Post-Brexit, it’s even more important to make the positive case for capital markets
July 2016 • Unlocking capital markets • by William Wright
The outcome of the EU referendum campaign showed that the banking and finance industry has a long way to go in rebuilding trust with the wider public and with policymakers. This speech by our founder and managing director William Wright on ‘Making the positive case for capital markets’ at the annual dinner of the Institutional Money Market Funds Association outlines what the problem is – and how the industry can work together to address it.
Ladies and gentlemen, good evening. I’m delighted to be here at the annual IMMFA dinner, and thank you to Jane and to Reyer for their kind invitation.
I had planned to talk about the implications of Mifid III, CRD V and UCITS 7 this evening. But in light of the past week, you will be pleased to hear that I’m not going to talk about institutional money market funds, or financial regulation, or Brexit – and definitely not Euro 2016. But I am going to say a few words about something that I believe relates to all of them – and to all of you.
That is, the urgent need for every sector of the capital markets industry – from investment banks and hedge fund managers, to institutional money market funds and private equity firms – to get on the front foot and make the constructive case for the vital role that capital markets can and should play in helping to drive growth and prosperity – and how they could do it better.
I’ll just take a few moments to frame my starting point in two important ways. I’ll then outline how many policymakers view the industry, and what you and the rest of the industry can do about it.
First, I have been accused – mainly by investment bankers – of being a fully paid up member of the Socialist Workers’ Party. I’m not. I’m not here to beat you up or to shout at you. In fact, I believe so fiercely in the value of capital markets that a few years ago I walked away from a cosy job running Financial News to – perhaps foolishly – set up a think tank called New Financial to make precisely this case.
We are a constructively critical friend of the industry, and want to work with it not against it, to help it make this positive, collective and constructive case.
And second, you may think that you work in institutional money market funds. You may consider yourselves asset managers very much at the less racy end of the capital markets spectrum, but to the vast majority outside of this room, you’re not. You’re all bankers now.
The dripfeed of scandals across the industry – whether it’s the manipulation of FX, Libor-rigging, the Panama Papers, or PPI – may have nothing to do with you personally or directly, but sadly it means that it can sometimes be hard to remember the positive case for what goes on in the financial markets.
To everyone in this room, the value of capital markets is self-evident. We all know that asset managers help their clients address their financial needs, help channel savings into productive investment that drives jobs and growth, and act as stewards of their clients’ capital. We know that you specifically provide capital preservation, diversification and liquidity.
Sadly, to the majority of people outside this room, it’s not self-evident at all. Whether we like it or not, the wider public and many policymakers do not trust the industry to act in anyone’s interest but its own.
If you doubt that, then reflect for a moment on the referendum campaign. What should have been a powerful and influential voice in the debate – the voice of finance – was mocked, ignored and effectively silenced – by a Leave campaign that successfully channeled this mistrust.
When England were knocked out of Euro 2016 by a country with a population smaller than Leicester, they were mocked by many people as overpaid underperformers. That is a polite version of what many of the same people think about ‘bankers’. This is hugely dangerous at a time when the European economy needs capital markets more than ever.
Minouche Shafik, deputy governor of the Bank of England, summed it up nicely in a speech last year when she said: ‘Well-functioning markets are the key to prosperity, but they must operate in ways that are fair and effective to sustain public support and confidence.’
Many people in the industry – particularly those sectors that don’t pose systemic risk to the economy or those at the quieter end of the spectrum – perhaps don’t think this applies to them and that they don’t have a case to answer. Many think this will blow over. Perhaps. But here we are 8 years on from the financial crisis and there are no signs of that yet.
What policymakers think
Since we launched New Financial in 2014, we’ve hosted events with dozens of senior regulators, officials and policymakers. And their views of the industry are illuminating. Here is what Lord Hill, one of the strongest advocates of a healthy financial and capital markets industry (and whose voice will be sorely missed in Brussels) said recently about the disconnect between finance and the real economy:
…To be seen as part of the mainstream, the financial sector has to change too. In the wake of the crisis and the scandals we sadly keep seeing, there is a big job to be done in rebuilding trust. I know you don’t want ever more prescriptive regulation matched by ever larger compliance teams. And nor do I. But then there needs to be a change in values and culture and a reconnection with society, businesses and the customers you serve. If you can do that, you will find in me someone who will champion the contribution you make to growth and jobs…
In deliberately simplified terms, here’s what many policymakers see when they look at the industry – even those who recognise the value of capital markets and support it.
