Markets for the Many: How civic finance can open up markets and widen access



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A new ResPublica Green Paper

After the events of 2008 and the recession that followed, it was inevitable that this Government would rightly undertake a programme of significant financial reform. The Independent Commission on Banking, established shortly after the 2010 General Election, set out to assess the need for structural and competitive reform in the banking sector.

In their final report, which was later incorporated into a Treasury White Paper, the commission recommended a package of reforms that proposed ring-fencing legislation; measures for increased bank loss-absorbency; and proposals that would encourage greater levels of competition within the sector. Many of these have now been implemented through the recently enacted Banking Reform Act.

These reforms will undoubtedly make the banking sector more secure and resilient against future crises, and are in the round to be welcomed. However, despite being a step in the right direction, financial reform has so far been too insular in nature, focusing almost entirely on prudential issues and the capabilities of individual financial institutions to withstand shocks.

We argue in ResPublica’s latest report Markets for the Many: How civic finance can open up markets and widen access for a more holistic approach to banking reform. We believe that financial reform should be more outward looking and geared towards ensuring that the wider needs of society are met by the financial sector.

This ‘civic approach’ to financial reform looks beyond simple financial stability, and assesses the overall ability of the sector to serve customers, help communities and support small businesses. In short, it asks the financial sector to adopt its civic duty.

The financial sector is one of society’s great economic and social enablers, and has the capacity to be a truly transformative force in society. Unfortunately, the current reform agenda, with its almost exclusive emphasis on simple financial stability, fails to recognise this.

But in order for the sector to perform this societal role, it must be inherently more competitive and diverse. The financial sector is currently typified and dominated by a small number of large banks of one ownership type (plc bank). In order to get the financial sector we need and deserve, and to have a diverse and competitive sector reactive to the needs of consumers, this situation needs to be remedied.

Only a financial sector with a significant number of players in each service area and a diverse mix of ownership models can truly be considered a responsible, healthy, and responsive sector capable of meeting the UK’s economic and social demands.

It is our belief that the Government can achieve this by promoting and encouraging civic finance institutions; those institutions which already assume their civic role within society. In Markets for the Many, we argue that three such institutions – building societies, mutual societies and community finance institutions – should play a much greater role in financial services. We have specifically chosen these institutions for their ability to make, due to their growth prospects and inclusive models, the financial sector inherently more secure, capable and ethical.

In comparison to our European neighbours, Britain performs badly in promoting civic finance institutions. Whereas our building societies account for only three per cent of banking assets, in five EU member states, including France and Germany, their European counterparts enjoy more than a 40 per cent market share.

In order for building societies to compete like their equivalents on the continent, we need to level the playing field between them and plc banks. One key way of doing so would be to allow building societies to lend to SMEs. Under current regulations, it is difficult for building societies to lend to businesses because of the restrictions on lending that mean that 75 per cent of all lending must be secured against residential property. We believe that the Government should amend current building society rules so that they are not so restricted in their lending activities. It is our recommendation that the Government reduce this limit to 50 per cent as a deregulatory measure to boost SME lending and increase competition in the corporate finance market.

British mutual insurers also lag behind their European counterparts; holding a mere 7.5 per cent market share compared to 40 per cent as enjoyed in Holland, Germany and Denmark. Part of their success on the continent is down to the competitive advantage they gain through central network institutions, which enable them to pool resources, share back office functions and lobby collectively. In order to increase their share of the market to increase competition and diversity, we recommend that mutual insurers here establish network organisations to compete with the large non-mutual insurers on issues of scale. In order to help achieve this, we recommend that the Government establish a Task Force to establish how our smaller friendly societies and mutual insurers can co-operate and go to scale to increase competition.

The final type of civic finance institution, community development finance institutions, provide credit to businesses that are deemed too risky by mainstream finance. These lenders prioritise disadvantaged communities and focus their attention on improving economic opportunity, alleviating poverty and regenerating neighbourhoods.

In the US, the Community Reinvestment Act requires banks and large financial organisations to reinvest in the communities they serve through CDFIs – delivering over $68bn of private investment in less than 10 years. The introduction of a UK Community Reinvestment Act would provide a much needed boost to our community finance sector and supply much needed credit to our struggling charities and businesses.

If we are to have a financial sector that is truly fit for purpose, an approach to reform must be adopted that goes beyond individual financial stability, and looks more widely at the ability for the sector as a whole to serve the needs of society. The civic approach, by promoting and encouraging civic finance institutions, could enable our financial sector to perform the transformative role that our economy sorely needs.

Cathy Jamieson MP, Shadow Financial Secretary to the Treasury, said:

“Since 2008, and with little help from the Funding for Lending scheme, many of our small businesses have struggled to secure finance from the large banks. Given the good lending records of alternative, more inclusive forms of financial services, including building societies and mutual societies, the government should be doing all it can to support the growth of these financial institutions to ensure we create a financial system that supports our small businesses and truly serves the needs of our citizens and communities.”

Phillip Blond, Director, ResPublica, said:

“We are finally in a period of growth, but we lack the root system to keep this growth sustainable. Until we get a proper structure for the funding of small business, we cannot secure Britain’s long term prosperity. This superb report tells us that we already have the SME support system we need – building societies. These, if freed from regulatory constraint, can and should lend to our small businesses. The solution is here, let us hope the Government reaches for it.”

  • David Llewellyn

    Contributing Author

    Professor David Llewellyn, Professor of Money and Banking at Loughborough University, is also currently Chairman of the Board of the Banking Stakeholder Group at the European Banking Authority (EBA). He has published widely in the area of financial regulation, acted...

    David Llewellyn
  • Adam Wildman

    Principal Research Consultant

    Adam originally joined ResPublica as a Research Manager in  2013 and rejoined in 2016 as a Principal Research Consultant. He mostly co-ordinates ResPublica’s research output on business and the economy. His coming work will focus on EU reform, the future...

    Adam Wildman