‘The state needs to be hands-on, and not leave it all to the pirates of City of London’
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 UK Chancellor’s annual Mansion House Speech brings two quotes to mind. The first is from Spanish-American philosopher George Santayana: “Those who cannot remember the past are condemned to repeat it”. The second attributed to Karl Marx is that “History repeats itself, first as a tragedy, second as a farce”.
Both are apposite to the government’s obsession with deregulation of the finance industry and promotion of its growth is further amplified by the Chancellor. Gone is the concern about financial crashes and turmoil caused by the finance industry.
The UK has had a banking crisis in everyday decade since the 1970s, culminating in the crash of 2007-08. The state provided £1,162bn of cash and guarantees (£133bn cash + £1,029bn of guarantees) to bailout ailing banks. Another £895bn of quantitative easing was handed to capital markets. London capital and Finance, Wyelands Bank, Woodford Equity Income Fund, Blackmore Bond and others are more recent continuation of the recklessness and get rich quick schemes. There is no pristine bank and too many have excelled at mis-selling numerous financial products, including pensions, endowment mortgages, precipice bonds, mini-bonds, split capital investment trusts, interest-rate swaps, car loans and payment protection insurance. For the period 1995 to 2015, finance industry made a negative contribution of £4,500bn to the UK economy
The economy is yet to recover from the crash. During 1990 to 2007, economic productivity increased by 38% but for the period 2007 to 2024 it crashed to 5.9%. During the period 1990 to 2007 average real wages grew by 42% and thereafter until 2024 they grew by just 2.2%.The real average wage is unchanged since 2008. Some 16m Britons, including 5.2m children and 9.2m working-age adults, live in poverty and lack resources for stimulating the economy. The bottom 50% of the population has 5% of wealth, and the bottom fifth has only 0.5% of wealth. Boosting the real spending power of the bottom 50% is a key requirement for rebuilding a sustainable economy. But the government has pinned its hopes on the finance industry.
Deregulation
The last Conservative government began to dismantle regulation introduced after the 2007-08 crash. In October 2023, the cap of bankers’ bonuses was abolished. The Financial Services and Markets Act 2023 reintroduced the competitiveness and growth of the industry objective for the regulators, effectively eroding the consumer protection mandate of the regulators and unleashes a race-to-the-bottom. Capital requirements for the finance industry increased after the last crash are being reversed.
The Labour government will dismantle or dilute ring-fencing of speculative or investment banking from retail banking. Speculative banking was central to the 2007-08 crash. Banks placed clever bets on price movements of shares, bonds, derivatives, food and commodities. They were not buying anything; just trading in what are called derivatives. All the financial horses can’t win all the time and when they didn’t, it all crashed.
Ring-fencing was introduced to separate the two sides of banking and manage the crisis. The Bank of England explained that the aim “is to protect the core retail banking services on which customers rely from risks associated with activities outside the ring-fence. Ring-fencing is intended to improve the resilience of the largest UK banks. It also seeks to ensure that if a large bank was to fail, there would be minimal disruption to banking services used by individuals and small businesses …”.
The crash did not dull the bank appetite for gambling. As one commentator put it “The total value of all the economic activity in the world is estimated at $105 trillion … The value of the financial derivatives which arise from this activity – that’s the subsequent trading – is $667 trillion. That makes it the biggest business in the world. And in terms of the things it produces, that business is useless. It does nothing and adds no value. It is just one speculator betting against another and for every winner, on every single transaction, there is an exactly equivalent loser”.
