John Kay chaired the Review of UK Equity Markets and Long-Term Decision Making, which reported to the Secretary of State for Business, Innovation and Skills in July 2012. He is visiting Professor of Economics at the London School of Economics; a Fellow of St John's College, Oxford; a Fellow of the British Academy and a Fellow of the Royal Society of Edinburgh. He is author of many books, including 'The Truth About Markets' and 'The Long and Short of It: Finance and investment for normally intelligent people who are not in the industry'.
Holly Cook: Professor John Kay, we're here at the APCIMS Annual Investment Conference and you've just given us a presentation in which you've described what is essentially an unsustainable situation whereby UK savers are getting disappointing returns, partly as a result of a plethora of players in the investment chain; the focus on short-term gain has damaged the reputation not on your financial services, but also other industries. What’s to be done about this situation? What are your recommendations?
Professor John Kay: Well, I think we can see where we want to be, which is we want a simpler, shorter investment chain with a stronger relationships between asset managers and companies in the one hand and between asset managers and their clients on the other.
Now, that requires change of culture, change of regulatory philosophy across the industry. We can’t do it by introducing lots more regulations and if we've disappointed people and--we have disappointed some people who thought we’d recommend lots of new regulations--then I am not apologetic for that.
Cook: So, you are not talking about deregulation, you are talking about a switch here in the focus?
Kay: Yes, absolutely right. Given what has happened in the industry over last couple of decades, anyone who thinks that it is not going to be intensively regulated is naive. But I think we need to regulate much more with concern for the structures and incentives that influence people’s behaviour and a lot less on devising complex rule books that are designed to control that behaviour.
Cook: You also talked an awful lot about trust and confidence and how that’s being damaged, not only from the UK savers’ point of view, but from the asset managers, the asset holders. What can we do to actually restore that trust and confidence?
Kay: Well, it’s not a matter of lectures about trust and confidence, which I am afraid a lot of people in the industry seem to think it is. For me, the largest factor that has eroded trust and confidence has been the replacement of a relationship-based culture by one focused on transactions and trading. And trust and confidence is very much about personal relationships, and can’t be created in environments in which you have active trading between anonymous agents. That’s the source of our problem, and it’s not going to change unless we start rethinking in that kind of way.
Cook: So if the focus is on relationships, are we talking about sort of rewinding times, the good old days where the stockbroker knew his client, and also the businesses he’s investing in?
Kay: Well, there is an element of rewinding time. Now there were lots of things wrong with that kind of old world as it was. It was expensive. In some ways, it was corrupt. But there were also a lot of things that were right. And the emphasis on relationships over trading as a means of getting essentially information about what companies are doing and what clients want is as valid now as it ever was.
Cook: Well, Professor Kay, thank you very much for joining me.
