Did we own the banks before the crisis?

I wrote this post for work over at Any Other Business, and they've kindly said I can re-post it here. In celebration of the fact that I have just all but finished the report referred to in the post, and can therefore stop working thirteen hour days whilst eating baby food out of a jar, I thought I'd do so. Enjoy.

A lot is made of the fact that 'we' – the taxpayers – now own some of the banks that failed during the financial crisis. The government, through UK Financial Investments, owns an 84% majority stake in the Royal Bank of Scotland and around 40% of Lloyds, and has often been criticised for its timidity when it comes to using that stake to control bank behaviour – whether it be restraining bonus levels or promoting sustainable investment.

But it's rarely pointed out that 'we' had a stake in the banks already: through our pension funds, life insurance policies and other savings. In 2008, pension funds accounted for 12.8% of UK share ownership, insurance companies for 13.4%. Although that's less than it was thirty years ago, it's still a lot: just a hair over £300bn.

Of course, there are two obvious differences between the government's holding in RBS and the holdings you or I have in, say, HSBC through our pension funds. Firstly, the government is a single shareholder with a large stake: it could, if it so chose, unilaterally influence the policies of the institutions it owns. By contrast, the 26% of UK shares owned by pension funds and insurance companies are dispersed between hundreds of different institutions. When you drill down even further, to the level of the ultimate owners – us – it's dispersed between millions.

Secondly, we as owners are far more distanced from the companies we own than the government is. UK Financial Investments is independent of government, the reason often given by the Treasury for its refusal to intervene to change bank practices. But that was a choice made by the government at the time of the bail-out. Most of our investments are legally owned by a set of agents (our pension fund or insurance company) who then outsource the job of managing those investments to another set of agents (the asset management firms). Unlike the government, we have no choice in this situation. In fact, we're so far removed from the rights we have as owners of major companies that it's hardly any surprise most of us aren't even aware of them.

This makes the duties owed to us by the people who manage our money absolutely crucial. The way they behave has an enormous influence on our future wellbeing – not only because it determines the level of our pension or savings, but also because of its indirect influence on the things that determine our quality of life – from financial stability to climate change. In the wake of the crisis, many accepted that institutional investors hadn't done enough to curb excessive risk-taking in the banks – they had taken their eye off the ball, behaving as 'absentee landlords'. And it's us, the ultimate owners, who pay the price for those mistakes.

The tendency to forget who the ultimate owners are has also contributed to the rise of what's been called 'agency capitalism' – whereby, essentially, intermediaries do incredibly well for themselves while the incomes of the people whose money they're managing continue to stagnate. Between 2002 and 2007, the fees paid to investment agents by our pension funds rose by over 50%. Meanwhile, real annual returns on our pension savings averaged just 1.1% - lower than in previous decades. FairPensions' upcoming report, 'Protecting our Best Interests', will argue that the government needs to take a fresh look at the duties our agents owe us to make sure they really are putting our interests first.

Some agents, such as pension fund trustees, owe incredibly stringent duties to their members, known as 'fiduciary duties'. At the heart of fiduciary duty is the idea that you have been entrusted to act on someone else's behalf, and you must bear that in mind in everything you do, never becoming complacent or using your position to further your own ends. It's a noble ideal. Crucially, it puts the people whose money is at stake back in the driving seat. Arguably, rediscovering the essence of fiduciary duty would go a long way towards encouraging a more responsible financial sector. Perhaps it's time to go beyond bashing the banks and look at the people who, on our behalf, have the right to tell the banks what to do. As Pensions Minister Steve Webb observed in a parliamentary debate just before Christmas, “There is occasionally a need to remind those who manage our money that it is our money.”