The finance industry is the only one that regularly needs to be bailed out by taxpayers
Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and a Labour member of the House of Lords.
Earlier this week, the Office of the Complaints Commissioner criticised the beleaguered Financial Conduct Authority, the UK’s financial regulatory body, for its failures in regulating Keydata Investment Services Ltd, another long-running City scandal. So far, £330m has been paid in compensation to investors and more is likely to follow after it entered administration.
Keydata is the latest example in a steady stream of financial scandals, such as London Capital and Finance, Connaught, Woodford, Blackmore, HBOS and RBS frauds, mis-selling of financial products and rigging of the interest and exchange rates. The bloated finance industry is a burden on the UK economy and its vital that its size and power is tamed.
We all use bank accounts, debit and credit cards, foreign currencies, pension and insurance services, loans, overdraft and mortgages, and need a finance industry. What we don’t need is fraud and unrestrained speculation, which has fleeced innocent people and misused scarce economic resources. The finance industry is the only one that regularly needs to be bailed out by taxpayers. At the height of the 2007-08 crisis, the government committed £1,162bn of financial supportto prop-up banks.
The recent scandals are not merely an aberration. The UK has had a finance industry crisis in every decade since the 1970s which showed that leading businesses indulged in frauds. They gambled people’s money away on clever bets with disastrous outcomes for the rest of us.
The 1970s secondary banking crashexposed frauds and fiddles at banks and insurance companies. The government bailed out the industry. The 1980s revealed frauds at Lloyd’s. Johnson Matthey Bank collapsed under the weight of fraud and the Bank of England organised a rescue. The 1990s were notable for frauds at Barlow Clowes, Dunsdale and Barings. The Bank of Credit and Commerce International (BCCI) was the site of the biggest banking fraud of the twentieth century though it is yet to be investigated.
The 2007-08 Financial Crash
Then came the 2007-08 crash. The values prevailing in the City of London were summed up in a government commissioned report on the share price rigging scandal at Guinness, which said that City boardrooms have ‘firstly, the cynical disregard of laws and regulations; secondly the cavalier misuse of company monies; thirdly, a contempt for truth and common honesty’. Little has changed.
Undeterred, successive governments have relentlessly promoted and protected the finance industry and neglected its impact on the rest of the economy. During the recent parliamentary debateson the Financial Services Bill, the government opposed calls for inquiries into abuses and regulatory failures.
The government and supporters of the finance industry exaggerated the economic contribution of the finance industry. For example, they claimed that that the industry provides “11% of tax revenues” which is about £75.5bn a year. This is false.
The figure is not provided by HMRC but by CityUK, a lobbying organisation funded by financial conglomerate and, big accountancy and law firms. The £75.5bn (new data now says £75.6bn) is conjured up by PricewaterhouseCoopersand cannot be independently corroborated. Ministers failed to tell parliament that only £34.1bn was directly borne by the finance industry and the rest was collected from employees and customers in the form of PAYE, VAT and other payments i.e. the industry did not directly bear it. There was no mention of the damage inflicted by financial scandals.
Research shows that between 1995 and 2015 the scandal-ridden finance industry made a negative contribution of £4,500bnto the UK economy. This is equivalent to around £67,500 for every woman, man and child.
Rather than a boon, the bloated finance industry is a curse. Its bailouts have delivered never-ending austerity and decimated household budgets and investment in public services.
The finance curse has skewed economic and social development. Thirty years ago, many UK universities delivered degrees in science, engineering and mathematics. Today, with the expansion of the finance industry, that number has shrunk. Almost all universities offer degrees in accounting and finance.
Young graduates are making a career in accounting and finance, starving science and engineering of scarce resources and preventing the development of manufacturing and new technologies. The UK has nearly 375,000 professionally qualified accountants, almost the highest per capita in the world. Yet there are numerous accounting and fraud scandals.
The finance industry has made the UK the home of a rampant illicit financial flows industry which has created bubbles and instability in the property, securities, arts and other markets. People’s pensions, savings and investments are increasingly plundered.
The post-covid economic recovery has begun but the full potential will not be realised without reducing the size and power of the finance industry.
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