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Financial Food For Thought

Financial Services - what do they do?

This was the wonderfully open non-sequitur that Economist and Financial Times Commentator John Kay kicked off with at our most recent Financial Services thought leadership breakfast. This led to a typically lively conversation between the leaders in Financial Services firms and members of the FreshMinds team who had gathered together for this mental workout on a cold October morning!

As much as I wish I could share with you all of the topics discussed over breakfast that morning, here's a choice selection of some of the most interesting ones that came up:

How can we improve the current state of affairs?

Under the umbrella of his chosen topic, 'The Future of Finance', John shared his thoughts on the Financial Services sector as a whole, what it does, what's wrong with it and what it needs to do in order to improve. He started with the analogy that the 20 or so people around the table could all have arrived with a number of pieces of paper, we could then spend the whole day bartering and dealing said pieces of paper and that at the end of the day some of us would leave with more, some less, but underneath it all they would all still just be meaningless pieces of paper. He then drew the immediate comparison to the UK's economy, where of the £700 trillion on Financial Services balance sheets only £200 billion of that is leant outside of FS, meaning that the big bankers are all at it in various rooms with various quantities of pieces of paper. Though John admitted this was a silly example it did help to highlight some interesting intricacies of the sector as a whole.

John outlined the four major areas that he feels need to improve for this state of affairs to gain more meaning:

  • Payments systems and tech need to be simpler
  • Capital allocation (residential mortgages)
  • Management of personal finances (cost of returns)
  • Risk Management (which he sees as the key to financial innovation)

Normal Accidents

John also addressed the issue of instability in the Financial Services sector and cited a chain of literature led by US sociologist Charles Perrow, who studied something that he called 'normal accidents'. These are essentially meltdowns in complex situations which Perrow suggests occur because everything in the system links to everything else, meaning that actions very quickly have consequences. Using the example of the Hiroshima nuclear reactor problem, Perrow suggests that since you can't build nuclear power stations without these consequences you should probably think about not designing nuclear power stations at all. Drawing upon Perrow's work John argued that what we might be looking for if we wanted to create a more stable financial environment is looser coupling and less interaction.

The Shocked and Appalled Defence

Another interesting topic that John spoke passionately about was the importance of culture and ethics within the Financial Services sector and the subsequent emphasis on personal responsibility that has all but disappeared from big banking. John referred to this shirking of responsibility as the 'shocked and appalled defence', with leaders of banks claiming no knowledge of any wrong-doings within their business. He referred to a centuries old piece of legislation that he feels should underpin the whole British economy - that no agent should put themselves in a situation where there is a direct conflict of interest. This boils down to the idea that 'if you take the bonus you should take the wrap'.

Regulation

John went on to refer to regulation as the continuing disaster of the Financial Services world and how it is becoming the root cause of more and more problems and not a helpful aid in any way, thus negating its original purpose. He was adamant that detailed prescriptive regulation regardless of industry is destined to always fail.

The Trusted Banker

Of course, some of John's more revolutionary ideas prompted discussion from our guests. One retort  was that his point of view was pointing to a whimsical and outdated return to the 'trusted banker'. However the conversation and subsequent questions began to agree that the burgeoning growth of the family office, VC and PE world is perhaps the systemic backlash and return to the 'trusted banker'. However it is no longer a 'banker' that is trusted, rather the portfolio manager/investment professional from the small cap investment vehicle. The high touch manager interaction of this space is beginning to represent something akin to the 'unbundling' of the bigger organisations which the general public and economic landscape has lost trust in and the resultant devolution of unwieldy global super-banks is perhaps one way to counter the misalignment of interest that John argues is almost symptomatic of such large organisations.

We're always happy to chat about Financial Services, so if you're interested in a new role or would like to find out about hiring our Minds on a permanent or interim basis then give us a call on 0207 692 4300 or drop us an email.

We run our thought leadership breakfasts throughout the year, so if you're a leader of a Financial Services firm and would like to come along to our next breakfast please register your interest here.