In the flurry of “10 Years On” publications last week, two in particular caught my eye. Both made their own splash but I haven’t seen anything so far that links them together, let alone to what they might mean for financial services regulation in the future as we attempt to peer through the Brexit fog. This, therefore, is the first of a short series of blogs that will try to understand the meaning of where we are now for regulation, and also what might be the future regulatory consequences of some of the options being proposed.
The first publication, the IFS’ “10 Year On – have we recovered from the financial crisis” (see link), contains a wealth of sobering analysis. I’ve written before about the 2009 debate over what letter shape would best represent the economic path of the financial crisis – was it a V, W, U or L? It turns out it has essentially been the last of these - a sharp decline followed by a flattening out, with no sign of a real terms recovery.
Perhaps the best historical example of this L shape is the “Long Depression” of the 1870s and 80s. This too was associated with speculation (land, gold) and a wave of globalisation (steam ships, railways, refrigeration), leading to bank failures, falling real incomes and labour market insecurity.
The sheer scale of the gap between GDP per capita today and what it would have been if the pre-crisis trend had continued, should by itself raise a series of important questions. For financial services firms, these include the effectiveness their business models and whether their forecasts of profit growth are realistic. And for regulators, there are questions about whether their focus is right, and how to avoid solving one problem only to find you’ve made another worse.
Turning to the second publication, the IPPR’s “Prosperity and Justice – A plan for the new economy”, I was struck by how much of the coverage focused exclusively on the involvement of Justin Welby, the Archbishop of Canterbury. Much more notable was the diversity and strength of membership of the IPPR Commission - across private and public sector, different industries, academia and a wide political spectrum. From what I’ve seen, the coverage so far has done the report a disservice.
This report too raises major challenges for firms – e.g. how to shift focus to long term performance, how to move away from over-reliance on the housing market and genuinely encourage innovation. And for regulators – e.g. what competition really means in an industry so highly concentrated and what role regulation has in facilitating the redress of inequality between generations. In this context, it’s a shame that the FCA’s work on the “Ageing Population”, published a year ago, should have gone quiet.
If we accept the logic of the IFS’ analysis, then it would be wrong not to look seriously at change of the type and scale the IPPR proposes. Both firms and regulators have strong incentives to think hard about the implications for them and how they operate. Otherwise they risk being left on the wrong side.
The next blog in this series will look at the implications for corporate governance.
GDP (national income) is just 11% higher today than it was at its pre crisis peak in 2007–08. As a result the economy is 16%, or £300 billion, smaller than it would have been had it followed the pre-crisis trend. GDP per capita is now £5,900 per person lower than it might have been had pre crisis trends continued.