Last summer, Democratic Audit published an explosive paper ↑on the growing influence of the corporate and financial sectors on British democracy. Here on OurKingdom, Lord Trevor Smith called it "the best account so far of the contemporary governance of the UK". OurKingdom has joined forces with Democratic Audit to publish a series of updates on the paper, of which this is the second.
The first Oligarchy Watch update (1), published November 2011, set out the influence of the European debt crisis and the growing global protest movement on British governance. This latest details significant events and new research published over the last few months - on inequality, finance, and lobbying.
* The power of the financial markets and ratings agencies to make or break elected governments.
* Europe-wide austerity programmes which, in the absence of growth, prove self-defeating as a means to reduce public debt, and which are likely to be reinforced by the Merkel-Sarkozy plan for the Eurozone.
* The intensification of economic and social inequalities.
* The continued dominance of the corporate and financial sectors over government policy in the UK, despite lip-service paid to the need for reform.
This update will only cover those areas where significant events have taken place or new research has been published since early November 2011.
The final report of the High Pay Commission (established by Compass with support from the Joseph Rowntree Charitable Trust) on 22 November showed that “during the last 30 years rewards have been flooding upwards…..[while] the general workforce’s share of GDP had shrunk by over 12% up to 2008”. In particular the report showed that executive incomes were set in a complicated and opaque way, and were determined more by luck, bargaining power and relativities with other companies than by effort or aptitude. Of the Commission’s recommendations to ensure transparency, accountability and fairness in executive pay, the government seems likely only to back measures to give shareholders a more effective say over executive remuneration. Many commentators, however, believe that, on their own, such measures are unlikely to make much difference, given the preoccupation of shareholders with share price, not issues of fairness or the erosion of public trust in the corporate sector. (2)
The Commission’s findings were reinforced by a report from the OECD on 6 December, which showed that income inequality had risen faster in Britain than in any other wealthy country except the USA since the mid 1970s, and was largely driven by the rise of a financial services elite. The report’s authors warned of the social consequences of this level of inequality, especially for young people with limited employment opportunities, “who believe they are bearing the brunt of a crisis for which they have no responsibility” (3). A new book by Stewart Lansley, The Cost of Inequality, highlights the economic consequences of these levels of inequality for the UK’s economy, with the leaders of corporate Britain sitting on huge surpluses which are not being invested, while UK consumers now have around £100bn less in their pockets than if the cake was shared as it was in the late 1970s. “It is a sum that has effectively been sucked out of the British economy in each of the last three years,” he concludes (4).
Meanwhile George Osborne’s autumn budget statement on 29 November was designed to erode the spending power of those on lower incomes still further, with another 700,000 job cuts announced for the public sector, and pay rises for those in employment limited to 1 per cent over the next two years at a time of high inflation and after a year-long pay freeze. At the same time, the tax and benefits changes announced by the Chancellor will, according to Barnardo’s, push a further 100,000 children and their parents into poverty. Overall, the poorest are calculated to bear 16 per cent of the cost of the new cuts and the richest only 3.5 per cent (5). It is perhaps not coincidental that those on low incomes are generally less likely to vote. Indeed, nearly half of all those in rented accommodation, and nearly half of those aged 19 to 24, are not even registered to vote, according to research by the UK’s Electoral Commission reported on 14 December (6).
There is no better evidence of the hold which the City of London and the financial sector exercises over government than David Cameron’s repeated equation of the “national interest” with its particular interests, and his refusal to endorse a new treaty for the Eurozone unless the EU agreed to exclude the UK’s financial sector from any new regulations, including a Europe-wide “Robin Hood” tax on financial transactions. Yet, as a new book from the Centre for Social-Cultural Change (CRESC) at Manchester University demonstrates, claims about the financial sector’s contribution to employment and taxation are greatly exaggerated, and not at all to be equated with the “national interest”. As to employment, their data show that employment in the financial sector, including high street banking, has only averaged a third of that in manufacturing across the two decades since 1991, and has flat-lined since then despite a huge expansion of output and profits. Figures for taxation show a similar story. In the six years since 2002-03 finance contributed 6.8 per cent of government tax receipts compared with 13.4 per cent for manufacturing. Against its total contribution of nearly £200bn over that period has to be set an estimated overall cost of the government bail-out to UK taxpayers of £550bn, or nearly £35,000 for each family resident in the UK. The supposed goose that laid the golden eggs, they conclude, instead “gobbled a hugely disproportionate share of the communal corn” (7).