* They see an industry that has been relatively protected from the fallout from the financial crisis, at least compared with many of its customers
* They see an industry where there has sometimes been a disconnect between pay and performance, and in which incentives are not always as aligned with customer outcomes as market participants’ stated commitment to their clients would suggest it could be.
* They see an industry which often complains that regulators don’t understand it, without pausing to ask why it sometimes seems so hard to understand and whether this ‘lack of understanding’ is the fault of regulators or of the industry itself.
* They see an industry that thinks and often acts in silos, with each one claiming that that it was nothing to do with the financial crisis, that it doesn’t require swathes of new regulation – and that it’s the guys across the road you need to worry about.
* They see an industry that sometime likes to hide behind jargon and dive into the detail, and which often prefers opacity over transparency.
* They see an industry which often prefers opacity to transparency and in which rivalry is sometimes confused with competition.
* And they see an industry which often fights every minor regulatory skirmish as though it were Custer’s Last Stand.
* In short, they see an industry that hasn’t yet worked out how to make the positive case for the value of what it does in terms other than its own.
It’s odd that we judge a company like British Airways on how successfully it flies us from A to B, at a decent price, how infrequently it loses our luggage, and how it mitigates the general unpleasantness of flying. But too often, the financial industry makes the case for what it does based on how many people it employs, how much money it looks after, and how much tax it pays…
Making the case
So what can the industry do about this? Keeping your heads down, quietly getting on with your business and looking after your customers is not, I’m afraid, an option.
The answer is engagement. Relentless, positive, and constructively critical engagement. That sounds nice, but what does it actually mean?
* As a starting point, ask yourself what it is the purpose of what you do. If your answer doesn’t include the words ‘customers’ or ‘end users’, then try harder.
* Sit down and work out what it is you do, how, and why. How could you do it better? If you can’t draw a picture of how it works, the way it works probably needs to be simplified.
* Think about who you customers are, what they want, what and how you charge them. Think about making the case not just for what you do, but making the case for the economics of how you do it. How could what you do could be more aligned with your customers’ interests? Rarely has the famous question from before the Wall St crash ‘where are all the customers’ yachts?’ been more important.
* Think about your customers’ customers. The end user – perhaps my mother – whose pension fund may be invested in one your funds directly or indirectly as a shareholder in one of your corporate clients. Don’t forget that even if ‘the man on the street’ isn’t your direct customer, the ‘man on the street’ helps shape the social climate within which policymakers operate.
* Think about the concrete and tangible benefits of what you do. The industry often likes to think of the biggest number it possibly can, without thinking of tangible examples or case studies of how it benefits it customers.
* Think about the language you use to explain the value of what you do. Remove the jargon and the acronyms. Imagine you are reading it down the phone to a newly-elected MEP whose first language isn’t English.
* Instead of asking ‘why don’t they trust us?’ flip it round and ask ‘why should they trust us?’ and work out how to re-earn that trust.
* By all means, think more about what your company can do in and around CSR or charity work, but beware that this can been seen as the equivalent of CO2 emissions offsetting. Better to reduce the emissions in the first place.
* We all know that bad regulation is bad for everyone, but think of what you are prepared to give up in order to reach a swifter if imperfect regulatory framework, instead of reflexively pushing back against any proposed changes.
* Think about the ‘licence to operate’ – that unwritten social contract which all businesses have made with society, and what it might say if you had to write it down.
* And don’t for a moment think that this is all about just coming up with a new narrative, hiring a good PR and putting a nice spin on things. It’s about translating all of the above in concrete change, led from the top down.
You should be proud as an industry of what you do. And what you do is too important for the economy and for your customers to pass up this opportunity. Coming up with a renewed sense of purpose for the capital markets would be an excellent start.
I’d like to finish with a short letter I read in the Telegraph this morning about Brexit, which I think is funny and enlightening whichever you may have voted. It’s from Barry Bond in Essex. ‘Sir, Did I want the Leave camp to win? No. I voted to leave because I hoped that a near-Brexit would give us extra clout in subsequent battles to reform a bloated, undemocratic EU. The bookmakers and pollsters let me down.’
No Barry, I think you let yourself down. I implore all of you in this room not to do a Barry. Don’t rely on others to make the case for you. In order to regain the trust of clients and policymakers, different sectors of the industry must work with each other and with policymakers to come up with constructive solutions to common problems.
Only by making a more compelling and more positive case for what they do – while embracing the need for significant reform of the way they do it – can capital markets hope to break out of the painful and damaging cycle of having that reform done for them.