The City is a “jewel in the crown” of the UK economy for the Conservative government, which aims to keep the sector growing by seriously weakening regulatory standards. This approach will come as no shock given the City’s current form has its roots in Margaret Thatcher’s big bang, but what is surprising is that the Labour party too is pushing for further deregulation.
In nearly 30 years campaigning on finance, I cannot recall both major political parties promoting the interests of finance so aggressively. Yes, the UK needs a successful financial sector, but deregulation and financialisation – a process whereby financial markets and institutions gain greater influence over policy and economic outcomes – is dangerous and costly for the rest of us.
History has a profound lesson for an incoming Labour government. Before the 2008 financial crisis, New Labour allowed finance to become too big by adopting a permissive approach to regulation. This left the UK one of the most exposed global economies when the credit crunch came – and people are still paying the price.
Today, mainstream banks are more resilient, but fault lines have shifted into the shadow banking system. Despite Brexit, the City remains one of the largest global financial centres and pursuing deregulation has consequences for the global financial system. Labour needs to recognise the risk of a regulatory race to the bottom.
Beyond increasing the risk of acute crises, deregulation and financialisation also cause everyday environmental, economic and social harms. The City now promotes itself as key to preventing climate catastrophe yet still generates huge fees financing climate harm. Yet, Labour won’t commit to giving financial regulators a duty to protect the environment from finance.
Financial market activities have inflated property prices, excluding younger generations from home ownership and leaving others exposed to huge mortgage debts, and pushed up private sector rents. Financialisation contributes to regional and household inequality as the huge earnings and bonuses in the finance sector outstrip the wages of ordinary workers and those with wealth gain most from rises in asset values. We have made almost no progress on financial inclusion post 2008. Millions of households have no or low savings, and so are dangerously exposed to financial shocks. The Financial Conduct Authority, the City regulator, recently found that nearly 13 million people had low financial resilience.
Banks piled into speculative activities, depriving real economy firms of much needed finance. City short-termism still hinders the ability of real economy firms to plan for the future. Company boards focus on pushing up share prices to keep investors happy (and to earn bonuses) by increasing dividends, which reduces the resources available for long-term research and development and investing in people.
Despite all we know, Labour wants finance to play an even bigger role in our lives. Private finance is a costly way to fund public policy goals. The state can raise taxes or borrow more cheaply – even when government borrowing costs are rising. Lenders and investors expect good returns for providing finance for projects and those returns have to be paid for in some way. Take Labour’s green plan. Labour had said it would invest £28bn a year in green initiatives with matched funding from private finance. By definition, using more costly private finance would push up the total cost of the green transition, feeding through to higher bills for households.
If that isn’t pro City enough, Labour would “de-risk” investments for private finance by allowing pension funds and insurers to invest alongside the British Business Bank. We face the prospect of the state underwriting the risk of losses, allowing financial institutions to bank the rewards. A case of heads the City wins, tails we lose.
So, even though deregulation and financialisation doesn’t make sense, why is it core to Labour’s economic policy? One reason may be this obsession with appearing “fiscally prudent”. In power, Labour would limit public spending, and using City finance to fund policy goals would keep costs off the state “balance sheet”. But, this is a false economy, a financial conjuring trick that would transfer higher costs to households.
Let’s hope Labour recognises the need to make the City work for the environment, real economy and society. There is still time to develop a more progressive agenda for finance.