The finance curse is devouring the UK

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

The finance industry now controls significant parts of the UK economy. It extracts wealth, destroys jobs and weakens economic resilience. Governments go to extraordinary lengths to promote and protect the finance industry, whilst neglecting other productive areas, such as manufacturing.

Obsession with Finance

Not so long ago, finance industry was mainly about loans, overdrafts, debit/credit cards, insurances and pensions, which we are all accustomed to. But investors wanted more. So, banks gambled on financial horses and committed frauds. The result was a secondary banking crash in the mid-1970s. The state bailed out banks, insurance and property companies. Governments remained besotted with the finance industry. The UK had a banking crisis in every decade since the 1970s with entities such as Johnson Matthey, Barlow Clowes, Barings, Bank of Credit and Credit International and British & Commonwealth Bank making headlines.

In 1986, the government deregulated finance. People continued to be ripped-off by mis-selling of endowment mortgages, investment bonds, split-capital investment trusts, precipice bonds, interest rate swaps, self-invested personal pensions, payment protection insurance, pensions, and other products. Reckless lending, speculation and low capital requirements became the mantra for rejuvenating the economy. Lehman Brothers and Bear Stearns led the stampede. Building societies such as Alliance and Leicester, Bradford & Bingley, HBOS and Northern Rock joined the chase for easy profits and converted to banks. All collapsed and in 2007-08 the crisis rapidly spread to the entire economy.

The state provided £1,162bn (£133bn cash and 1,029bn guarantees) to rescue banks, and £895bn of quantitative easing to stimulate financial markets. The economy is yet to recover. The average real wage has hardly changed since 2008. Between 1995 and 2015, the finance industry made a negative contribution of £4,500bn to the UK economy, effectively wiping out 2.5 years of gross domestic product. 

After the crash some reforms were introduced, including higher capital requirements, closer monitoring by regulators, ring-fencing of retail from speculative banking and a cap of bankers’ bonuses. This was not accompanied by any attempt to rethink finance even though some 40% of the world’s dirty money is laundered through London and UK Crown dependencies. Governments permitted unregulated shadow banking, which includes private equity and hedge funds, to expand and devour the economy.

Devouring the Economy

Private equity takes over existing businesses with finance from banks, insurance companies, pension funds and wealthy individuals seeking higher returns. It acquires control but injects little share capital. Takeover targets are loaded with the secured debt, often routed through opaque offshore entities, and are expected to pay it off. Financial engineering, asset-stripping, staffing and wage cuts, dumping liabilities and tax abuse are key elements of the business model. When businesses are collapsed, private equity and banks, as secured creditors, walk away with most of the proceeds from the sale of the business assets, leaving little for unsecured creditors and pension schemes.

The list of private equity victims is long, and includes entities such as Bernard Matthews, Body Shop, Byron Burger, Casual Dining, Cath Kidson, Claire’s, Comet. Debenhams, Flybe, Four Seasons Health Care, Homebase, HMV, Maplin, Monarch Airlines, The Original Factory Shop, Payless Shoes, Poundworld, Silentnight, Southern Cross, Thomas Cook, TM Lewin and Toys “R” Us. Thousands of jobs have been lost, creditors have not been paid, supply chains have been destroyed, workers have lost some of their pension rights, town centres have been decimated and the country’s tax base has been eroded.

Private equity now controls large swathes of the UK economy including AA, ASDA, Bella Italia, the Blackpool Tower, Center Parcs, Legoland, Morrisons, Travelodge and Zizi. It has extensive stake in UK airports, seaports, hospitals, care homes, law and accountancy firms, football teams, housing, GP surgeries, veterinary services, dental services, motorway service stations, energy networks and water companies. 

Thames Water never recovered from its 2006-2017 ownership by a private equity consortium led by Macquarie Group. It extracted annual returns of between 15.5% and 19% a year by dumping raw sewage in rivers and by neglecting investment. To date, Thames Water has paid out £10.4bn in dividends since privatisation in 1989. Despite inflation-busting price rises, it has not built a single new reservoir since 1989. Despite changes in ownership, Thames Water continues with the extractive business model. It is deeply embedded in the water industry. Private equity also has a stake in Northumbrian Water, Southern Water and Yorkshire Water, and the entire sector survives by exploiting customers.