The Chancellor’s response is to loosen or dilute ring-fencing with the claim that it will somehow encourage lending. The Governor of the Bank of England told the Treasury Committee that “there are no restrictions on lending by ring-fenced banks to UK non-financial corporates and SMEs
One of the problems of the finance industry is that no one accepts responsibility. The post-crash response was to introduce the Senior Manager Certification Regime (SM&CR) to fix responsibility on named individuals. In justifying the regime, the Financial Conduct Authority said: “The SM&CR aims to reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold people to account … the SM&CR aims to encourage staff to take personal responsibility for their actions, improve conduct at all levels, make sure firms and staff clearly understand and can show who does what”. Now the regulators are consulting on its dilution. It will now be diluted to appease the finance industry. No one has demonstrated how dilution or the end of the SM&CR regime won’t have negative effects.
In the interests of stability, UK banks are subject to Minimum Requirement for own Funds and Eligible Liabilities (MREL) requirements. This enables banks to absorb losses. MREL is the minimum amount of equity and debt must be maintained to enable banks to fund activity. MREL is separate from the capital requirements set by the regulators. The purpose is to ensure that shareholders, not taxpayers, absorb losses when a bank crashes. The Chancellor claims that lower capital requirements will be “freeing up billions for lending and investment”, and will somehow lead to higher investment in productive assets. However, the City has a poor record of long-term investment. In 2023, companies raised £953.7m by issuing new shares. This rose to £3.4bn in 2024. The UK-listed companies retuned £86.5bn in dividends to shareholders, and FTSE100 companies alone returned another £56.9bn in share buybacks. The net result is that companies rely upon retained earnings and debt to finance long-term investment in productive assets
Despite low rates of interest, inflation, corporation tax and numerous tax reliefs, the UK has been bottom of the G7 league for investment in productive assets in 24 out of last 30 years. It ranks 28th among 31 OECD countries. This is despite the state-backed Private Finance Initiative (PFI) programme, which guaranteed profits.
Money released by the latest capital reduction is more likely to end up in speculation, dividends and share buybacks rather than investment.
High Risk ISAs
Ever since the 1980s, governments have privatised publicly-owned enterprises and offered people discounted shares to encourage them to become shareholders. Individuals own about 10.8% of the shares in UK listed companies. Indirect share ownership has also been pushed through Individual Savings Accounts (ISAs) with the carrot of tax free income. Around £750bn is held in ISAs, including £285bn cash and £450bn stocks and shares ISAs.
The government wants more people to hold stocks and shares ISAs and is dangling higher returns by permitting Long-Term Asset Funds (LTAFs) to be included in ISAs. The LTAFs are designed for investors with long-term investment horizons and invest in illiquid assets such as private equity, private credit, venture capital, real estate, and infrastructure. The government will enable primary investors to turn illiquid assets into liquid.by selling them to households, and increase their financial risks.
One seasoned investor has warned that “Private markets are notorious for their lack of transparency, with even seasoned institutional investors struggling to get the data and visibility they need to make smart decisions in the space … For retail investors considering investing in LTAFs, this lack of clarity could mean taking on risks without having a full picture of their investments” .
A stock and shares ISA does not put money directly into companies. Rather the money goes from the pocket of investor A to B, with banks slicing and dicing packages for a fee. Not everyone has appetite for high risk investment, or has the cash for investment. For example, 16% adults have no savings and 39% have less than £1,000. The average man has savings of £13,140 and a woman has £6,869. The median wage of a UK employee (May 2025) is £30,252.
The Chancellor’s Mansion House Speech offers nothing to most people. The government’s obsession with deregulation increases vulnerabilities and likelihood of abuses. It has been preceded by discussions with City elites, who inevitably favour a kind of lawlessness that increases their gains. The crash of 2007-08 happened because governments had been bought off by the finance industry and believed in light-touch regulation. The supposed rush for investment in productive assets never materialised. To government is sowing seeds of future crises.
To manage the economy, the state needs to be hands-on, and not leave it all to the pirates of City of London. Above all, it needs to redistribute income and wealth to boost the purchasing power of the bottom 50% of the population as without that people cannot buy goods and services, Alas, that is not on the government’s agenda.
Image credit: Lauren Hurley / 10 Downing Street – Creative Commons
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