190. Why The UK Lost Its Appetite For Risk

0:00It was a scandal that taxpayers effectively bailed out investment bankers tens and tens of billions of pounds. If we hadn't bailed out the investment bankers, millions and millions of ordinary savers would have lost their savings. Now that debt to GDP is about 100%, truthfully, this is an example of a government thinking, oh, well, we'll probably not be in power when the next banking crisis comes. We won't be blamed for making this decision and the banks will be blamed all over again. Because there will be, at some point, another banking crisis. and it'll be a catastrophe because it would come close to bankrupting the UK.

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2:29Hello and welcome to The Rest is Money with me, Robert Peston. And me, Steph McGovern. So loads to talk about again. I tell you what though, Robert, you wouldn't want to be a minister doing any form of interview between now and the budget, would you? Because literally every single time you're just going to get asked, what taxes are going up? That's just going to be the dominant question forevermore now, isn't it, with every minister? Yeah, and I've got quite a lot that I want to say about what I've learned about the black hole in the public finances. And I think maybe we should come back to that a little bit later.

3:02But shall we just start with the Chancellor announcing to the city in her mansion house speech that she has, well, she would say persuaded the banks and the regulators to somehow, and it's all a bit nebulous, persuade or lobby or send marketing to ordinary people about the benefits of share investing. And I mean, the Treasury and the Chancellor are making a big deal of it. I just wondered what you made of it. Yeah, so the idea is that you'll get these kind of pop-up adverts to try and encourage you to invest because as we've said there's a huge problem in this country with lots of people saving their money in cash savings but not taking the risky option which is often the more fruitful one which is to put your money in stocks and shares but should we just clarify for a second there because you used the phrase risky and i think you know the thing that you know you pointed out that people sort of misunderstand that word don't they because yeah totally because all the evidence shows that if you are looking for returns over five years or something like that, the risks of investing in the stock market in shares, or at least the costs, shall we say, are significantly less than the costs of putting your money in cash.

4:37Because if you hold your money in cash, it'll be eroded by inflation. And typically, obviously, shares, investment products, they can fall as well as rise. But all history shows that over a period of time, the likelihood is you will make much more money by holding your money in essentially stock market investments. As long as it's broadly based and you've taken proper advice, you're going to make more money doing that than you are if you hold it in cash. But it's that understanding that we keep coming back to. But I wonder, so if these adverts, I think which are a good idea to advertise investment potential, but the problem is all of these ads are going to say the value of your you know cash may go down as well as up and then that'll put people off again but i think there needs to be something more tangible which goes but looking at history because that line is going to put people off because it does i see it all the time with my friends and family they go oh but i don't want i don't want to lose money and you could lose money with stocks and shares whereas you can't lose money with cash saving but in real terms you can you certainly can so the i asked the treasury this morning just to tell me a bit more about the detail of what was actually happening and what it said was that major financial services firms have agreed to support the campaign on retail investment and they include barclays natwest hsbc lloyd's banking group aj bell out hargreeves landstand it includes actually straightforward investment firms likest james's place and Schroder's.

6:04There's also, I think, got to be some tweaking of the regulations. So they said that, quotes, the Money and Pension Service, the Financial Conduct Authority, and indeed the Treasury, they're claiming, are somehow going to support it in a so-called advisory capacity. Now, what I immediately thought when seeing that was, given that the leading names happen to be the big banks. This must have been some kind of a deal, because as you may have noticed, the Chancellor has allegedly been persuaded by the banks not to make more restrictive the cash ISAs. We talked about whether or not one way to get people to invest more in stocks and shares was simply to give fewer opportunities, maybe reduce the size of a cash ISA.

6:52She's chosen under pressure from banks and building societies not to do that. So my working assumption is they've agreed to spend a bit of money on trying to encourage more of an investing culture. I mean, God, will a bit of direct marketing or TV advertising, will it make that much of a difference? I mean, I was conscious of the cultural and I think behavioural impact of those adverts that the Thatcher government ran in the 1980s to encourage us to buy shares in, you know, there was the famous Tell Sid campaign to get us to buy shares in British gas. You were, I don't even know if you were born then, to be perfectly honest.

