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As the old ways of turning a profit become more difficult – from assembling cars to selling soap powder – politicians of all stripes want the City to inject some dynamism into the economy.
From Labour to Reform, the siren call of London’s financial district is strong. If only, they ask, the wheels of the banking industry could be cranked to spin faster, surely much more money could be generated and we would all be rich.
While Rachel Reeves boasted of the huge benefit to economic growth from public investments in rail and renewable energy as central pillars of the government’s spending review, in truth it is not enough to propel the economy forward.
To generate the kind of income that will pay for the next 30 years of an ageing society, plans to link Manchester and Liverpool by a marginally faster and more reliable train, though good in itself, is not the answer. The Treasury knows it is just an upgrade to existing services and will deliver only incremental returns.
To turbocharge growth, the chancellor wants private money to take the lead, partnering government to share the burden of building bridges and tunnels and spurring investments in whizzy new ventures.
And as a start, the Treasury wants the shackles taken off the bankers so they can become more inventive in the way they make money, taking risks that were previously frowned upon, if not banned, and rewarding themselves accordingly.
It is 18 years since Northern Rock’s high-risk mortgage lending began to unravel and 17 years since Lehman Brothers went bust. Long enough, it seems, for memories to fade, and with them concerns about the damaging consequences of light-touch regulation.
That said, it’s easy to see why the temptation to let the banks loose is back on the agenda. UK banks are among the most profitable in Europe and London plays host to the largest number of foreign banks. The UK’s unicorn businesses – those privately held startup companies worth more than £1bn – rank in number behind only the US, India and China.
Some startups are considered to be at the forefront of the financial technology boom, including Revolut and Monzo. What could be better for Britain than to leverage a fintech industry that already has a worldwide reputation?
Revolut has championed handling funds invested in cryptocurrencies, and for this service, and its banking and wealth management, it has emerged as the most successful European fintech of the past decade. It was valued at $45bn last year. And there is no stopping the chief executive, co-founder and 25% owner, Nikolay Storonsky. He plans to expand into mortgages and consumer lending to challenge the major lenders, as well as growing in the US.
Monzo is the digital bank best known for its coral pink debit cards. After 10 years, the company announced its first profit last year, of £15.4m, after more than doubling revenues to almost £900m.
Reeves also wants pension funds to take more risks, which is a boon for an asset management industry that has fallen out of favour with the public in recent years due to its high charges and failure to deliver returns that better passive investments.
Last week, the House of Lords financial services regulation committee gave Labour’s mission a boost. It attacked the main City watchdogs – the Financial Conduct Authority and the Prudential Regulation Authority – for having “a deeply entrenched culture of risk aversion”. In a report that the Treasury will have privately welcomed, the committee said the regulators were partly to blame for holding back economic growth.
If the FCA and PRA, which have already pledged to reduce the paperwork and oversight of the City, become more trusting of its ability to manage risk, there is likely to be a sugar rush of activity, much as there was during the noughties.
Labour has helped get the ball rolling by lifting the bankers’ bonus cap, to allow publicly listed banks to join the bonanza of rewards enjoyed by executives in Revolut and Monzo.
Monzo may have made only £15.4m profit but this modest sum was not to be re-invested. It was enough to warrant big payouts, including a £12m bag of cash and shares that Reuters said most likely went to the chief executive, TS Anil.
Underscoring how light-touch regulation is matched by executive pay bonanzas, a report last month by the jobs website eFinancialCareers found that bonuses in the UK’s investment banks had risen by 26% year on year, beating their equivalents in Asia, Europe and the US. The average bonus payout for a City executive was about £110,000. And the trickle-down effect works in finance. At junior levels, bonuses increased by as much as 133%, the survey found.
Labour’s backbench MPs know how this play ends. After all the partying and profit-making, there will be a severe hangover. And when that happens, the taxpayer is asked to save the day. Somehow, the profits of the financial sector belong to the bosses and the losses belong to the people.