Financialization of Humanity

To appease the finance industry, governments have financialised humanity. Care and compassion have become profit centres and commodities.

Instead of expanding the capacity of the National Health Service (NHS), governments have handed contracts for eye-care to private equity-controlled entities, making profit of between 32% and 43% from NHS work.

With the NHS dentistry in disarray, people are turning to the private sector. Private equity is making inroads into the £8.4bn sector. The initial consultation fee has increased by 23% in the last two years, and the price of a simple tooth extraction has increased by 32%. Gross profit for private equity-owned My Dentist, PortmanDentex and Rodericks Dental, and Bupa Dental Services, rose by 20% year-on-year between 2023 and 2024. Profit margins are in the range of 20%-30%.

84% of children’s homes and over 80% of adult care homes in England are run by for-profit entities, increasingly controlled by financial investors. Private equity is a key player in the sector. Around £1.5bn is extracted  from the care home sector each year in the form of returns to investors. The quality of care is poor.

Since 2015, over 40 fostering agencies in England providing homes for vulnerable children have been taken over by private equity companies. The fees are double the cost of local authority placements. Profit margins for these private agencies average around 21%.

Six companies backed by private equity control 60% of the UK’s £6.3bn pet-care market. Average vet prices rose by 63% between 2016 and 2023, well above the rate of inflation. Vets working for large companies are under pressure to hit profit targets by offering repeat appointment and unnecessary treatment at exorbitant prices.

Gifts from the State

Governments bend laws to support the finance industry. Most of the post-2008 banking reforms have been reversed. Shadow banking remains unregulated and almost everything is financialised.

Millions of motorists have been mis-sold car purchase loans. As the case for possible £44bn compensation reached the Supreme Court, Chancellor Rachel Reeves made an unprecedented intervention. The Treasury sought the Court’s permission to contribute evidence to argue that high compensation could “cause considerable economic harm.” Such lobbying was rejected as the Supreme Court is solely concerned about interpretation of law. Undeterred, the Chancellor considered emergency legislation to shield lenders from claims. Ultimately, the court judgment was not severe.

Tax laws are bent to appease the finance industry. Wages are taxed at marginal rates of 20% to 45%, and earners also pay national insurance. In opposition Chancellor Rachel Reeves said that these arrangements should apply to private equity bosses too. However, the promised reform has not been delivered. The income of private equity bosses continues to be taxed as a capital gain, with maximum tax rate of 34.1%. No national insurance is charged.

Banking frauds are swept under dust-laden carpets. HBOS frauds, dating back to 2002-2007, provide an example. The Financial Conduct Authority, the Serous Fraud Office and the City of London Police were unwilling to prosecute.  In February 2017, the Thames Valley Police and Crime Commissioner decided to prosecute and secured six criminal convictions, including a senior ex-HBOS banker. Despite that there has been no detailed regulatory investigation. The Commissioner said, “I am convinced the cover-up goes right up to Cabinet level. And to the top of the City.” In this vacuum, Lloyds Bank (owner of HBOS since 2008-2009) appointed former High Court judge Dame Linda Dobbs to investigate and publish a report by 2018. No report has been published and ministers dodge questions in parliament. Victims await compensation which could run over £1bn.

The Financial Services and Markets Bill now weakens the role of the Financial Ombudsman Service to secure redress for complainants and imposes a ten-year limit within which complainants can secure redress. Compliance with rules rather than whether companies acted reasonably and fairly is the proposed rule.

Finally …

The above is brief indication of the capture of the UK state by the finance industry and its consequences. The economy has been devoured. Low wages and tax abuse have been normalised. Town centres have become economic deserts. Wealth extraction is prioritised. Unprecedented resources are devoted to financial engineering and tax abuse. The UK has over 405,000 professionally qualified accountants, the highest per capita in the world and more than the rest of Europe combined. Inevitably, other sectors are denied graduate talent.

Appeasement of the finance industry hasn’t delivered the promised investment in productive assets. For the last 30 years, the UK has languished at or near the bottom of the G7 and OECD league of investment. When the financial bubble bursts, large tracts of the economy will be washed away and there won’t be enough money to bailout the infected sectors.