Ten bright ideas to make the banking serve the UK – rather than itself

George Osborne and Vince Cable have tried cajoling, coaxing and bribing Britain’s banks to lend more to businesses and help rebuild the economy. Yet the latest official figures show lending to firms still falling, while the reputation of the banks has continued to be undermined by scandals from Libor-fixing to money-laundering. And despite a forest of new regulations and reforms, many officials privately believe that if it came to the crunch, any future chancellor would have little choice but to bail out a big bank that fell into distress.

Meanwhile, ordinary savers have little choice but to plump for one of the so-called big four banks – Royal Bank of Scotland, Lloyds, Barclays and HSBC – that dominate the sector and have, according to Martin Wheatley, head of new watchdog the Financial Conduct Authority, spent years “viewing consumers simply as sales targets”.

On Friday, campaigners, academics and financiers will gather in London at the Transforming Finance conference, to offer a more radical vision of how banking could be rebuilt to serve the economy better – and keep savers and taxpayers safer. Here are 10 proposals that will be on the agenda.

1  BYPASS THE BANKS

While the mainstream banks remain reluctant to lend, scores of innovative institutions are springing up to channel savers’ money to promising investments, or to lend to people who were previously “unbanked”.

Many of these new bodies are harnessing technology. The Bank of England’s executive director for financial stability, Andy Haldane, has suggested that “peer-to-peer” financial institutions are set to become increasingly economically important.

The conference will hear from several such bodies, including Abundance, which invites the public to invest directly in renewable energy projects; Buzzbnk, which raises money from the public for charities and social enterprise; and the London Rebuilding Society, which allows hard-to-reach customers – including, say, those with special needs, or very low incomes – to borrow against the value of their homes to fund major refurbishment.

2  CAPITAL CONTROLS

For about 25 years, there was a prevailing consensus that lifting barriers to cross-border flows of capital and allowing financial institutions to bestride the world was a good thing because it helped spread risk and let investment flow to where it was needed.

But Ann Pettifor of the economics thinktank Prime argues that these flows of hot money bring few benefits and leave policymakers powerless to the whims of financial markets.

“The number one priority must be capital controls,” she says. “The Bank of England can control the policy rate, but it has no control over all other rates – and the policy rate is irrelevant to the real economy.” She would like to see controls imposed – perhaps by taxing flows of money into or out of the economy – to prevent sharp swings in interest rates such as those that have driven Greece and Cyprus to the brink of bankruptcy. “We’re talking about democracy here: the financial markets have hollowed out our democracy.”

3  NANNY STATE

Ever since Alistair Darling rescued RBS, the Treasury has been determined to manage the taxpayers’ stakes in the bailed-out banks at arm’s length, being scrupulously careful not to exert undue political influence. George Osborne appears to be keen to hand the bank back to the private sector before the next general election.

But a growing number of thinkers – not least the new archbishop of Canterbury, Justin Welby – are calling for a much more hands-on approach. That could just mean breaking RBS up into two entities: a “bad bank”, to deal with the legacy of dodgy lending decisions from before the crisis; and a “good bank”, free to make new loans.

But Tony Greenham at the New Economics Foundation (Nef) would go further and separate it into a series of regional lenders, firmly rooted in their local area. “RBS should absolutely not just be flogged off. It’s about doing something that services broader economic interests, and not just the short-term economic cycle,” he says.

Pettifor agrees that the state should take closer control over the banks it rescued. “I would say to them: the taxpayer’s willing to provide support to you, but the terms are: ‘thou shalt lend to the productive sector, not the speculative sector’.”

Professor Richard Werner of Southampton University adds that by breaking up RBS into scores of separate, local banks – perhaps two or three in each county – with jointly owned back-office operations, the government could create the equivalent of the much-admired German Sparkasse network of local lenders. “We need local banks, and they need to be independent, largely separate entities. It’s not rocket science: we need small loans across the country, and that needs small banks,” he says.

4  BANG ‘EM UP

“What we would like to see in the most serious cases is senior members of the bank in the dock,” says Rosie Sharpe of campaign group Global Witness. It has tracked the activities of financial institutions in a series of money-laundering and corruption cases, many of them involving developing countries. High-level executives back in the banks’ home countries invariably get off scot-free.

