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OPINION

Sin and the City

Sin and the City
May 28, 2014
Sin and the City

The City is not a moral place, to be sure. But its real sins are a far subtler affair, from which boom-era drug parties are frankly a distraction. A much bigger problem is surely that the basic business of finance, which is to match savers and borrowers, has become shrouded in often unnecessary complexity.

Layers and layers of middle-men talk with suave authority about an unknowable future, living very comfortably off fees of which most savers are only vaguely aware. Savers gamely pay up, not because they like the service, but because they find it easy to ignore fees taken discretely out of the large sums of money they entrust to the industry. Fees due tomorrow rather than today, as is often the case in wealth management, are particularly easy to ignore.

There is a word for this problem: intermediation. In 1963, individual investors owned 54 per cent of the value of the UK stock market. At the last count, in 2012, they owned just 10.7 per cent (including within nominee accounts), according to the ONS. At first, the intermediaries that took over were UK pension funds and insurance companies. Since the globalisation of the City that started with ‘Big Bang’ in 1986, however, they have been replaced by overseas institutions. These now own 53 per cent of the UK stock market, much of it within unit trusts (think BlackRock and Fidelity).

We should not be too nostalgic for the simplicity of yesteryear. People have been riling against complex social and commercial systems at least since Shakespeare's time: "no name of magistrate" would Gonzalo admit to his utopia in The Tempest. And the rapid growth of pension and insurance funds after the Second World War did not reflect the disenfranchisement of private investors, but rather the new City consensus for investing in equities rather than gilts, and the evolution of a mass savings market as society grew richer. Institutions took on risks individuals were ill placed to deal with - or so the paternalistic establishment then thought.

Mrs Thatcher famously thought otherwise. The continuing decline of individual share ownership even after her hugely hyped privatisations and the introduction of personal equity plans (forerunners of today’s Isas) is more mysterious. Perhaps the radical liberalisation of the old order, under which stock brokers were not even allowed to advertise, encouraged the proliferation of entrepreneurial middle-men more than it did individual risk-taking. Perhaps, as economist John Kay has argued, the end of paternalism eroded old relationships of trust - trust that had to be replaced, paradoxically, by regulation and further intermediation.

Whatever its causes, the proliferation of intermediaries is a problem not just because it increases the cost of investing, both for the saver and the economy, but also because it divorces the City from society. Gavin Oldham, founder and chairman of the Share Centre, sees "parasitical intermediation" at the root of the Occupy protests of 2011. Executive pay, the theory goes, could be better curbed - or better tolerated - if society had a more direct stake in executive performance. Consumers' rejection of City middle men can also be seen in the explosive growth of peer-to-peer lending.

There are some signs that intermediation is now thinning out. The 10.7 per cent of the UK stock market owned by individuals in 2012 was higher than the record low of 10.2 per cent recorded in 2010. The Retail Distribution Review has pushed fund fees into the open, making the system clearer and cheaper for savers. The decline of defined-benefit pensions, sad in some respects, is at least forcing employees to engage with their savings, shining more light on dim practices. The abolition of compulsory annuitisation this year may have a similar effect.

The revolutionary spirit of peer-to-peer lenders like the subversively named ThinCats or execution-only brokers like Mr Oldham is winning - even if 'disintermediation' isn't the kind of drama that attracts the likes of Martin Scorcese. But the old question remains: to what extent is the public prepared to engage with matters of personal finance? The government wants us to take control, but the level of financial knowledge among those who work outside the sector is very low, in my experience, even among the highly educated. Without better financial education, the latest revolution may peter out - or even lead to damaging upsets.