7:35Well, I was a little kid, but even I know the Tell Sid or whatever it was, whoever Sid was. So there was a massive government-led advertising campaign to encourage people to buy shares in these privatised companies like British Telecom, like British Gas. And I think for a period, there was more of an investing in shares culture in this country. I'll be really interested to see what these adverts then look like. What are they going to be offering shares in particular companies? Is it just going to be planting an idea? Because if it's just planting an idea, I suspect that won't take root in the same way.

8:13This is really quite complicated and difficult stuff. So I happened to be having a chat the other day with a bloke called Alistair King, who's the Lord Mayor of London, who's very much involved in trying to create more of an investment culture. And he told me something that I was completely unaware of because you think of the Scandinavian countries as sort of lefty countries. But he says that in Sweden, way more Swedish people invest directly in shares. And he says, if you go to a Swedish bar, quite a lot of them are just talking about their investments. And they do definitely in a country that's supposed to be much more left wing than on the whole Britain is.

8:52So this is not a thing about left wing or right wing. It's something cultural that for the reasons that I don't fully understand, this country had for a period and now it seems to have lost again. Well, I think a lot of it is around two things. One is the storytelling around this. So, for example, with the Sid advert she mentioned, it was really tangible. There was like a human face to it in the sense of, yes, it was someone who was working as an actor or whatever, but there was like a really good storytelling around it in terms of you could own something British and you can be part of its success and you can benefit from its success.

9:31Like it was really understandable and tangible to people. secondly now we've got as we've said this this real fear of risk because we've been through things like the credit crunch and seeing what happened then and seeing the queues outside northern rock i think it's it's really changed the appetite for risk because people have gone well hang on a minute do you not remember those queues outside the banks like that i don't i don't want them to have my money and risk it. So banks were seen, I think, that were much more trusted in the past, whereas now they're not necessarily seen as having the consumer's best interest at heart, even though that's probably always been the case, because, you know, they're working for the shareholders, essentially.

10:19I think there's more of a aversion to risk because of what we've seen in the not that distant future. And I think what could work here is if the government tells this story well in terms of the ads like if they you know they put people to it they make it about families just to be clear the government is not itself going to be fronting the campaign but it's encouraging the banks and financial institutions to run these campaigns but i take the point that it's all about the creativity and the way that they then present their case well here's an example right the government at the minute keep asking me to do explainers for them So, for example, recently the Department for Education were, you know, really concerned about the number of people who are not claiming the child benefits that they're owed.

11:07So they asked me, can you explain that actually loads of people are not claiming their benefits? Because they've got this real problem with people not trusting the government or people not understanding. and I think stocks and shares feel so esoteric to normal families. That's why they need to bring in storytellers to do it for them, which is why they've blatantly asked me to do the child benefit stuff is because they need storytellers. So that's going to be the key here is how they tell that story that makes it understandable for people. You're completely right. There is another thing, though, that is different today from the 80s.

11:49That was a much more swashbuckling time. And one of the things, it's sort of amazing now to think about it, but basically the government and its advisors deliberately underpriced these privatizations. So you were literally, you know, if you bought these shares, you were guaranteed a windfall, right? I mean, it was sort of shocking, actually, the way that everybody piled in, shares would soar. And quite a lot of people just sold immediately and pocketed, you know, 30, 40 percent gains. Now, today, with the obsession for, you know, value for money, not flogging government assets at a discount, got to make sure that the taxpayer gets their money back.

12:35I mean, that was, frankly, a blatant political bung to voters by the Thatcher government, which no government could get away with today. Because people would say this is just, you know, this is essentially a bribe to middle class voters. But what if they did it so it was not for middle class and they means tested it? Could that have been slightly fairer? And would that have made it more, you know, like the 80s? Because that did feel like it was more, it wasn't just about middle class people then. I mean, people will be screaming at them however they're listening to this. You know, the way that Gordon Brown, do you remember I talked to you about Gordon Brown's initiative to encourage young people to start saving?

