Brexit and the crisis in capitalism

UK Finance CEO Stephen Jones on the climate that has led to Brexit, and the routes to restoring confidence in business

The never-ending Brexit debate has taken its toll in the UK on both long-term investment and consumer confidence.

We should all remember though that, whatever the outcome, the UK will still remain one of the best places in the world to run a business, with a world-revered legal system and strong regulatory framework; a reputation for fairness, reliability and low levels of corruption; high professional standards and talent for entrepreneurship and creativity; plus a world-class network of professional services from law to accountancy.

Reforming capitalism

But we shouldn’t delude ourselves that simply continuing with the status quo will be enough to see us through the turbulence of the months and years ahead. The Brexit vote in the UK wasn’t just a cry of protest against our membership of the EU. It was symptomatic of a broader crisis in confidence in the traditional ‘Jack Welch’ brand of capitalism. For too many people, the capitalism that for decades delivered growth and progress is now not seen to be delivering for society as a whole.

As UK Chancellor Philip Hammond remarked in October: “Brexit did not happen in a vacuum. It is a product of something deeper and wider. It happened because a gap has opened up between the theory of how a market economy delivers and distributes rising prosperity, and the reality experienced by ordinary people.”

Both sides of the ideological divide are now in agreement that there is a crisis of confidence in capitalism – and something must be done about it.

So how should we respond? The traditional capitalist model sees the role of a business as simply to generate profits for, and pay dividends to, the providers of its capital. But the idea that providers of capital should only focus on quarterly metrics of financial performance and financial returns is becoming increasingly untenable. More and more, it is how those profits and dividends are generated that is being judged as a critical metric of long-term performance. Firms are now being judged not only in terms of the products and services they offer, but also the way in which they are provided.

That means looking at the impact on customers, colleagues and the communities in which a business operates.

It is important that we in the business community adapt to this new political reality and take a more strategic, sustainable approach – an approach that can both reinvigorate public faith in capitalism and secure the UK’s competitiveness into the future. At UK Finance, we have been working with many of our member firms to share best practice on how financial institutions can implement and explain their long-term purpose and strategy.

Culture and conduct

The answer begins with culture and conduct. In the aftermath of the financial crisis, the primary focus was on restoring balance sheets and strengthening capital and liquidity. Since 2008, every element of the UK’s banking system has been fundamentally changed to ensure that taxpayers never have to bail out a bank again. The largest banks now hold 10 times more of the highest-quality capital and double the amount of liquid assets, fortifying their resilience to any future shocks.

But the root cause of the crisis had as much to do with culture and governance standards as with a failure of prudential regulation. Ten years on, this failure of governance continues to shape public perceptions. Regulators now rightly place a significant emphasis on improving the way in which we conduct business. The rules introduced into the UK after the financial crash are among the strictest in the world. Employees within regulated firms are now held individually accountable under the Senior Managers and Certification Regime. And remuneration and bonuses are aligned to the future financial performance of the company.

Combined, these set the tone for personal responsibility for those at the top and the prioritisation of long-term sustainability over short-term gains.

Diversity

We should seek to ensure that the people we work with are from as broad a range of backgrounds as possible and have every opportunity to thrive.

Creating an open and inclusive workplace should be a defining factor of a modern business in 21st-century Britain. Having a more diverse pool of talent will not only help us to reconnect with our customer base. It will broaden the experiences, backgrounds and perspectives that we can draw upon from colleagues at all levels.

UK Finance is a proud signatory of the Women in Finance Charter, setting ourselves a target of 40% of senior management positions being filled by women by January 2021, and we have undertaken to promote the Charter’s values within the sector. And in total there are now some 300 signatories to the Charter across our industry, representing firms responsible for around 800,000 employees.

We know this is an area that the Association of Corporate Treasurers (ACT) is active in, too, through its Diversity and Inclusion Calendar, which champions a more representative workforce across the treasury profession.

