How will financial services evolve?

The financial services industry is changing - with demands to make it more inclusive – according to Brett Scott, author of The Heretic’s guide to Global Finance

March 9, 2015

World Finance discusses how structural reforms may herald a new dawn for financial services.

The financial services industry is changing, with demands to make it more inclusive. With me is Brett Scott, financial activist and economic hacker.

World Finance: So Brett; lets start with the occupy movement. Now, this give macro-level critique of structural flaws in our economic and social systems; and you say a new world of financial activism is coming. But can the little people really make a difference? And do the big financial institutions care what they think? And more importantly, should they care?

Brett Scott: Large financial intermediaries rely on small people. For example, people support banks with their deposits; people support the investment management industry with their pensions.

So actually a large part of the power dynamic in the financial sector is between a kind of diffuse group of lots of people, who then support these sort of centralised intermediaries who have lots of power.

And the question is ,when you sort of think about financial reform, is how do you mobilise the power of the diffuse, ordinary people in society, to try to balance and contest the power of financial institutions. And I think people are trying to work out ways in which you do that now.

World Finance: Perhaps the crux of the matter is that they don’t understand financial systems; I think you used the phrase “financially illiterate.”

Brett Scott: People on a sort of ground level have quite a good understanding of their day to day finances. I mean, a lot of financial literacy work goes around, how do I balance my personal budget and so on. There is a lot of good stuff around it, and actually people are quite good at that.

What tends to be missing from a lot of financial education – for example you would never find this in schools – is any kind of education around the political dynamics of the financial sector; and actually the philosophy that underpins it. For example, what even is investment supposed to be for?

World Finance: Well I read you said you’d like to see the financial system be more like Wikipedia; how so?

Brett Scott: Well I mean, Wikipedia is an example of an open source platform. You can sort of see a few different features of Wikipedia.

In the one sense, it is open to people participating, so you could actually go in and produce stuff on Wikipedia. So in a sense there is a lot of work to be done in opening up the production of financial services to the average person: for example, through things like peer to peer finance.

On the other hand, Wikipedia is also something that has widespread access, so there is a whole lot of work around financial inclusion: how do you expand access to the financial system? And then there is a third element of this analogy with Wikipedia, which is that it has a transparency process, or an accountability process, where people can contest changes.

World Finance: So in essence you’re talking about a free for all, maybe even getting rid of regulators. Might we not see a Snowden situation?

Brett Scott: The point is, you want to create a more diverse financial system. So right now the system that we have is very, sort of, passive consumers of financial services; then these quite aggressive financial intermediaries; and then regulators that have to try and keep the financial intermediaries under control.

You would actually want to try and create more of a balance between regulators, smaller financial institutions, and more citizen power in the process.

World Finance: Your book talks of zones of finance that feel intuitively wrong to a lot of people, what are we looking at exactly?

Brett Scott: People have a sense that the financial sector is some kind of mysterious thing outside of themselves. And they sort of think of Canary Wharf and these big towers.

And part of that is because of this issue of financial literacy; but also there are a lot of things that the financial industry does that is very large scale and quite opaque and complex; it give a sense of alien-ness to it.

World Finance: But isn’t this true of any industry, I mean the layman doesn’t understand, you know, most industries; so why does it even matter?

Brett Scott: Its true, I mean for example, we don’t understand necessarily how the bridge that goes across a river stays up, because we haven’t studied engineering and so on. But on average it seems to work, and in a way it doesn’t affect our day-to-day lives: the fact that we don’t necessarily understand that.

I would argue, personally, that in the realm of finance people’s day-to-day lives are constantly impacted by this; and they are constantly having to interact with the financial sector in quite a personal way.

So that lack of understanding has a lot more problematic dynamics, especially considering the fact that the financial industry has played such an important part in the overall economy, and it has a lot of political power. Not understanding it continues to help it get that political power in Westminster and other places.

World Finance: You’ve referred to an unspoken class cohesion between financial professionals and politicians who attend the same universities. So are you suggesting a problem with our education system, rather than isolating just one section of society?

Brett Scott: The political power that the financial sector has within the UK economy… there’s a lot of, sort of, class dynamic to that. The same person who is a fund manager also probably is friends with people who are politicians.

So to some extent there is a class analysis that you can do, and that obviously links up to education in this country.

For example Oxbridge. I did a masters degree in Cambridge University, and certainly in Cambridge University there is a very big implicit understanding that what happens there is that some people go to becomes politicians, some people go to become financiers or accountants or lawyers; so the high end. And others go and do other things.

But there is a definite sense that these universities bring together the elite class cohesion.

World Finance: So how do you foresee the landscape of the financial industry in the future?

Brett Scott: It’s very hard to know what will happen, there are so many chaotic different forces in the world.

I think one thing you could definitely say is that there is a generation change occurring over time. So for example, a lot of the management level in banks right now were educated say in the 1970s, 1980s. They had certain attitudes about the world.

The new generations that are now moving up the management ranks of banks have different viewpoints. They tend to be more liberal, they tend to have more understanding of environmental issues. That’s a positive trend.

I think it will be hard to see banks of the future not caring about, say, sustainability. Although you don’t know how long that will take. On the other hand, there’s also the element of technology: huge, big-data technologies to sort of, crunch consumer profiles, and target people and so on. So those are some potential trends.