out engaging in the public debate, leading the process of change. Anthony Jenkins at Barclays and Stephen Hester at RBS are doing this and Anthony Browne, newly installed at the British Bankers Association, has said his main mission is restoring trust. Good.
But much more needs to be done and there are still many lessons to be learnt. Barclays releasing details of £40m worth of bonuses to senior executives at the same time as the Budget announcement sent all the wrong messages and is indicative of this.
It goes without saying that politicians are not in a position to lecture on trust – we are less popular than you and we learnt the hard way after the expenses scandal, when we had to get our house in order. But at least the people saw politicians brought to book – with some of our number serving time in jail for their wrongdoing.
Particularly in respect of the LIBOR rigging scandal, it seems to me that we will not rebuild trust with the public or affect a culture change in finance until custodial sentences are imposed on those guilty of criminal wrongdoing in your sector. It cannot be right that someone who seeks to cheat the benefits system out of a couple of hundred pounds in my constituency may well be thrown into jail for doing so, but those who seek to rig the financial system and receive hundreds of thousands of pounds as a result never seem to suffer the same fate. Is not the prospect of jail for gross wrongdoing one of the best ways we can affect a culture change?
Changing culture and making our banks safe
This brings me to my third point: if our banks are to rebuild trust, we need to see a change in culture in the sector and our banks must be made safe. Never again must we be in a situation where they have the potential to bring down our entire economy; never again must the perception or reality be that the interests of those in the sector are being put ahead of the customers and beneficiaries the sector is supposed to serve.
So today, it is essential that the reforms under way to address these two interconnected issues must be completed and implemented in full.
Structural reform to separate retail from investment banking activities is not just necessary from the point of view of stability and security, it will also improve the culture in our banks. Both the Independent Commission on Banking and ongoing Parliamentary Commission on Banking have made various recommendations in this regard. We are clear: if the letter and spirit of the ICB’s proposals are not delivered and we do not see cultural change in our banks, we think full separation will be necessary.
And whilst action at the level of the institution is important, institutions are made up of individuals, which is why remuneration arrangements that create the right incentives and behaviours are important as well. The EU has led reform in this area.
But, beyond reform of pay, there must be much stronger individual responsibility for decisions made and action taken. That is why we have argued for a new code of conduct for bankers. As Ed Miliband said in his banking speech last July, just as the doctors and lawyers professions have clear rules and codes of conduct which lay down what is expected, we need the same for banking where anyone who breaks the rules can be struck off.
Of course, structural reform and stronger individual responsibility are not a panacea; we need proper resolution mechanisms, making it easier and less costly to sort out banks that get in to trouble, and greater capital and other loss absorbing capacity in our banks as well.
At this juncture I should say we should have better regulated the banking sector during our time in office but we didn’t and that is a source of regret.
In fact, mea culpa in that respect is due across the political spectrum given the consensus which existed around a more light touch approach before the crash. During the Second Reading of the Financial Services and Markets Bill in July 1999 my opposite number, Vince Cable, expressed broad support for the regulatory framework we put in place, saying its “philosophy” and “architecture” reflected “a broad consensus” – consequently neither of the two current parties of Government voted against FSMA in Opposition.
A banking system that serves the real economy
Finally, we need a banking system that better serves the real economy – one of my principal concerns as Shadow Business Secretary is that it does a better job for British industry and our small businesses.
This is not just a problem of the recent banking crisis. We have had a banking system that is too concentrated – with five banks serving nearly five million businesses – for some time. And with too little diversity of business models – where if one bank will lend you money they all will, and if one bank won’t, they all won’t.
So we would reduce the barriers to entry for challenger banks to create more choice, building on the recent proposals of the old FSA.
We are delighted that Nationwide – a mutual – will enter the market for business lending next year.
We want more sources of alternative finance, from innovations in factoring like MarketInvoice or in peer to peer lending like FundingCircle which Labour local authorities are using to invest money in local businesses.
And we are arguing for a proper British Investment Bank, with funds distributed not through the existing bank network as in the Government’s proposal, but through a new network of geographically mandated regional banks – a British version of the German Sparkassen.
Therefore my fourth and final point is that if the sector is to do a better job for our wealth creators, we need not just more competition “in” banking but more competition “to” banks as well.
Let me finish by saying this: today, I represent many City workers in my Lambeth constituency. What they do matters enormously to Britain’s place in the world and to the growth of the global economy. Having worked in the City myself for several years, I know the overwhelming majority of people there, yes, want to do well, but are hardworking, honest people who want to do a good job for our country too.
But I also see on Streatham High Road, which runs through the middle of my constituency, the struggles of the businesses in other sectors who struggle to access finance and the long term, patient capital to grow. They are my constituents too.
All we ask is that in addition to providing a global hub which helps the UK compete, our financial sector does a far better job for them at home too.