Background
In his latest report Promoting corporate diversity in the financial services sector, Professor Jonathan Michie argues that more effective competition would help underpin a more robust regulation of financial services in the UK. Professor Michie argues that mutuals need greater market share to put real competitive pressure on the big banks, and that greater diversity would realign the financial sector's attitude to risk.
The dominance of the big banks and the large shareholder plc business model is detrimental for individual customers and for the UK's long-term economic stability, says the report. It adds that the dominance of the shareholder model in the UK, whose purpose is to maximise financial returns to the shareholders, was one of the factors leading to the global credit crunch and the first global recession since the 1930s.
Professor Michie proposes that the first move for a government, which has already expressed its commitment to promoting mutuals, should be the creation of a new Minister of Mutuals. It proposes this new minister should have similar status to the Minister for the City, supported by sufficiently qualified and senior officials. They would deal with the different departments in government that handle the mutual sector, and have responsibility for mutuals in all sectors, including manufacturing, football clubs, retail, health, education, as well as the financial services sector.
A change of attitude is needed amongst regulators and the media in how mutuals are regarded, the report suggests. 'A bias against the mutual corporate form because of its inability to easily raise capital', exists despite the fact that this reduces their risk appetite. It argues ' a financial services sector with a strong mutual sector will have a greater diversity of risk appetite than would otherwise be the case, which is a positive outcome in terms of creating a stable and robust financial services sector.'
The report quotes the Government's Coalition Agreement as being committed to diversity in financial services: 'We want the banking system to serve business, not the other way round. We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.' (HM Government, 2010, p. 9)
This report sets out a detailed strategy for achieving these goals.
Further recommendations include:
- Northern Rock, which was demutualised in 1990s, should become an asset-locked public interest mutual. The report argues this would help the government by supporting competition and diversity through the maintenance of a strong mutually-owned financial sector.
- The Bank of England needs to be more accountable for its decisions relating to mutuals; and there should be a requirement to report on diversity in the financial services sector, for example in an annual review.
- Regulation for banks and mutuals needs to be 'proportionate'. Large players currently enjoy a competitive advantage being able to absorb the costs. It argues regulation on the whole disadvantages mutuals and is a barrier to greater diversity.
Professor Jonathan Michie
Professor Jonathan Michie is founder of the Oxford Centre for Mutual and Employee-owned Business at Kellogg College, Oxford University. He is one of ten people on the Commission on Ownership who have been selected as leaders in their field to produce an authoritative report on the influence of ownership on the governance of the UK. The research for the Commission is being undertaken by the Oxford Centre for Mutual and Employee-owned Business.
The report Promoting corporate diversity in the financial services sector was commissioned by Mutuo. It has already received backing from The Building Societies Association and the Association of Financial Mutuals, whose Director-Generals, Adrian Coles and Martin Shaw respectively,contribute a joint Preface to the report saying: 'The Oxford Centre has provided a commendable piece of research that sets out, with great clarity, why we need diversity. It sets out the pathway to achieving a healthier financial services sector and a regulatory system that will recognise the unique benefits that mutuals bring to financial diversity - a lower appetite for financial risk, focus on service, stability and member engagement. We passionately believe a strong and vibrant mutual sector is good for society and for everybody's financial well-being. We call upon the Government, and all those committed to a financial services sector that is both more stable and fairer to consumers, to act upon the recommendations that are contained within this report.
Oxford Centre for Mutual and Employee-Owned Business
The Oxford Centre for Mutual and Employee-Owned Business is a research centre committed to operating to clear, politically-impartial principles. Its principal activities are research and professional development. Short courses and educational programmes focus on the business needs of the mutual and co-owned business sectors. The Centre offers a gateway for the mutual and co-owned business sectors to seminars, guest lectures, and other activities. Networking and partnering within and beyond Oxford, including international academic exchanges, allow the Centre to draw on the best work globally to inform research, and to communicate research to users.The Centre is working in association with Mutuo and the Employee Ownership Association. The Centre collaborates with others internationally, including the Centre for Co-operative and Community-Based Economy at the University of Victoria, Canada.The Centre published a report in September 2009 on 'Converting Failed Financial Institutions into Mutual Organisations' that can be downloaded here.
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