13:23I think they were called the child trust funds from memory. I talked about them in an earlier episode. And, you know, that was a significant distribution of public money to kids in funds that they held, they had to hold till they were adults. it went to everybody and in some cases that's that's provided a a serious chunk of money but it also went to people on very very low incomes you know that was that was the kind of initiative you are talking about it is funny though you've obviously got the child trust funds and now you've got like junior ices and things pretty much everyone i know has got junior ices for the kids when your kids turn 18 they're going to have shared loads of money and it's like is that a good thing for an 18 year old to have thousands of pounds like I'm not doing that for my little girl because I think I was irresponsible at 18.

14:15Unfortunately my kids were a little bit too old to benefit from you know the Gordon Brown funds but I've talked to parents of kids with these funds maturing and you're right so many of them are having kittens about is this all going to go on parties and shall we say uh uh activities that are not always legal i won some money when i was 18 for all the engineering stuff i did and it was a substantial amount of money for me back then and i did not spend it well i mean i did put some of it away but i also took my friends out a lot and i did lots of good times i mean look it seems to me you know if your kid um stupidly blows this money, right?

15:01That's a lesson learned, right? Because two or three years time, they're going to be thinking, for flip sake, I wish I'd realised the benefits of saving and investing. So I basically take the view it is good to give kids responsibility in this way. You've got to help them understand the benefits of saving. If they don't listen to you, they might feel a bit sore a few years later when they wish they had the money. Yeah, that's a really good point. Right, let's have a quick break and then should we go back to some of this stuff around leads reforms, actually, and also the big black hole that Rachel Reeves has got to contend with.

15:32Right, we'll be back in a couple of minutes.

15:38Welcome back to The Rest is Money with me, Steph McGovern. And with me, Robert Peston. Now, you were talking earlier about how you worry that we have more of a risk culture, let's say, 20 years ago, 30 years ago than we have today. And I'm sure you're right about that. And, you know, there is something pernicious about a sort of belief that you can regulate away all risk and about the idea that voters might want you to regulate away all risk. I think, as you say, we've become too much of a safety first culture. But if we are going to remake Britain into a more entrepreneurial place, which we would need to do if we want to get the growth rate up, there's no question that the government's ambition is to get people more generally to understand how to measure risk and then to take the right kind of risks to increase income, to increase wealth.

16:43And it's interesting to me that the Chancellor is talking that language now a lot. In the Manchin House speech, she said that she is going to be not only taking measures to reduce over-regulation in the financial sector, but more broadly than that, she wants to create more of a risk-taking culture. That's fine, right? And I really approve of that. One of the things that really matters if you're going to do that is you have to have ministers and officials and indeed people not going absolutely bonkers when something goes wrong. right because we have because the problem we've got in this country is a terrible blame culture right if you want people businesses individuals to take risks now you know an area where for example this risk aversion is most pernicious in my view is in whitehall itself in the public sector taking decisions now about almost everything seem to take ages because civil servants just seem to be obsessed about just you know making sure nothing could possibly go wrong and nobody's going to blame them.

18:00We have to be more understanding of failure if we also want to encourage risk. And we've got to distinguish between failure that is the responsibility of a corrupt or negligent individual. You know, obviously, whether it's the inflected blood scandal or the post office scandal where, you know, we are seeing senior authority figures making decisions that are just shockingly negligent. And of course, they should be held account for those decisions versus failure, which is just somebody made a calculated risk. It's still a risk and external events or just something went wrong that was beyond that individual's control.

18:48And in those circumstances, you know, you have to actually give that person the benefit of the doubt. You can't say, oh, my God, that person has done something absolutely appallingly terrible. They got me locked up for a million years. If broadly, they've made a calculated risk in a rational way that just hasn't worked out. But it's hard, isn't it? Because it's so subjective whether that risk was a rational risk or an irrational risk. And that's part of the problem as well. The other thing that really stood out to me in the last couple of days was these changes from the financial ombudsman about the interest that someone gets when they have been mistreated or missold something in the banking sector so you know eight percent is the interest that you get um for every year that you've not had the money you should have had because you were missold something or whatever and that has now changed to i think it's less than one percent i was reading something martin lewis put out on this about how basically he said consumers have been sold down the river by it because they will you know now if they've had a problem where they've been missold or mistreated they will get a much lower interest rate which would not account for how much money they could have made you know at the moment um actually to be clear uh that would be a real terms increase but there are certainly circumstances in which inflation could be higher than um the bank rate plus one percent of course.