Sharpe points to the fact when HSBC was recently fined $1.9bn by the US authorities for facilitating money-laundering by terrorists and drug-runners in Mexico and Colombia, head of compliance David Bagley resigned, but no other senior executive was punished. “There should be someone at board level who is personally responsible,” she says.

5  PEOPLE POWER

Much of the money circulating around the financial system is owned by ordinary members of the public, through their Isas, pension plans and other savings. Catherine Howarth, chief executive of lobby group ShareAction, says: “What I’m hoping to convey at the conference is the potential to grow a popular movement for change in finance among the millions of citizens with a small stake in the system.”

She would like to see workers asking more questions about how the shareholdings in their pension funds are managed, and given new rights to information about how their investments are being used.

She says: “The widespread lack of trust in the financial system and in pension providers could be reduced if people could access information and influence what happens to their hard-earned savings.”

6  LOOK TO THE LONG TERM

The short-termism of banks and City investors, who tend to demand a fast return on their cash, has been a frequent complaint of British companies for many years.

Howarth at ShareAction believes one way of changing that entrenched quick-buck culture is to change the definition of the “fiduciary duty” that fund managers and pension fund trustees legally owe their clients. The Law Commission is consulting on clarification of the term to allow investment managers to take into account longer-term issues – such as climate change or unethical behaviour – that could affect a company’s sustainability over a bigger timescale than the next quarter or two of results.

Campaigners hope a change of definition could help persuade decision-makers at the heart of the financial system to take a more enlightened view of their responsibilities – and serve the economy better, too.

7  MAKE THEM PAY

Despite all the changes in regulation since the financial crisis, many officials believe Britain’s biggest banks continue to receive a huge implicit state subsidy – worth £35bn a year, according to the Nef – because anyone who lends them money assumes that, in extremis, they would be bailed out.

Finance Watch, a Brussels-based thinktank, calls for the banks to be forced to pay the full cost of that subsidy. On that basis, many of the relatively low-margin trading that forms a large part of the activity of giant, cross-border banks would be uneconomic, and the economic advantages of being such a huge bank would diminish.

“It’s about applying the rules of capitalism to investment banks,” says spokesman Greg Ford. “There should be no subsidies, no bailouts for failure.”

8  GET MUTUAL

“Once you raise your eyes over the Channel, you find that we have a very weird-looking banking system,” says Nef’s Greenham. Since a wave of “demutualisations” in the 1980s and 1990s, Britain’s banks are overwhelmingly owned by shareholders (including, since the crisis, the taxpayer). On the continent, mutual ownership, with the benefits flowing back to savers and borrowers instead of out to shareholders in dividends, is far more common. These “stakeholder banks” have generally shown themselves to be more resilient during the past five years.

The Co-operative Bank’s recent withdrawal from a deal to buy more than 600 branches from the bailed-out Lloyds Banking Group dashed the hopes of many campaigners keen to see a mutual mount a genuine challenge to the status quo in the banking sector. But Move Your Money, the group that tries to persuade consumers to boycott the big banks, is keen to see local credit unions attracting more customers, and there are calls for the strict regulatory limits on their activities to be lifted, to allow them to provide a fuller banking service.

9  START YOUR OWN CURRENCY

As a small-scale fightback against globalised high finance and footloose multinationals channelling profits offshore, a number of regions have started “parallel currencies”, which can only be spent on goods and services from local businesses. In Bristol, for example, the local credit union allows savers to deposit money in their accounts and receive the same number of “Bristol pounds” in exchange, which they can spend in the area, or even use to pay some local taxes. The idea is not to replace sterling – each Bristol pound in circulation is backed by £1 – but to encourage money to circulate around the local economy, creating jobs and stimulating growth.

10  GET TOUGH ON COMPETITION

Lack of competition has been a problem in the British banking system for decades. Sir John Vickers, author of the independent commission on banking’s 2011 report, called for the sector to be referred in its entirety to the Competition Commission if it failed to implement all of his reforms. But many of those speaking at the Transforming Finance conference would like to see more drastic action, such as limits on the market share of deposits a single bank can take.

Greenham at Nef says it’s also crucial for more information to be made available about where banks operate, where they take savings, and where they lend, postcode by postcode, so that the authorities and the public can see if deposits are being sucked out of some areas and channelled elsewhere. In the US, the Community Reinvestment Act forces banks to publish such data.