Although even the most rose-coloured glasses struggle to paint a warm picture of the decade characterised by the winter of discontent, an IMF bailout, electricity blackouts and inflation at 30%!
Life on Mars?
However, apart from what Heath, Wilson and Callaghan did for us, we were much happier, apparently.
The 1970s were not all bad and they did leave us with a legacy that directly influenced the shareholder revolution of the ‘80s and ‘90s, which has resulted in a transformation of British industry and positive real returns for investors. However, as with all revolutions there have been a number of unintended consequences. I think the most significant of these comes from having access to an ever expanding set of data in an ever decreasing period of time.
When we were blissfully unaware of what was going on in our immediate surroundings, never mind what was happening on the global stage, we relied upon personal relationships to form judgements and build trust. By removing this link we have exposed one of the fundamental flaws in the human system – not everyone can be trusted.
No shock there then, but because of our current environment and the global interdependency of business and governments as well as our inherent scepticism, we have diminished our level of trust in business and humanity to an all-time low.
Regulation trumps trust
Improvements in technology have changed lives, mostly for the good and as such are not directly responsible for this state of affairs.
However, we should not forget that an intervention of a complex system will create unanticipated and often undesirable outcomes. It seems embedded in the social sciences that we should be wary of the hubristic belief that humans can fully control the world around them, but not in the world of financial markets, as demonstrated in the crisis of 2008.
The initial reaction by some, to this loss of trust, is to regulate more.
Greater regulation in itself does not work and is a weak response to failure; importantly, more regulation does not equal more trust or better service. The industry as a whole needs to refocus on what investors want to buy rather than what the market wants to sell. I don’t think we need a plethora of new regulation, just better regulation.
The regulatory landscape in the UK has already changed greatly since 2008, much of which has been correctly targeted at protecting the retail investor.
- The regulator has implemented RDR, which came into effect at the start of the year and the Alternative Investment Fund Managers Directive (AIFMD) which comes in next year;
- Financial reporting is also going through a change and the emphasis on better, as opposed to more, reporting is welcomed;
- The concept of integrated reporting is gaining significant business-lead momentum and the European Parliament’s resolution supporting the initiative is encouraging;
- The UK Stewardship Code which was first published in 2010, has been revised and aims to improve the process of engagement between companies and their potential institutional investors by asking them to “comply or explain” their adoption of seven fundamental principles;
- The United Nations-supported Principles for Responsible Investment Initiative, whose signatories account for $32trn (15%) of the world’s invested assets;
- The Vickers Commission and the subsequent reforms will help with this but trust, which takes years to build and seconds to destroy, will take much longer restore;
- The FCA and the PRA both state they will be responsible for “delivering a forward-looking, judgement-focused approach to supervision…” all adding to an approach designed to convey clarity and trust, but they need to deliver on this objective.
Business needs to embrace these new initiatives and take the lead in rebuilding trust. This is not something that can happen overnight but business needs to kick-start the process through engagement and transparency as a matter of urgency, before being regulated into doing so.
Not all financial institutions are facing the same issues and many have been quietly getting on with producing sustainable returns as well as working openly and responsibly with shareholders. However, the erosion of shareholder trust cannot be fully restored by short-term capital returns alone. All of these initiatives will help but the industry needs to engage more directly, more clearly and more meaningfully with all its stakeholders before we can confidently say that the crisis of confidence is over.
As Karl Marx said: “History repeats itself, first as tragedy, second as farce”. This is still pertinent but let us endeavour to repeat the positive aspects of our history not the farcical ones.
George Renouf, director of public affairs, Alliance Trust
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