The figures of the financial sector’s tax contribution are considerably lessened by its widespread complicity in tax evasion and avoidance, documented in the original Unelected Oligarchy paper. Among its costs to the wider society should be included both specific and generic damages brought to light over the past two months. Following hard on Lloyds Banking Corporation’s mis-selling of payment protection insurance came a record fine to HSBC on 5 December for recommending investments to elderly people who had a life expectancy shorter than the length of the investments (8). And a leaked report to the Treasury on management and transaction fees charged to pension and other savers concluded that “the industry is actually destroying value for the UK investor at least as fast as the stock market can create it”. As an example, a saver making £70,000 in contributions between 1994 and 2009 would have seen a profit of £46,000 entirely consumed by the financial service industry’s fees (9).
Wider economic costs brought to light over this period include the enormous growth of speculation in commodities, especially in food, where the percentage of those speculating in the futures market rose from 12 per cent of all traders in 1996 to over 60 per cent in 2011, so contributing to higher food prices even when harvests are good (10). Then there are the complex new derivative products continually being developed, such as “exchange traded funds” (ETFs), which exacerbate the volatility of markets and carry a high risk of wider failure (11).
Common to all these stories is a combination of regulatory failure (except occasionally after the event) and an inability to prosecute any individual for gross negligence or recklessness with other people’s money. The long-awaited report by the Financial Services Authority (FSA) into the collapse of RBS, published on 12 December, blamed the collapse on a series of disastrous errors made by the bank, including its £49bn break-up bid for Dutch rival ABN Ambro without conducting “due diligence” on its worthless holdings, and a massive expansion into US sub-prime mortgage derivatives just when these were turning sour (12). Both Fred Goodwin and the head of the bank’s investment banking division, Johnny Cameron, have admitted that they had no understanding of how the complex loan structures linked to the sub-prime mortgages actually worked (13). The FSA report also blames the light touch regulation insisted on by the Labour government, and its own failures of supervision, but concludes that the chief responsibility must lie with the bank’s board. Yet no individual broke any law, and none can be legally held to account for their failures.
In the wake of the report, Richard Alderman, head of the Serious Fraud Office, called for a new criminal offence of “recklessly running a financial institution” (14). The symbolic stripping of Fred Goodwin’s knighthood has none of the deterrent effect that seeing bankers sent to jail would have had. In the meantime, the current executives of the state-owned RBS were set to enjoy another round of bonuses, despite a collapse in the bank’s share price and a failure to meet its target of lending to small businesses, had not public outrage and Labour’s persistent campaign led to Hester and his chairman yielding up their bonuses.
One argument often made when the previous government sank so much cash into failed banks was that it would recoup the money when a revived bank was sold back on the open market. Yet a rushed sale of Northern Rock to Virgin Money, announced on 17 November, for a price of £750 million represented a loss of at least £400 million to the taxpayer. A widely supported alternative of re-mutualisation was rejected without explanation by the government, although an analysis by Landman Economics had concluded that re-mutualisation would deliver a better payback to taxpayers than a sale (15). Moreover, the sale is not all it seems. Only the so-called “good” bit of Northern Rock has been sold; the “bad” bank that holds about £50bn of mortgages, many of them lent at over 100 per cent of a property’s value, remains in public hands, together with any future liabilities. And a careful analysis of the sale by John Lanchester has shown that Branson’s purchase of the Rock has been financed with £400 million of the bank’s own capital, achieved by reducing its Tier One capital ratio of 30 per cent to 15. “So the buyers are using the Rock’s own assets to help buy it” (16). And he adds that this is a fairly standard procedure in take-overs, whereby a company’s assets are plundered to help finance its purchase, leaving it much more vulnerable to any market downturn, as we have seen with a succession of retail companies on our high streets.
