The power of vested interests – if we use them

Whilst having a many very interesting conversations with different players in and around the finance industry, looking for disruptive policy ideas, an intersting early theme has come through around the different use of power by vested interests within the finance system.

Its clear that the parts of the finance system that make money from trading have become highly skilled at deploying their considerable weight in the corridors of power to protect their own interests.

Watching Financial Times columnist, John Plender, being attacked from all sides at a recent roundtable event for daring to say that a Financial Transaction Tax might help reduce systemic risk from high frequency trading, was to see a well oiled lobbying machine at work. Many comments from the banking sector were complaining that the government was not being critical enough of the FTT proposals in the EU. Days later George Osborne was upping the ante describing it as a direct attack on The City.

At another event, the launch of the Climate Bonds Standard, Sean Kidney was pointing out how little the world of institutional investors seemed to be involved in policy or lobbying. Here are financial players with considerable clout, trillions of dollars of assets under management, who stand to lose a great deal from increased systemic risk in finance, yet are standing by whilst the risks pile up.

If they get organised, in a way that other sectors have done in the past, like automobiles, oil, or banking, then policy debate may be quite different. As yet, though, they show no signs of doing so. A recent lecture at Fair Pensions from Keith Ambachtsheer, Director of the Rotman International Centre for Pension Management, however, illustrated that sections of the pensions industry are beginning to think about models that better address their member’s long term interests, but there is still very little engagement with policy making.

At the other end of the scale, new innovations in saving and lending, such as Zopa or the forthcoming Abundance Generation, which seek to make a more direct connection between individual savers and the projects to which their money is being lent, want to engage in the policy debate but struggle to be heard.

This is the classic problem for new entrants, of course, incumbants dominate the policy agenda, so if new business models face policy barriers, the established players have no interest in removing those barriers. Government and regulators are talking about increasing competition within the banking sector, but not allowing competitive challenges to it.

So currently, those financial players who choose to wield the power they have (the short term traders) are ensuring the interests of those with limited power (individual savers) and those who seem not to understand how much they have (long term investors) are not being served by the financial system. Governments will need to use their power to redress this imbalance if we are to return to a financial system that truly serves the public interest.