A review of the UK financial sector by John Kay, a professor from the London School of Economics concludes that activities in the city are dictated by short-term profits.
The government-commissioned review urges simplification of the process of buying and selling shares on the stock market. It also recommends reducing the number of intermediaries involved in the process, which Kay says, increases costs and undermines market efficiency.
Professor Kay warns that trust in the financial sector is at an all-time low and fund and asset managers need to become guardians of company stocks and not just focus on delivering short term profits.
Kay calls for a return to the days when an investor could go to a stockbroker and arrange for them to select a company and purchase shares. His report recommends a stronger focus on the personal relationships between individual investors, company executives and fund managers.
He says the advent of an array of intermediaries such as investment consultants, fund managers, pension trustees and independent financial advisers does not create a trusting environment for traders.
Kay warns that the ever-growing list of intermediaries means the “strength of any single relationship is diminished.”
Professor Kay says that trust is the “essence of financial intermediation” but that the financial services industry is as far away from that as it has ever been. He warned that a recent poll by ITN showed that only ten per cent of people believed that bankers told the truth.
Writing in the Financial Times, Professor Kay says, “It is hard to see how trust can be sustained in an environment characterized by increasingly hyperactive trading, and it has not been.”
“To achieve the fundamental objectives of equity investment – high-performing companies that generate strong and sustainable returns for savers without undue risk – the chain of intermediation should be shorter and simpler,” he added.
Professor Kay recommends that shareholders should have more say on remuneration packages for top executives and who is appointed to the board of major companies.
His proposals could lead to further job losses in the city if they are implemented.
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