Damning verdict on City: 'No longer fit for purpose'
Kay Report calls for an overhaul of regulation and curbs on traders chasing short-term profit
Monday 23 July 2012
A high-level government review into the City of London has concluded that it is riven by short-termism and staffed by too many people earning too much money.
A report commissioned by business secretary Vince Cable was made public this morning and finds a financial sector that is no longer fit for purpose. Professor John Kay, a leading economist, has made his recommendations after scores of submissions and interviews with top business and investment people.
In particular, Mr Kay says that regulation needs an overhaul and that traders seeking short-term profits are not acting in the wider interests of the public and should be marginalised.
His review comes when the stock of the banking sector has never been lower, given a seemingly constant run of scandals involving rogue trading, interest rate fixing and global money laundering.
Mr Kay told the Independent: "There is a short-termism problem, and the largest source of that is the culture which is no longer based around long-term trust. It is based around transactions and trading. Regulation has focused far too much on behaviour and not enough on structure."
His words are likely to be greeted with horror in City dealing rooms, where job losses are already common because of low levels of investor activity.
Mr Kay agrees that his proposals would lead to fewer jobs for traders. He said: "There should be fewer of them and they should be paid less. The objective of financial markets is not to provide jobs for traders. The real problem is that we have proliferated the number and the cost of the intermediaries. We need a philosophical shift in the way people think about markets."
His report, the Kay Review of UK Equity Markets and Long Term Decision Making, will make uncomfortable reading for many in the financial sector.
He envisages a world in which fund managers become more powerful and think longer term. "We want to marginalise traders," he said. "And the way we do that is to have asset managers that are the centrepiece of all this. They should have fewer stocks that they hold for longer, and that they take a real substantive interest in."
Mr Kay traces the breakdown in the City culture of trust back to the deregulation of the financial markets in the 1980s. He says the present public and political disgust at banks is a "great symbolic chance" to change things for the public good.
Asked if he expects top politicians such as George Osborne, the Chancellor, to back his proposals, he replied: "I think things have changed in the last few weeks. What has been brought home to people is that what has gone wrong in the financial sector is not the product of one or two events that no one could have anticipated but things that are embedded in the culture of the industry. Markets are not for market participants, they are for end users.
"We ought to be more concerned about the misalignment of incentives. We should put people in the situation where it is in their commercial interests to do the right thing." Mr Kay received strong lobbying on contentious issues such as short-selling, high-frequency computerised trading, foreign takeovers and diversity in the boardroom. The issue that topped many investors' list of concerns was executive bonuses.
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