Communities

Digital innovation is transforming the way that we do business, creating new ways for customers to access services. But this technology is not for everyone. Part of the crisis of confidence in modern capitalism has been driven by those who feel increasingly alienated by a world that is changing beyond recognition, and a desire to reassert a sense of identity and belonging. Customers and the communities they live in should be at the heart of every firm’s business model. While we adapt our business models to new technologies and introduce exciting new products and services, we need to also strive in all sectors to ensure no one is left behind.

In retail banking for example, the use of contactless cards and online banking continues to rise, with customers logging into mobile banking apps 5.5 billion times in 2017. But while many customers are making the most of technology to manage their finances while on the move, many still prefer to have physical access to everyday banking services. So we are working hard to ensure that vulnerable groups in society are not excluded and that access to vital services is maintained for those who need them.

Financial inclusion

Promoting financial inclusion also means improving capability. Millions of families across the country struggle with their day-to-day finances, switching between mainstream banks and unregulated lenders to pay the bills, and millions of small business do not have adequate business planning and management capability. As an industry, we are redoubling our efforts to build financial capability, working closely with the Money Advice Trust to improve financial education in schools up and down the country. And we are leading a new initiative that will provide SME customers with guidance and advice to help them prepare for Brexit, together with the Federation of Small Businesses and other business groups.

This should go hand in hand with efforts to harness advances in technology to improve access to banking and other financial services, and providing digital education for those customers and businesses who need it.

Cyber

Of course, the scale of digital transformation also brings with it new risks.

Which brings us to the issue of cybersecurity. Cyberattacks are never far from the headlines. There have been more than 1,100 cyberattacks on the UK over the past two years, equivalent to over 10 a week. A major cyberattack on our financial system could have a significant impact on the broader economy.

So it is vital that we stay one step ahead and ensure our finance system is as resilient as possible. UK Finance is tackling this challenge head-on, working with the Bank of England, GCHQ and the National Cyber Security Centre to develop the new Financial Sector Cyber Collaboration Centre.

This centre will be capable of addressing cyberthreats as they emerge, in a faster, more coordinated and effective way. Importantly, it will take the practices of the best to a wider group of smaller institutions – because, like NATO, an attack on one is an attack on all. We need to redouble our efforts to collaborate, not compete, in this critical area. That means fostering cooperation with government and law enforcement, and across different business sectors.

Sustainability

There is no doubt that we are exhausting the natural resources of our planet at an unsustainable rate. But, so far, international action has remained woefully behind what is necessary to prevent catastrophic climate change.

It is now over three years since the Bank of England’s Mark Carney made his ‘Tragedy of the Horizon’ speech at Lloyd’s of London. Business is beginning to step up, with over 500 organisations globally signed up to acting on the recommendations of the Carney-inspired Task Force on Climate-related Financial Disclosures. And within regulated financial services, we have recently seen confirmation from the Financial Conduct Authority and Prudential Regulation Authority that they plan to bring climate-risk considerations into the supervisory regime. But action on climate change will require a collective effort from all of us, from large businesses to individual households. So it’s fantastic to see the ACT recognising the achievements in this field through its award for green finance.

Crucially, we mustn’t think about climate change as a cost on business.
If we can get on the front foot, it can also bring opportunities in terms of new jobs, cleaner cities and better infrastructure, and put the UK at the forefront of the transition to a low-carbon economy and the growth areas of the future.

The way in which we approach these issues will have a significant impact on the success of businesses, the economy and broader society in the years ahead.

By engaging with our stakeholders in the widest sense – our colleagues, communities and customers – we can promote the long-term interests of the companies we lead and, in doing so, we can all promote the long-term success of the UK economy and rebuild public trust in capitalism.

About the author

Stephen Jones is CEO of UK Finance, the voice of the UK’s banking and finance sector

This article is an edited version of the speech he gave at the ACT’s Deals of the Year Awards dinner. You can find more Deals of the Year coverage here

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