In The Lab’s forthcoming video, Transforming Finance, Andy Haldane from the Bank of England says that policy makers made a great mistake in the years running up to the crash. They mistook diversification of financial portfolios for diversity of financial service business models.
So Britain has a monolithic finance sector dominated by a handful of universal banks, all too big to fail, so receiving implicit tax payer subsidy. Other countries like Germany, the US and France have smaller banks, local banks, co-operatives, credit unions and state banks, as well as larger entities.
The Finance Innovation Lab believes that a diverse finance system would be much better for people and planet. We held a workshop on how to enable such a system earlier in 2013 and the ideas generated can be seen here.
Now, with support from the Friends Provident Foundation, we will be carrying out a series of interviews with the growing alternative finance sector in Britain to explore what are the policy changes that will be needed to replace our old, monolithic finance system with one that is diverse, sustainable and fit for the 21st Century. But what kind of diversity do we want? Payday lenders and vulture funds add diversity, but not in a good way. Below is a first stab at criteria for the sort of alternative finance providers that the system needs more of.
It’s not an exhaustive list and we ‘d love to hear your suggestions for other criteria. Have a look, share with colleagues and friends, and if you are involved in a financial service delivering some of these sort of changes to the system, we are very interested in hearing your views on policy changes needed to scale up the sector.
- Increased transparency – the easier it is to see how your money is being used by an intermediary, or the level of fees and charges that are applied, the better the customer experience will be.
- Greater accessibility for all social groups is another feature which will improve the fairness of the financial system. Products which are open to all, and not restricted to those with higher income or more assets, should be encouraged into the system.
- Cutting rent seeking in finance – if a new financial provider can demonstrate they are reducing the rent taken by them as an intermediary, this contributes too fairer and more efficient system.
- Investing not speculating – financial services which make as direct a connection between investor and the real economy as possible should be favoured over those which ‘make money from money’.
- Taking a long term view – if equity investments in companies are being made, products which take a long term approach should be encouraged as a counterbalance to the short term bias of existing equity markets
- Valuing social and environmental impact – if the product or service is improving the ability of the finance system to value environmental and social risks and benefits of any given investment, this will help improve the overall market and its sustainability
- Distributed profits – products or services that encourage greater distribution of profits across the economy should be encouraged over those that concentrate profit and asset ownership in the hands of a few
- Simplicity – if the product is simple and accessible to the consumer, this will improve financial literacy and act as a barrier to rent seeking behaviour in the finance system by the creation of over complex products
- Scalable – finally it is important that any new alternative finance service or product is scalable, if it is to contribute to increasing the diversity of the finance system. Whilst there is space for niche products in the market, they will not transform the system on their own.