More diverse financial services are critical to restoring trust in UK banking

Mark Boleat
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THE business of politics and the politics of business are rarely more intertwined than during the party conference season.

Last week, the City of London was in the crosshairs of the Liberal Democrats, and it is likely to remain in sharp focus as Labour takes the stage in Manchester today.

We all know that the financial services industry is not the flavour of the month. The City – and banking in particular – has suffered a series of blows to its reputation. This is despite the fact that many recent problems, like Libor rigging, have proven global in nature.

The Financial Services Authority’s Martin Wheatley outlined some sensible measures in his review of Libor on Friday. Steps have also already been taken to address many other problematic issues. But, there is clearly a long way to go before finance is viewed in a better light by voters and politicians.

Key to this is reemphasising that service is at the heart of financial services. This means that some product lines and practices, commonplace before the crisis, should be phased out and replaced by improved ones.

The new leadership at Barclays, for example, is currently reviewing all aspects of its business model as part of the exotically titled Project Mango. This is welcome. The industry can serve customers better by being open about what shape large, complex organisations might take in the long term.

Bank lending to business is at the core of this debate, given its crucial role in driving the economy forward.

Vince Cable’s innovative plan to establish a business bank could help to improve the flow of credit to small firms, as could the new Funding for Lending scheme. The latter has already allowed RBS to make £1bn of discounted loans, with interest rates reduced by up to 1.7 per cent – therefore saving small to medium-sized enterprises £20m.

But we should not forget that the increased availability of lending needs to be matched by demand. The banks have long been criticised for failing to provide enough funding (despite stringent capital and liquidity restrictions). But, given the economic uncertainty, many small firms are understandably hesitant about taking on more debt.

By definition, small businesses are risky ventures that are more liable to fail. This means that bank lending is not always the most appropriate source of funding. Alternatives, like angel investment, peer-to-peer lending platforms, and supply chain finance, can sometimes suit the business models of small firms better.

Businesses, politicians and the City all want the same outcome to this debate. A more diverse financial infrastructure is fundamental to making sure we achieve it.

Mark Boleat is policy chairman at the City of London Corporation.