20:17Can I ask you what you think about the the you know the fact that this ring fencing of retail and investment divisions in banks is going to change because that was something that came about in the credit crunch wasn't it? Yes I mean there was this there was this idea and this is very much a sort of British initiative that because our financial institutions use depositors money to finance very very risky lending and that in turn led to the mother of all government bailouts of our banks one way to make the system safer was to separate investment activities in banks the riskier lending and the riskier investing from looking after ordinary people's savings and lending to regular punters.

21:08And so this system, which is expensive for the banks because they have to hold more protective capital. If you ring fence in that way within a banking institution, there are costs involved because you have to put away, as I say, more protective capital and more liquidity. It's sort of rainy day money. It's to hold in case things go wrong. And there were also huge sort of bureaucratic issues around keeping these activities separate. I thought, frankly, the intellectual case for doing that, I always thought was a powerful one, because it was a scandal that taxpayers effectively bailed out investment bankers.

21:49And they, you know, they had to be bailed out, because if we hadn't bailed out the investment bankers, millions and millions of ordinary savers would have lost their savings. Right. And the idea was if you separate ordinary people's money in the retail bank from the investment bank, then you could, in theory, allow the investment bank to go bust and the rest of us wouldn't be affected. Right. That was the theory. OK. And I think that I personally think there was quite a lot of logic to it. The reason the government has basically said this can be unwound is because of, I suppose, experience since then.

22:30We were, I think, the only country in the world to adopt this model. and other countries which haven't adopted that model haven't experienced crises since the 2007-8 banking crash and therefore the government is basically saying UK institutions are at a disadvantage as a result of ring fencing. Ring fencing hasn't been adopted anywhere else and that doesn't seem to have been a disaster. So why do we need it here? I mean, I have to be honest with you, I'm not wholly persuaded that the abolition of ring fencing is sensible because there will be at some point another banking crisis. And you only have to look at the countries that weathered the banking crisis better in 2007, 2008.

23:21Countries like Canada, for example, or like some of the not all of them, but some of the Scandinavian countries. countries the reason they weathered it better is because they had put in place not this structure but other structures that meant that their banks were more secure had more capital uh were essentially stronger that's twice we've mentioned the scandy countries now and the fact that you know people there invest more in stocks and shares and also they're better equipped for financial crisis what is it about those countries that seem to be so much better than ours because even from a skills point of view they're better and often their taxes are higher but it seems to be better services and things like that it's we could learn a lot from the scandy countries and maybe we need to come back to that you'll never know therefore whether or not retail uh retail ring fencing is a good idea until we have another crisis right now you know and um you know as i say intellectually the case for it seemed to me to be reasonable and i'm just slightly worried that this is an example of a government thinking oh well we'll probably not be in power when the next banking crisis comes so you know it you know won't be we won't be blamed for making this this decision and the banks will be blamed all over again so the last thing any of us want is to find ourselves in a position where we the government has to bail the banks out again and the thing to remind people here about is when we bailed out the banks uh to the tune of tens and tens of billions of pounds, right, the ratio of government debt to GDP, to our national income was, I don't know, it was about, by that point, it was about 40%, 40, 50%.

25:27Now that debt to GDP is about 100%, truthfully, it would be a catastrophe if we had another banking crisis because it would come close to bankrupting the UK. and there was in 2007-8 scope for the government to borrow very large sums of money to prop up the banking system it was a scandal that we had to do that because essentially the commercial sector was being subsidized by taxpayers it was a scandal but the government could afford to do it they can't afford that now anyway we should probably wrap things up shouldn't we yeah thanks very much see you soon goodbye from me yeah goodbye bye