After a series of recent lobbying scandals involving Adam Werritty and later the public affairs company Bell Pottinger, the government finally published consultative proposals for a statutory register of lobbyists on 20 January. These are more notable for what they omit than what they include. The proposed register will only cover organisations which lobby on behalf of third parties, and only require them to disclose which ministers or civil servants they are lobbying and on whose behalf. Significant exclusions are:
* in-house lobbyists in companies and businesses, who outnumber those in lobbying firms by at least four to one;
* informal meetings between ministers and lobbyists;
* a statutory code of conduct to govern the lobbying process;
* information about which matter or area of policy the lobbyist is trying to influence;
* information about how much money has been spent in the process.
All of these were called for by the Commons Public Administration Select Committee (PASC) in a report on lobbying in January 2009 (17). Tamasin Cave, of the Alliance for Lobbying Transparency described the government’s proposals as lacking “both breadth and depth; they would reveal only a portion of the industry, and then no meaningful information” (18). One way to assess the impact of lobbying is to look at policy outcomes. At the end of the original Unelected Oligarchy paper two current policy issues were identified as test cases for corporate influence over government. One was reform of the banking sector, where the implementation of any new regulation following the Vickers report has been postponed until 2019, to allow more rounds of consultation between the Chancellor and the banks. This delay has been described by Robert Jenkins, a member of the Bank of England’s new Financial Policy Committee, as “so long as to allow lobbyists to chip away until the proposal [for reform] becomes both unrecognisable and ineffective”. He asks, “Why are we so timid when it comes to financial reform? Is it that we are intimidated by those for whom the reforms are destined?” Even Jenkins admits that, even if the proposed ring-fence between the high-street and investment arms of the banks eventually takes effect, “over-leveraged banks operating outside the ring-fence will still threaten financial stability” (19).
The other policy identified as a test case was the reorganisation of the NHS in the Health and Social Care bill. One constant element in the bill, despite all the many changes and amendments since the first draft has been the opening up of the NHS to private health providers, described by the co-chair of the NHS Consultants’ Association as the bill’s “main supporters and beneficiaries” (20). Opposition to the reorganisation from health professionals, and even Parliament’s own Health Select Committee, has now reached a crescendo (21). Their arguments are simple: that the NHS cannot conduct a major reorganisation at the same time as meeting the financial savings required of it; and that opening up the service to competition is incompatible with the cooperation and coordination necessary to deliver effective health and care to an increasingly elderly population. The way in which the Tory election manifesto promise not to undertake any further top-down reorganisation of the NHS was so rapidly reversed by Stewart Lansley in the weeks after the 2010 election still awaits a satisfactory explanation (22). The concern expressed in the PASC report on lobbying of 2009 that “commercial corporations and organisations have an advantage which is related to the amount of money they are able to bring to bear on the political process rather than the cogency of their case” has not grown any less since that time (23).
2 . Cheques with balances: why tackling high pay is in the national interest, http://highpaycommission.co.uk/
3. Divided we stand: why inequality keeps rising, www.oecd.org/cls/social/inequality
4. Stewart Lansley, The Cost of Inequality, Gibson Square, 2011; see also article by the author in the Independent, 11 January, 2012
5. All figures quoted by Polly Toynbee in the Guardian, 30 November, 2011
6. Great Britain’s electoral registers, 2011, at www.electoralcommission.org.uk/
7. Ewald Engelen et al., After the Great Complacence, Oxford University Press, 2011, pp.146-153
8. Independent, 6 December 2011
9. Reported in the Observer, 18 December 2011
10. Observer, Business Analysis, 18 December 2011
11. Guardian, 16 December 2011
12. The Failure of the Royal Bank of Scotland, www.fsa.gov/uk/pubs/other/rbs.pdf
13. Guardian, 13 December 2011
14. Guardian, 17 December 2011
15. Guardian, 17 November 2011
16. John Lanchester in The London Review of Books, 15 December 2011
17. PASC, Lobbying: Access and Influence in Whitehall, 5 January 2009
18 For the full consultative proposals and a critique, see www.lobbyingtransparency.org
19. Guardian, 15 November 2011
20. Guardian, 6 April 2011
21. Reported in the Observer, 22 January 2012
22. But see the report by the Alliance for Lobbying Transparency on 28 March 2011 at www.lobbyingtransparency.org
23. Op. cit., p. 5.