Labour should back a co-operative rebuilding of finance

by Peter Jefferys

Behind the noise of this summer’s events – the riots; phone hacking; Gadhafi’s fall – the great economic issues facing Britain have been largely muted. Of course had this not been a summer of scandal, war and looting, the huge losses and gains on the stock market and the dearth of growth worldwide would be much firmer in the public consciousness. People are already feeling this deep crisis through its ramifications: the rising costs of living and terrible jobs market. We are in a highly precarious position, with many comparisons made to the scale of the crisis in 2007/08 and we must pay close attention to the solutions being offered by the Government and our shadow team.

It is equally vital, though, for Labour to look beyond the day-to-day fluctuations of markets and even quarterly growth figures in order to form a vision for the future of the economy. The Shadow Chancellor has offered a sharp critique of the Government’s economic strategy, but Labour must also have a positive alternative for fairer financial services. A vision that would appeal to voters and reduce the risk of future crises – after all, financial services are at the heart of the current problems.

This is much more than simply advocating ‘banker bashing’ – short term measures of retribution on the city of London. We would do well to remember that financial services are integral to our economy and to the lives of citizens, access to credit and banking services are import right across the economy and our society. Rather, we need to think about long-term, sophisticated changes of emphasis in what sort of financial services we support.

Nowhere is this clearer than with the future of Northern Rock. Labour advocated an approach in the 2010 manifesto that would have seen Northern Rock depositors take back ownership within a new ‘Co-operative Building Society’. Re-mutualisation would reverse the failed Tory policy of allowing Building Societies to become risky shareholder owned banks and create a much safer organisation, unlikely to require a future taxpayer bailout. The Chancellor, however, has decided to flog-off the Rock with no consideration of its future business model. We have a petition to stop the sale here.

Beyond Northern Rock, we are campaigning for a greater emphasis on the role of financial mutuals – such as building societies and credit unions. Financial mutuals are member owned, rather than shareholder owned, meaning that business decisions are taken in the long-term interests of customers, rather than the short-term interests of capital. Labour did much in power to support financial mutuals, but more is needed to increase the diversity of financial services provides. Labour should support the creation of a ‘diversity index’ and corresponding diversity threshold for UK financial services, in order to ensure that such services are not dominated by a few, pseudo-monopolistic plcs.

We are also advocating a new international approach for the rating and regulation of financial products and services. Labour should support much needed reform to Credit Ratings Agencies (CRAs), the bodies which severely mis-rated financial products in the run up to the banking crisis and recently caused unnecessary woes through a downgrade of American sovereign debt, initially based on a $2 trillion miscalculation. The current business model of ratings agencies is a classic conflict of interest – CRAs rate the quality of financial products but are paid for by the same institutions that create and sell those products.

Just yesterday, the former head of Moody’s launched a stinging attack on CRAs, suggesting that there is a longstanding culture of intimidation and harassment within the companies from management to analysts, ensuring that ratings match the needs of clients (large financial institutions).

Given the failure of CRAs to adequately rate debt in the run up to the crisis and the current unnecessary pain caused to the American economy, the time is rife for reform of CRAs. The Co-operative Party advocates the creation of a UN backed mutual Credit Ratings Agency, to be funded by contributions from investors, member countries and debt issuing organisations. The mutual structure would ensure that no one funder has undue influence, giving far greater credibility to ratings issued. This is a great ambition for Labour to get behind, as it puts democracy at the heart of the international financial system.

These policies offer the basis of a co-operative vision for the future of financial services that Labour could get behind. Injecting democracy and other co-operative values into financial services would provide a positive Labour Co-operative alternative to the Coalition’s inaction and de-facto endorsement of the status quo.

Peter Jefferys is the policy and campaigns officer of the Co-operative party


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4 Responses to “Labour should back a co-operative rebuilding of finance”

  1. Nick says:

    Quite. There is nothing wrong with people willingly getting together to do anything. The problem has arisen because Labour and the Tories have forced people to cooperate. They have run up massive debts, and they haven’t had the consent of the people to do this, since they have lied as to the extent of the debts.

    For example, the state pension doesn’t not appear on the government books. Governments, Labour included aren’t admitting they have run the biggest ponzi fraud of all time. Namely taking money for people’s retirement and spending it rather tahn saving it.

    Now you want to shoot the messenger. You don’t want CRA’s revealing the extent that the government has no clothes when it comes to its debt. You’ve taken a hypocritical stance, that they got it wrong then, so we shouldn’t let them get it right now.

    Even you’re UN CRA is wrong. CRAs are not for the benefit of the borrowers. It’s just for the benefit of the lenders. Why should the borrowers get a look in?

    Finance is not about democracy. Finance is about whether or not you get your money back.

    Here is one example of where it has gone wrong.

    If you go back and look at historical average wages, and instead of letting the government get your NI, you had invested it in the FTSE. Risky, but how risky?

    Well someone on median wages, currently 26K a year, would have a joint life pension, RPI indexed linked, at 65, of 21K a year.

    Instead the “none” risky option, the government rewards those hard working people with 5K, at 66, CPI not RPI, and not fully joint life.

    Goverment is the rip off.

  2. Pete Jefferys says:

    Thanks for your thoughts Nick.

    “CRAs are not for the benefit of the borrowers. It’s just for the benefit of the lenders. Why should the borrowers get a look in?”

    I disagree – CRAs rate debt so that borrowers can make an informed choice about where to invest. As the former head of a CRA recently said, there is a classic conflict of interest in having CRAs funded by the issuers of debt, as there is a perverse incentive to provide ratings that suggests products are less risky than they are. This is a market distortion and can lead to poor investment choices, as we saw with Lehman Bros AAB ratings one week before its collapse.

  3. David says:

    Pete

    If you want to see NR made Mutual, why doesn’t the Co-op bank buy it? If it delivers value to their members, then it’s a sensible transaction to undertake.

    I think you fundamentally misunderstand the role of the rating agencies. Yes their costs are paid for by borrowers/issuers (not usually the banks selling the securities but the underlying corporate borrower). They do not exist “for borrowers to make an informed choice about where to invest.” They exist to allow investors (pension funds etc who make up the vast majority of money under management…) to be able to decide which companies to invest in. Issuers of debt into the capital (bond) markets decide to pay for rating agencies to assess their company in order to improve their access to that market. Some pension investors are limited to buying investment grade or better bonds therefore, without a rating, issuers cannot access those funds. For other smaller investors who may lack the scale of the largest funds who employ their own credit analysts, the rating allows a quick and dirty comparable to be made to other companies. Issuers are prepared to pay the raters’ fees because overall it lowers their cost of issuance (in other words their debt becomes cheaper).

    Having worked a lot, both before and since the crunch, with the agencies, I can tell you that they do not just take the borrower’s word for where a rating should be and do act independently. If they did not, they would cease pretty quickly to have any credibility with investors. As I note above, issuers only pay for the rating because investors want it….

    I agree the agencies are not infallible. No sane investor would invest solely on the basis of a rating however they do provide a useful third party sanity check as to the underlying fundamentals of a business

  4. swatantra says:

    The Coop Bank have already acquired the Britannia Building Societies, and these will be merged into the Bank over time. The Coop Bank is also looking into bidding for the fallout from the breakup of Lloyds TSB.
    So there is likely to be more Coop Bank prescence in our High Streets.
    The idea of the Coop Bank bidding for NR is a good one.
    You have to remember that the Coop Bank was the only bank not having to go to the Govt for a bailout. Whch proves that a mutual/cooperative structure is a sound structure.

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