A full recording of the event, which was sponsored by Aberdeen Asset Management, can be heard here:
John Kay, the economist and Financial Times columnist, spoke at a recent Prospect event to discuss his book, Other People’s Money.
Bronwen Maddox, Editor of Prospect, chaired the discussion. Also on the panel were Martin Gilbert, Chief Executive of Aberdeen Asset Management and Will Goodhart, the Chief Executive of CFA UK, the organisation that represents Britain’s financial analysts.
Kay set out the core critique of his book: that the City consists of institutions that trade almost exclusively with one another. This activity, he pointed out, is vast. The total nominal value of all outstanding derivatives, a kind of financial asset, is $700 trillion, he said, an amount equal to three times the value of all assets in the world.
Lending to non-banks makes up less than 3 per cent of banks’ balance sheets. The financial system, he said, is increasingly pre-occupied with itself and its activities are becoming ever more divorced from the interests of the real economy.
Kay was clear that Britain does need a financial services sector—but one with a very different character.
Equity markets began in the nineteenth century as a way to fund the development of railways and other capital-intensive corporations, said Kay. Now, things are very different. Companies such as Google, Facebook and Apple are very capital un-intensive. They do not require factories or production lines, and employ many fewer people than the global corporations of the past. As the demand for large-scale up-front equity finance has declined, so the nature of equity markets has changed profoundly, said Kay. Stock markets have become a way of taking money out of companies, not putting money in.
Turning to the asset management sector, Kay said that its most important role was stewardship, where asset managers work with companies in which they invest in order to encourage better performance. But what kind of performance? At this point, Kay drew a distinction between different ways of gauging success. The first method was by measuring a company’s “alpha”, a measure of how a company performs against its competitors. (An asset manager can hold equities that are falling in value, but which are still generating “alpha”.) But more significant than this is “beta,” a measurement of how a company is performing overall, not just against the competition. Asset managers, Kay said, should pay much more attention to beta.
Martin Gilbert agreed, saying that in his view asset managers needed to become better at owning companies. They should attend companies’ annual general meetings, and worry about the workings of businesses, including succession plans for senior management.
Will Goodhart conceded that the investment sector had done a bad job of explaining how it tries to improve the “beta” of the companies in which it invests.
The conversation then turned to pensions. Martin Gilbert said he was in favour of encouraging compulsory contributions to pensions, and lamented the unintended consequences of accounting rules, which he said had killed off Britain’s final salary pension system. Changes to accounting rules in the past decade meant that companies had to start including their final salary pension scheme obligations on their balance sheets. Once that happened, said Gilbert, the whole system had to go.
John Kay turned to the recent changes to the rules governing pensions. Under these changes, pensioners no longer have to buy an annuity with their pension savings, and can instead spend the cash on whatever they want. He characterised this change to the system as a short-term reaction to low interest rates. The pensions system, he said, had been undermined by accounting rules and regulation, which, he said only added to systemic complexity.
This, he said, applied not just to pensions but also to financial services more broadly. Reform of the industry should not consist of introducing more rules, he said, but should be structural. Overly-large corporations should be broken up, he said. Retail and investment banks should be broken up, to ensure that banks were no longer “too complex to fail.”
In his closing remarks, Kay emphasised that this sort of structural change in the financial services sector would have to be imposed on the financial industry—it would not be able to reform itself. Governments should have taken all banks into public ownership in the aftermath of the 2008 financial crisis, he said. And now, the only way to achieve the necessary structural reform, he said, would be as a response to the next financial crisis.
John Kay, the economist and Financial Times columnist, spoke at a recent Prospect event to discuss his book, Other People’s Money.
Bronwen Maddox, Editor of Prospect, chaired the discussion. Also on the panel were Martin Gilbert, Chief Executive of Aberdeen Asset Management and Will Goodhart, the Chief Executive of CFA UK, the organisation that represents Britain’s financial analysts.
Kay set out the core critique of his book: that the City consists of institutions that trade almost exclusively with one another. This activity, he pointed out, is vast. The total nominal value of all outstanding derivatives, a kind of financial asset, is $700 trillion, he said, an amount equal to three times the value of all assets in the world.
Lending to non-banks makes up less than 3 per cent of banks’ balance sheets. The financial system, he said, is increasingly pre-occupied with itself and its activities are becoming ever more divorced from the interests of the real economy.
Kay was clear that Britain does need a financial services sector—but one with a very different character.
Equity markets began in the nineteenth century as a way to fund the development of railways and other capital-intensive corporations, said Kay. Now, things are very different. Companies such as Google, Facebook and Apple are very capital un-intensive. They do not require factories or production lines, and employ many fewer people than the global corporations of the past. As the demand for large-scale up-front equity finance has declined, so the nature of equity markets has changed profoundly, said Kay. Stock markets have become a way of taking money out of companies, not putting money in.
Turning to the asset management sector, Kay said that its most important role was stewardship, where asset managers work with companies in which they invest in order to encourage better performance. But what kind of performance? At this point, Kay drew a distinction between different ways of gauging success. The first method was by measuring a company’s “alpha”, a measure of how a company performs against its competitors. (An asset manager can hold equities that are falling in value, but which are still generating “alpha”.) But more significant than this is “beta,” a measurement of how a company is performing overall, not just against the competition. Asset managers, Kay said, should pay much more attention to beta.
Martin Gilbert agreed, saying that in his view asset managers needed to become better at owning companies. They should attend companies’ annual general meetings, and worry about the workings of businesses, including succession plans for senior management.
Will Goodhart conceded that the investment sector had done a bad job of explaining how it tries to improve the “beta” of the companies in which it invests.
The conversation then turned to pensions. Martin Gilbert said he was in favour of encouraging compulsory contributions to pensions, and lamented the unintended consequences of accounting rules, which he said had killed off Britain’s final salary pension system. Changes to accounting rules in the past decade meant that companies had to start including their final salary pension scheme obligations on their balance sheets. Once that happened, said Gilbert, the whole system had to go.
John Kay turned to the recent changes to the rules governing pensions. Under these changes, pensioners no longer have to buy an annuity with their pension savings, and can instead spend the cash on whatever they want. He characterised this change to the system as a short-term reaction to low interest rates. The pensions system, he said, had been undermined by accounting rules and regulation, which, he said only added to systemic complexity.
This, he said, applied not just to pensions but also to financial services more broadly. Reform of the industry should not consist of introducing more rules, he said, but should be structural. Overly-large corporations should be broken up, he said. Retail and investment banks should be broken up, to ensure that banks were no longer “too complex to fail.”
In his closing remarks, Kay emphasised that this sort of structural change in the financial services sector would have to be imposed on the financial industry—it would not be able to reform itself. Governments should have taken all banks into public ownership in the aftermath of the 2008 financial crisis, he said. And now, the only way to achieve the necessary structural reform, he said, would be as a response to the next financial crisis.
