The Financial Inclusion Centre submitted a response to HM Treasury’s consultation on developing a growth and competitiveness strategy for the UK financial services sector. The submission can be found here: HMT FS Growth and Competitiveness FIC submission 121224 FINAL
Our key message is that, while we fully recognise the need for the UK to have a successful financial sector, government should not prioritise financial sector growth for the sake of it. History shows us what happens when finance is allowed to become too dominant.
The financial sector should be judged on: how well it serves the interests of the real economy, the environment, and society; and the sustainability of any growth including the terms on which it attracts overseas business.
So, we would suggest that the strategy should be articulated as having a dual purpose of creating a financial sector which: serves the interests of the real economy, environment, and society; and competes and attracts overseas business on the basis of trust, and confidence and a deserved reputation for market integrity. The emphasis should be on sustainable growth and economic, environmental, and social utility not growth per se.
One of the key concerns we have about the government’s strategy is the absence of a
comprehensive performance framework to allow for an objective evaluation of how well the sector is serving our interests. Strategies are usually accompanied by such a performance framework.
The financial regulators have been required to develop and produce a number of operating service metrics to demonstrate how well they are supporting the growth and competitiveness objective. It is quite right that Parliament and government should expect regulators to demonstrate how efficiently they execute their roles. But, operating service metrics are input and output measures. They indicate how well regulators are serving the interests of the firms they regulate. They tell us little about how well regulated markets are serving our interests and, in turn, how effective financial regulators are at ensuring that those markets work.
As the Financial Inclusion Centre said in its submission to the House of
Lords Industry and Regulators Committee report on the accountability of UK regulators: “regulators should be judged on how well they make the industries they regulate serve the interests of the real economy, environment and society, not on how well they serve the interests of regulated industries”.
There are numerous reports published by industry trade bodies and consultants extolling the benefits of the financial sector to the UK economy. But, we are not aware of any regular reports which assess how well the ‘City’ serves the interests of the real economy, environment, and society (including households).
In a forthcoming report, we are proposing a new performance framework to allow
stakeholders to measure how well finance serves the interests of: consumers and households; the real economy, business with a focus on SMEs and microbusinesses, regional and local economies; and environmental and social goals. Specifically, we have developed a set of performance outcomes to track and measure how well finance meets the needs of those interests. We have urged the Government to deveolop an objective, comprehensive performance framework to accompany the strategy for the sector.