It takes teeth to have any chance of fixing the City

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The Independent Online

Goodness knows the City of London could do with a dose of sanity. Yesterday, an academic, of all people, tried to provide one. In castigating a "lack of trust and poorly aligned incentives" John Kay, a professor at the London School of Economics, is hardly saying anything new. But he does have some half-decent ideas for fixing the City's problems and there is lots to like about his Government-sponsored report, not least its home truths for the fund-management community, which bears more responsibility for t.

They are, after all, just as fond of bonuses as bankers, and have continued to pick them up despite the fact their inaction is a significant contributor to the City's current low watermark.

Professor Kay's ideas include the creation of a stewardship code, providing guidelines for some of the more recidivist fund managers and an investors' forum to facilitate collective engagement with companies.

He wants boards to consult with investors before making appointments, an end to the US practice of quarterly financial reporting, and an emphasis on fiduciary duty. All this seems rather sensible and had governance groups purring, which is usually an indication something is on the right lines. Leave it to the Trades Union Congress to get to the nub of the one real problem. It's worried that if all this is voluntary it won't work.

The City doesn't really do voluntary. Within its eyries sits a vast corps of vested interests which would far rather spend millions on lobbyists and PR companies to lie about how seriously they take the need for reform while doing precious little in practice. They're already sharpening their talons for the months ahead, in which time the Business Secretary, Vince Cable, will be formulating a response that could be frustrated by the refuseniks on the Tory benches who have friends in the City and an interest in it providing them with cushy jobs when they're out of Westminster. The Investment Management Association's line yesterday is a case in point. It used the phrase "welcome" with a "but", the standard response of organisations to reports they don't like. It then went on to whine that Professor Kay doesn't recognise that fund managers are different to traders and therefore don't contribute to short terminsm.

Except they do by inaction. They could have moved against the destructive remuneration packages the report has identified years ago, but they didn't. The shareholder spring was only prompted by their fear that Mr Cable might legislate to force their hands. Mr Cable's more radical proposals were watered down and the bits of Kay the City doesn't find to its taste are likely to suffer the same fate.

The road to the hell of the financial crisis was paved with truckloads of good intentions. Without teeth, this report will simply add another slab.

Leave it to the TUC to get to the nub of the one real problem. If it's voluntary, it won't work