The Archbishop of Canterbury made headlines last week saying Britain’s economic model was “broken” and needed fundamental reform (News, September 8). Write in the Financial Time, to coincide with the launch of an interim report from the Commission on Economic Justice, Bishop Welby lamented “a deep state of economic injustice,” and said most people wanted an economic system that was “in the service of human development and the common good. Well”.
The Archbishop was right to say that the economic system was not working. Consider these alarming facts: 1.5 million people do not have access to a bank account; 2.9 million people are in financial distress; the charity that I chair, StepChange, estimated in 2015 that 8.8 million people were over-indebted and that a quarter of the population had saved less than £ 500; and 13 million people do not have enough savings to cope with an income shock.
The personal cost of this is heartbreaking. For example, more than two-thirds of Christians Against Poverty clients have visited their GP because of the negative impact of their financial problems, and one-third of them have considered or attempted suicide.
There is a strong argument to be made that financial distress is the number one cause of social harm in this country today.
It has traditionally been argued that these problems must be resolved by the public authorities: the government and the regulator. This is combined with the exhortation from the management of financial services companies to “behave better” and improve their culture.
Speaking as a former regulator, I think this approach will not produce a fairer financial system. A new holistic and integrated approach is needed, of which regulation is only one component. An integrated approach would include significant changes in the following areas:
Regulation. In my opinion, we must recognize its limitations. The best approach is a mixture of principles and rules, combined with flexible supervision and a credible and determined application. In addition, we need a duty of care to consumers and recognition of the specific needs of vulnerable people.
Industry standards. We need an approach that combines industry standards with official regulation. Industry standards are necessary to ensure practitioner support and ensure that the regime is responsive and flexible to changing circumstances.
Financial education. Financial education and knowledgeable consumers are essential to any successful financial system. This will require a considerable investment by the government and intervention throughout the school program to ensure that there is sufficient time in schools.
Culture / Ethics. It is recognized that without the right culture, and no matter how good the regulation, the results will always be poor. Companies must focus more on serving the common good through the actions of their institution and their employees. It requires the right culture.
Building a good culture requires a clear business purpose, strong leadership, and the right incentives and disincentives. In my experience, there is still a lot more that financial companies could do in this area. My suspicion, however, is that without legal intervention the desired results will not be achieved.
Companies should be explicitly required by law to ensure that they act in the common interest, in addition to providing value to their shareholders. Company law must be changed: it must be clear what it means to act in the common interest, and employees must learn to act as stewards of their institution, not as individuals optimizing their personal financial situation. .
Governance / ownership. Shareholders should not focus exclusively on their fiduciary responsibility to maximize returns for their investors, but also on contributing to the common good and promoting stewardship by the companies in which they invest. This would require that certain specificities be included in the legislation. For example, pension funds and insurance companies might be required to invest a percentage of their funds for advocacy purposes.
Market structure. Encouraging competition and a greater diversity of institutional ownership structures would be good for promoting consumer choice and financial stability. For example, most developed economies have a much larger mutual sector than the UK. In the United States, 25 percent of savings are held in credit unions, compared to three percent in the United Kingdom.
Even if all these changes are made, however, we still cannot be sure that we will achieve a more just economic system. There is also a need for a change in the attitude and behavior of those who fund companies, and those who run and work in them.
For change to be effective, three key elements are needed. First, businesses need to be run by people who value stewardship and focus on the common good, not just their own personal financial gain. Second, people should be allowed to make honest mistakes without being blamed. We need thoughtful accountability for premeditated wrongdoing, but it can easily escalate into harmful injustice. ad hominem attacks. Addressing these issues would require a change in the values of society.
Third, a consensus must be established on the balance between protecting consumers, especially the most vulnerable, and the freedom of individuals to make their own choices, with the attendant obligation to take personal responsibility for their actions. .
It must be recognized that the root causes of the “broken” economic system are essentially behavioral and not economic; and that shaping behavior to support the collective good requires a complex set of interventions in which we all have a role to play.
The central point here is to recognize that money in itself is not an ethical issue. It is not a value: it is a transmission mechanism through which the intentions of people are expressed.
The Church has a key role to play in resetting the economic agenda.
First, it could lead the public debate on how to change the way the system works. This could encourage changes to the statutory framework that determines the priorities of boards of directors and shareholders. A stronger obligation to act in the public interest and as guardians of their institutions would bring about significant changes. Such changes would require specificity to function and an obligation to demonstrate results. This would have the added benefit of promoting confidence and restoring confidence in the system.
In a democracy, such fundamental change can ultimately only happen if it is led by policy makers. But we must draw hope from the Church’s success in setting the agenda for high-cost credit providers, which has led to regulatory change and the actual collapse of their historic model.
Second, church members could do more to support the development of community finance institutions, such as credit unions, and help those in financial difficulty. Tackling financial hardship is as important as tackling any form of mental distress or physical deprivation. This was the mission of the Archbishop’s Responsible Credit and Savings Task Force, and was carried out by the Just Finance Foundation, of which I am a director.
Action in this area requires the commitment of congregations and their clergy. Good progress has been made in this regard over the past two years, but I still feel that some of the clergy are reluctant to get involved. Many give the “annual sermon on tithing,” or occasionally preach on stewardship, and that’s it.
Third, the Church as an institution could do more to lead by example at both parish and central level. This is already the case in financial education: the Church is leading the way by introducing financial education in its primary schools, which educate a quarter of the country’s children. In addition, the Church has established its own credit union for its employees, which is one of the fastest growing credit unions in the country. These two initiatives demonstrate the power to lead by example – action, not talk.
There is a lot more that could be done, however. For example, the Church could do more to support credit unions. Does each individual parish church have a credit union account? I do not think so. Opening an account would show support and help grow the institutions most capable of helping vulnerable and excluded people. Supporting local community finances also strengthens the role of the Church as the focal point of the community – as an institution that cares about the community and works to strengthen it.
Importantly, the Church of England’s own financial institution, Church Commissioners, could show leadership through the real investments it makes. He is already a leader in ethical investing principles, but he could show leadership in the area of social impact investing: for example, by setting up his own social impact fund and bringing in other external investors, or a direct investment program in community funding organizations.
The common theme here is that, rather than pushing for particular outcomes, the Church should focus on changing how the system as a whole works, in order to create a fair and ethical financial system. Central to this approach would be the recognition of the validity of the Church’s will to influence public policy. The emphasis would be shifted from talking about specific taxes and expenses to encouraging a radical change in the drivers of individual forms of behavior.
I am no theologian, but I passionately believe that creating a fair financial system should be a goal that the Church, both as an institution and as a community, sees as essential to its mission. I also believe it is an achievable mission.
Sir Hector Sants is a former Managing Director of the Financial Services Authority. He is a director of Just Finance and chairs StepChange. He writes in a personal capacity.
This is an edited excerpt from a speech given at a conference at Ripon College, Cuddesdon.
Sir Hector Sants is interviewed for Episode 26 of the Church Times podcast, which will be released late Friday afternoon: www.churchtimes.co.uk/podcast.